Instructions for SIMPLE IRA Contributions
- An employer sets up a SIMPLE IRA by filling out IRS Form 5304 or 5305, depending on whether the employer wishes to allow employees to set the plan up at their own financial institution or the employer requires the plan to be set up at a single financial institution, respectively. Employers with 100 or fewer employees are eligible to establish and maintain a SIMPLE IRA. Employees that have earned $5,000 in any two prior years working for the employer and are expected to earn $5,000 or more in the current year are eligible to participate.
- Employees can contribute up to 100 percent of their income into a SIMPLE IRA, up to the maximum allowed by the IRS. In 2011, the annual limit is $11,500. Employees 50 years and over can contribute an additional $2,500 catch-up payment. When the employee designates an amount of income to contribute to the plan, it must be deposited in the plan by the last day of the following month. For example, if a contribution of $750 is designated on November 12, it must be deposited by December 31 to be eligible for tax deferral.
- The employer can choose one of two methods for calculating the employer portion of the contribution. An employer can make a dollar-for-dollar matching of employee contributions up to 3 percent of the employee's gross salary. The employer can choose to make a matching contribution of less than 3 percent in two years out of every five, but not less than 1 percent. For example, if the employer contributes 3 percent, 1 percent and 2 percent in a three-year period, the next two years' contributions must both be 3 percent. Under the second contribution method, the employer can contribute 2 percent of the employees' gross salaries regardless of whether or how much the employees contributed.
- The investment options available for a SIMPLE IRA depend on the plan and the financial institution that holds it. Some plans have a pre-set group of investment choices while others allow for more of a selection. A self-directed SIMPLE IRA allows plan owners to manage the portfolio holdings themselves. This is often the type of plan used by those employees who want to buy and sell in the stock market.
