What is a SIMPLE IRA?

A SIMPLE IRA is an Individual Retirement Annuity funded with employee elected salary deferrals and matching or nonelective employer contributions. SIMPLE IRAs are suited for small businesses with less than 100 employees earning $5,000 or more in the previous calendar year and the same or greater anticipated earnings for the current calendar year. For 2006, the maximum salary reduction contribution was $10,000, or $12,500 for participants over the age of 50. Under a SIMPLE IRA, salary-reduction contributions are excluded from an employee’s taxable pay and not subject to federal tax withholding. In addition, with a SIMPLE IRA, an employer must make either matching contributions (up to 3% of the employee’s compensation) or a non-elective contribution equal to 2% of each eligible employee’s compensation, which must be made whether the employee decides to make salary-reduction contributions.