Basics

• The SIMPLE IRA is basically a traditional IRA meant for small business owners, their employees or self-employed individuals. The retirement plan is only available to businesses with 100 or fewer employees earning at least $5,000 over the course of the year. Even if an employee fails to meet other qualifications, he is counted toward the 100-person maximum. Once a SIMPLE IRA plan is established, the employer must maintain that plan for the remainder of the calendar year.
  
  

Starting SIMPLE IRA

• Certain financial institutions like banks or insurance companies are qualified to set up SIMPLE IRA accounts. You may set up a plan between Jan. 1 and Oct. 1, assuming you did not already have a SIMPLE IRA plan, in which case the new plan needs to be established on Jan. 1.
  
  To establish a SIMPLE IRA plan, you must complete Form 5305-SIMPLE if a particular financial institution is selected for employees, or Form 5304-SIMPLE if employees choose the financial institution. Another option is to use a prototype plan provided by the financial institution that handles the SIMPLE IRA. You must then set up either a trust account with Form 5305-S or a custodial account with Form 5305-SA for each eligible employee.
  
  

Contributions

• The employee owns the SIMPLE IRA plan and controls the account. He chooses whether or not to contribute his own money to the plan in the form of salary deductions. The IRS sets limits on the amount an employee may place into the account. In 2010 and 2011, that limit was $11,500 plus an additional $2,500 for individuals 50 or older. According to the IRS, the employer is required to make contributions equal to the employee's contribution up to 3 percent of his compensation. The alternative is for the employer to give all eligible employees a non-elective contribution equal to 2 percent of each employee's compensation.
  
  

Considerations

• A SIMPLE IRA fund is easier than other small business retirement plans to set up and change down the road. Even if you don't have any employees currently, if there is a chance you will hire someone down the road, you will already have a retirement plan established. One drawback to the SIMPLE IRA is the lower limit compared to other plans like an SEP IRA, which allows up to $49,000 per year. Consider how much you are likely to contribute and whether or not you will have more employees when considering retirement plans.