Businesses with fewer than 100 employees can find an inexpensive retirement plan in a SIMPLE IRA.
In 2010, workers may contribute up to $11,500 in pretax earnings to a SIMPLE IRA, and those 50 or older can contribute a maximum of $14,000. These amounts are subject to cost-of-living increases as time goes on.
With the SIMIPLE IRA, there are no complex federal reporting requirements, as is the case with 401(k) plans. Plus, employees are fully vested from day one.
"They're pretty straightforward," says Rick Meigs, president of 401khelpcenter.com.
SIMPLE IRAs allow employers to choose how they want to contribute funds on behalf of employees from year to year. For instance, they can match workers' contributions on a dollar-for-dollar basis, up to 3 percent of individual earnings. Or, they can reduce the match to 1 percent in any two years within a five-year period. An employer can also make nonelective contributions up to 2 percent of wage earners' compensation for a maximum of $4,900, regardless of workers' participation.
The SIMPLE IRA at a glance
- Perfect for businesses with 100 or fewer employees.
- Contributions from employees' pretax earnings and employer contributions.
- Contribution limits of $11,500 per individual or $14,000 for those over 50.
- Employer matches between 1 percent to 3 percent of pay.
- Earnings grow tax-deferred until withdrawn.
Earnings grow tax-free until they're withdrawn, when they're subject to income tax.
As with other workplace plans, individuals who tap a SIMPLE IRA too early -- before age 59½ -- generally must pay an early-withdrawal penalty. Withdrawals must begin by age 70½.