SIMPLE plans are one of the most attractive options available for small-business owners. With these plans, you can choose to use a 401(k) or an IRA as your retirement plan. A SIMPLE plan is just that--simple to administer. This type of retirement plan doesn't come with a lot of paperwork and reporting requirements.
You can set up a SIMPLE IRA only if you have 100 or fewer employees who have received $5,000 or more in compensation from you in the preceding year. The employer must make contributions to the plan by either matching each participating employee's contribution, dollar for dollar, up to 3 percent of each employee's pay, or by making an across-the-board 2 percent contribution for all employees, even if they don't participate in the plan, which can be expensive.
The maximum amount each employee can contribute to the plan is $10,000 for 2005. After that, the amount will be indexed for inflation. Participants in a SIMPLE IRA who are age 50 or over at the end of the calendar year can also make a catch-up contribution of an additional $2,000 in 2005 and $2,500 in 2006. This is one of the lowest maximum contributions of all available plans. Therefore, the tax deduction for the contribution will not be as great as it could be with some of the other plans.
See also "401(k)."