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Small businesses in search of a straight-forward and inexpensive retirement plan should consider a SIMPLE IRA.

While not the most popular type of IRA, SIMPLE IRAs may be the best vehicle to offer retirement benefits to your employees, especially if you have fewer than 100 employees.

Small businesses tend to avoid retirement plans. Only about a quarter of businesses with fewer than 10 employees offer a plan, according to the Social Security Administration, while just half of those with 10 to 24 do. With half of working American households at risk of a lower standard of living in retirement, according to Boston College’s Center for Retirement Research, it’s critical to start saving for the last third of your life as soon as possible.

How much can you contribute to a SIMPLE IRA?

It’s called SIMPLE (short for “Savings Incentive Match Plan for Employees”) for a reason.

Employers don’t have to worry about complex federal reporting requirements like they do with 401(k) plans, and employees are fully vested as soon as they start saving.

In 2018, workers may contribute a maximum of $12,500 in pretax earnings to a SIMPLE IRA account, and those 50 or older can go as high as $15,500.

Employers, who are required to chip in to their employees’ accounts, have two options to contribute funds on behalf of employees:

  • They can match workers’ contributions on a dollar-for-dollar basis, up to 3 percent of individual earnings
  • They can make nonelective contributions up to 2 percent of wage earners’ compensation up to the annual limit of $275,000 for 2018.

“They’re pretty straightforward,” says 401kHelpCenter.com’s Rick Meigs.

Earnings grow tax-free until they’re withdrawn, when they’re subject to income tax.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 59 1/2 — generally must pay an early withdrawal penalty. Withdrawals must begin by age 70 1/2.

“They’re pretty straightforward,” says 401kHelpCenter.com’s Rick Meigs.

How does a SIMPLE IRA work?

Let’s say that you make $60,000 a year, and your employer — Smith Inc. — matches your contributions up to 3 percent of your pay. You know that financial planners say you should save at least 10 percent of what you earn, including any match, so you decide to set aside 7 percent. You, then, would save $4,200 in pretax dollars, while another $1,800 from Smith Inc., for a total yearly savings of $6,000. (Four decades of savings with a 6 percent return would yield you almost $1 million, not including any raises or bonuses.)

In that scenario, you’d need to chip in some of your own pay in order to earn the “free money” from your employer. But Smith Inc. could also decide to make a 2 percent nonelective contribution for its employees. In this scenario, you’d receive $1,200 annually whether or not you put up your own money.