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SIMPLE IRAs

A SIMPLE IRA, or Savings Incentive Match Plan for Employers, is a retirement plan for small business owners with 100 or fewer employees. SIMPLE plans are funded by employer contributions and elective employee salary deferrals. Employer contributions are tax-deductible and employee contributions are excluded from income for federal income tax purposes.

 

What employers are eligible to establish a SIMPLE IRA plan?

Entities such as:

  • Corporations
  • Sole proprietorships
  • Partnerships
  • Tax exempt organizations
  • Government entities

 

How can a SIMPLE IRA plan benefit your small business?

  • Tax deduction: Employer contributions made to an employee's SIMPLE IRA are generally tax-deductible as a business expense.
  • Tax savings: The amount employees contribute through salary reduction to their own SIMPLE IRAs will help reduce their taxable income each year.
  • Flexibility: You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees' pay.
  • Attract and retain employees: Providing a retirement plan will help you recruit and keep valuable employees.

 

How does a SIMPLE IRA plan work?

As the employer, you generally must match dollar-for-dollar employee contributions up to three percent of compensation. A lower percentage, not less than one percent of compensation, may be used in any two years of a five-year period. As an alternative, you may choose a two percent non-elective contribution for all employees eligible to participate in the plan.

SIMPLE IRAs may be funded by different types of investment, including stocks, bonds, certificates of deposit (CDs), mutual funds and variable annuities.1 Limits for the 2012 tax year are as follows:

  • Maximum individual contributions: $11,500
  • Catch-up contribution for individuals age 50 and above: $2,500
  • Maximum aggregate contribution limit (excluding catch-up contributions): $23,000

 

SIMPLE IRA Distributions

Employees may take a distribution from their SIMPLE IRA at any time. Distributions are subject to ordinary income tax. They may also be subject to a 25 percent federal income tax penalty if taken before age 59½ and within the first two years of the employee's participation in the plan. Distributions that are taken before age 59½ and after this two-year period may be subject to a 10 percent federal income tax penalty.

Talk to your financial advisor to find out if this type of plan could be right for you.

 

Retirement Planning

Financial planning can be complex. We provide information and strategies to help you navigate the world of investing.

Learn more >


1 If you are investing in a variable annuity through a tax-advantaged retirement plan such as a Roth IRA, you will receive no additional tax advantage from the annuity.  Under these circumstances, you should only consider an annuity because of its other features, such as lifetime income payments and death benefit protection.

Current tax planning strategies emphasize the deferral of current income taxes, on the basis that your federal income tax rate may be lower at retirement. As you decide how much to defer, please keep in mind that federal income tax rates are unpredictable and subject to significant fluctuation. It is possible that federal income tax rates at the time you take a distribution (e.g., at retirement) may be higher than tax rates at the time of deferral. Other factors, including any other sources of income and state income tax rates, may also change the tax bracket and overall tax rate to which you may be subject in the future. Please consult with your tax advisor for an individualized tax planning strategy and advice. The Hartford does not predict or in any way guarantee favorable tax results.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.