Set Up

• Business owners with up to 100 employees may set up a Simple IRA Plan to help provide retirement benefits for their employees. A Simple IRA account is opened for each employee and the employee is the sole owner of his account. The Simple IRA is similar to a 401(k) plan in that employees may make pre-tax contributions from their salaries to fund their accounts. Simple IRA Plans may be set up any time between January 1 and October 1 in a given year.
  
  

Eligibility

• Employers may not offer any other type of retirement plan to their employees if they sponsor a Simple IRA Plan. To be eligible, an employee must earn at least $5,000 during each year of his Plan participation. An eligible worker is entitled to participate in a Simple IRA Plan even if he chooses not to fund his account. The individual Simple IRA accounts can be set up at a bank, credit union, brokerage firm or insurance company. The chosen financial institution acts as the Plan Trustee. Employees may invest in certificates of deposit, stocks, bonds, mutual funds or any suitable product offered by the institution that administers Simple IRA Plan.
  
  

Contributions

• If a worker contributes to his Simple IRA, his employer can elect to match that contribution up to 3% of the worker's salary. Alternately, the employer may choose to contribute a flat 2 percent of an employee's salary whether or not the employee contributes to the plan. For the current year, workers may put up to $10,500 into their Simple IRAs. Those over 50 years old may add an additional $2,500. On his tax return, the employer may deduct the full amount that he contributes to his employees' Simple IRAs.
  
  

Distributions

• An employee under 59 1/2 years old, with few exceptions, must wait two years after he begins participating in the Plan to withdraw funds from a Simple IRA. The penalty for early withdrawal is 25 percent of the amount withdrawn. The penalty for early withdrawal after the two-year waiting period is 10 percent. An employee may rollover a Simple IRA to another Simple IRA tax free. He must wait two years from the beginning of his participation in a Simple IRA to roll it over to a non-Simple IRA tax free.