Simple Ira
Understanding SIMPLE IRA to Save for Future Investments
We all want to work because we want to earn for our everyday expenses and save money so that we can use it for our future. We must have heard of the Individual Retirement Accounts or IRA. IRA is a retirement account that has tax advantages for our savings for retirement and it is available in the United States. There are 5 types of IRA: SIMPLE IRA, traditional IRA, Self-directed IRA, SEP IRA and Roth IRA. Among the five types of IRA, if we want to choose an employer-provided retirement plan, SIMPLE IRA is our choice.
What is a SIMPLE IRA? To explain what a SIMPLE IRA is, we must first know what each letter stands for. SIMPLE stands for Savings Incentive Match Plan for Employees and IRA for Individual Retirement Account. SIMPLE IRA is a retirement plan given by eligible employers to their employees. This is done by taking contributions from the pretax salary of each employee or by having the employee pay for their contribution without deducting anything from their salary. This type of IRA is common and similar to the 401(k) (Profit sharing plans) and 403 (b) (Tax Sheltered Annuity Plans) but SIMPLE IRA have lesser contribution limits.
Many people choose the SIMPLE IRA rather than the common qualified 401 (k) and 403 (b) types of IRA because it is easy to administer and the contributions costs are lower. Employees can give their contributions in 2 ways: Either by elective-deferral contributions or by non-elective contributions. In Elective Deferral contributions, the employee agrees to make contributions to the plan via their pretax compensation. On the other hand, if the employee chooses Non-elective contributions, it is the employer that makes a non-elective contribution not based on salary reduction of his employees.
There are SIMPLE IRA contribution limits between the employer and employee. For the employee contribution limit, employees can actually defer up to 100% of their compensation. While in the employer contributions limits, there are 2 ways that they can add contribution. First is that they provide a dollar-for-dollar matching contributions for employees who chose the elective-deferral. Second is that they add 2% of non-elective contribution for eligible employers. Employers will only have to choose one from among the two ways to add contributions.
In establishing SIMPLE IRA eligibility there are certain requirements to comply. For employers, the requirement is having at least 100 employees and they must not maintain or use any other plans but only the SIMPLE IRA. On the employees, they are only eligible if they receive at least $5000 in compensation during any two years.
SIMPLE Individual Retirement Accounts are very important to all of us because they help employees in building an investment. This investment will be very useful when they retire in the future. These investments can turn up into a future business or simply be used in everyday expenses for employees when they retire so that they will have funds to spend on anything that is important and needed.
