It’s not news that far too many people approaching retirement haven’t saved enough. Many of them say they plan on working full-time beyond normal retirement age and part-time after they retire. But the reality is that those plans are often derailed by illness or other changes in circumstance, so that a much smaller percentage of people who intend to work in retirement are actually able to.
For some people, beginning to participate in or to increase current contributions to, an employer’s 401(k) plan may help. But other people work for small businesses or employers who don’t offer any type of retirement plan–because these plans are often too expensive, complex, and complicated for a small business to handle.
Enter the SIMPLE individual retirement account. The SIMPLE part of the plan moniker refers to Savings Incentive Match Plan for Employees. Under a SIMPLE IRA, employees and employers make contributions to traditional IRAs, subject to certain limits.
This is an excellent start-up retirement savings plan for small employers who do not currently sponsor a retirement plan. Self-employed individuals are also eligible to start a SIMPLE IRA. Financial advisors can perform a valuable service for small business or self-employed clients by making them aware of these plans.
Advantages. For the small business owner or employer, having a SIMPLE IRA helps attract potential employees who may be reluctant to take a position with a company that has no retirement plan.
From the descriptions above, it is easy to see that other advantages to the employer include: the SIMPLE IRA is easy to set up and run–requiring only a phone call to a financial institution to get things started, it has low administrative costs, and employer contributions are tax deductible.
Employees who contribute to a SIMPLE IRA do so on a tax-deferred basis, through convenient payroll deduction. This advantage, plus allowing a much higher contribution, makes the SIMPLE IRA preferable to a traditional or Roth IRA. Each employee is always 100% vested in (or has ownership of) all money in the SIMPLE IRA, an advantage over other types of employer-sponsored retirement plans that require a vesting period for employer contributions.
Establishing a SIMPLE IRA Plan. To start a SIMPLE IRA, the employer or small business with 100 or fewer employees and no other type of retirement plan contacts an eligible financial institution and completes a few Internal Revenue Service forms.