Simple IRA

  1. A SIMPLE IRA is so simple that the IRS suggests that there are four phases of understanding a SIMPLE:

    1. Deciding on which SIMPLE,
    2. creating it,
    3. understanding and making contributions,
    4. terminating it.

  2. The IRS literature about a Savings Incentive Match PLan for Employers extols the virtues of it from this point of view:
    1. An easy way to include employees in a retirement plan.
    2. The employer must contribute and the eligible employee may contribute.
    3. The financial institution that holds the SIMPLE takes care of virtually all filing requirements.
    4. An eligible employee is one who
      1. Received at least $5,000 in compensation from you during any two preceeding years,
      2. is expected to receive at least $5,000 during the current year,
      3. is not covered by a union plan.

  3. However, the employer looks at it from another point of view: How can I make a $5,000 IRA-like contribution to my retirement without having to contribute toward employee accounts?

    1. If the employer has an eligible employee, the employer mustmust contribute into the employee's plan.
    2. How much? That is determined by which of two SIMPLE plans the employer set up at the beginning of the plan:
      1. The 2% plan.
        1. This is called the 2% non-elective contribution.
        2. In this plan, the employer must contribute 2% of the employee's gross wages into the employee's SIMPLE IRA account.
        3. The employee does not have to make any contributions at all; the employer still does.
        4. If he wants to, the employee may contribute up to his contribution limit.


    under age 50

    age 50 or over













    1. But if the employer selects the dollar-for-dollar plan, he does not have to put any money if the employee does not.
      1. If the employee puts money into his SIMPLE IRA, then employer must match it dollar-for-dollar.
      2. However, the employer stops when his contribution for the year reaches 3% of the employee's gross wages for the year.
      3. The employer can even reduce the 3% to 1% in two of five years counting the current year and four preceeding years.
      4. The employer's hope is that the eligible employee will not make any contributions to his plan.