SIMPLE IRA
A savings incentive match plan for employees (SIMPLE) IRA allows small employers to contribute toward their employees' and their own retirement. Sole proprietors and businesses with 100 or fewer employees, including contractors, can establish SIMPLE IRA plans. You cannot establish a SIMPLE IRA if your company has another retirement plan.
Employees make pre-tax salary contributions to SIMPLE IRAs established by their employers. Workers are eligible if they made at least $5,000 in any prior two years with your company, and if they expect to make at least $5,000 in the year you establish the plan. The plan must be established between Jan. 1 and Oct. 1.
You can choose the financial institution that will manage contributions or have your employees select a bank or brokerage. Employees can contribute $10,500 to their SIMPLE IRAs in 2007, and employees 50 and older can contribute an additional $2,500.
Pros: Employer contributions are tax-deductible, and employee contributions are tax-free until investments are withdrawn. The program is easier to set up and administer than some other retirement plans.
Cons: SIMPLE IRAs require employer contributions. You generally must match up to 3 percent of the employee's contribution, but there are some exceptions to this rule. You also can contribute up to 2 percent of an employee's salary to his or her retirement account regardless of whether that employee is contributing to his or her SIMPLE IRA.
SIMPLE 401(k)
The SIMPLE 401(k), a cross between a SIMPLE IRA and traditional 401(k) plan, largely borrows from strengths of both plans. The rules for the SIMPLE 401(k) and SIMPLE IRA are virtually identical except that employers must file an additional tax form with the IRS if they have SIMPLE 401(k) plans. Employees are also allowed to take out loans and hardship withdrawals from their 401(k).
Pros: The loan option gives employees access to their retirement accounts, although they will probably pay penalties for early withdrawals. The plan is easier for small businesses to administer than a traditional 401(k) and employers do not have to abide by non-discrimination rules.
Cons: The plan requires more paperwork and administration than a SIMPLE or SEP IRA because of the early withdrawal and loan options.
