As a small-business owner, you may need to review the benefits and incentives you can provide prospective employees -- particularly in the area of retirement planning. If a 401(k) is not appropriate for your business, you can offer your workers a SIMPLE IRA (Savings Incentive Match Plan for Employees). This plan is available for any type of business with 100 or fewer eligible employees -- those who earned at least $5,000 in compensation in any two previous years and are reasonably expected to receive $5,000 of compensation in the current year.
A SIMPLE IRA can truly be a "win-win" situation for you and your employees. Here are some of the key advantages:
- Tax benefits -- You and your eligible employees can defer up to $10,500 of salary in 2007, or $13,000 if you are age 50 or older. All contributions are tax deductible and earnings grow tax deferred until withdrawal.
- Ease of administration -- A SIMPLE IRA is one of the most inexpensive and easiest retirement plans to administer and maintain. You will have virtually no setup costs, no administrative fees and no discrimination tests.
- Funding flexibility -- You are generally required to match your employees' elective contributions on a dollar-for-dollar basis, up to 3 percent of their compensation. The 3 percent match can be reduced for two years out of a five-year period. However, you cannot reduce the match below 1 percent in those two years.
Also, instead of making a match, you can contribute 2 percent of each eligible employee's compensation, up to the indexed limit of $225,000.
- Range of investment options -- You can fund a SIMPLE IRA with almost any investment vehicle available.
- Contributions to other IRAs allowed -- If you set up a SIMPLE IRA, you cannot have another tax-qualified plan for your business. However, you and your employees can still contribute up to $4,000 a year, or $5,000 if you are 50 or older, to a traditional or Roth IRA. Although the traditional IRA contributions may not be tax deductible, they will still grow on a tax-deferred basis. (Roth IRA contributions are not tax deductible, but earnings grow tax-free, provided you meet certain conditions.)
Although a SIMPLE IRA offers many benefits, you need to make sure your employees understand that this plan is intended for retirement -- not for short-term goals. In fact, anyone under age 59-1/2 who withdraws money from a SIMPLE IRA within two years of making their initial contribution will be subject to a 25 percent penalty, in addition to regular income taxes. After the first two years, distributions taken before age 59-1/2 will incur a 10 percent penalty, although there are some exceptions.
A SIMPLE solution... Before you launch a SIMPLE IRA, consult with your tax adviser. If this plan fits your business, you may be pleased with the results. Remember, happier employees are better employees.
