What You Must Know About Simple IRAs Before Tax Day

simple ira plan

A Simple IRA plan is one type of business IRA often used by businesses with less than 100 employees.

The Simple IRA plan is popular with business owners for two reasons.  The first reason is because it Is easier to start and administer than a 401k plan.  The second reason is that  the administration fees are usually less than a 401k plan.  If the business owner can save money, everyone wins.

As a business owner you just have to be aware of the required match, so that at tax preparation time you do not miss the deadline date for matching.  The employer match in a Simpler IRA plan is due no later than the filing of the employer’s income tax return.

The rules and regulations established by the IRS for Simple IRA’s are different than the rules of 401k plans.

Rules & Regs of Simple IRA’s

Administration of a Simple IRA:

  • NO discrimination testing required.
  • Lower contribution limits than a 401k plan.
  • Easy to start.
  • Easy & inexpensive to operate.
  • Employer must have less than 100 employees.
  • Employer cannot offer another qualified plan, such as a 401k plan or profit-sharing plan.


  • To be eligible an employee must earn $5,000 or more in compensation in the prior 2 years.


  • Employees may contribute.
  • Employers must contribute.
  • For 2010 and 2011 the maximum contribution limit if $11,500.
  • Catch-up contributions are allowed in a Simple IRA Plan.
  • Employees over age 50 can take advantage of catch-up contributions.
  • For 2010 and 2011 the catch-up contribution is $2,500.


  • Employers must match.
  • Employers have 2 matching methods to choose from.
  • Employers can match the employees’ contribution or their compensation.
  • If they match the employees’ contribution, the match is dollar for dollar up to 3% of the employees’ contribution amount.
  • The other matching method is where the employer makes a 2% of compensation match to all employees, regardless of whether or not the employee made a personal contribution.
  • The employer will have to determine which matching method is most cost efficient.


  • Loans from a Simple IRA are not permitted.

Withdrawals from a Simple IRA:

  • Simple IRA PlanWithdrawals made before age 59 1/2 are subject to a 10% early withdrawal penalty.
  • If withdrawals are made within the first 2 years of starting your contributions to a Simple IRA Plan, the early withdrawal penalty is increased from 10% to 25%.
  • Early withdrawals will also be subject to taxes.

Research shows that companies who offer some type of qualified retirement plan, such as a Simple IRA or 401k plan, have an easier time attracting and retaining talented employees.   So the IRS established Simple IRAs to provide smaller business owners with a more cost efficient qualified retirement plan that they could offer their employees.

Simple IRAs help the employees save money for their retirement and help the business owner save money on fees and administration costs.


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