Savings Incentive Match Plan For Employees (S

By Entrepreneur Staff

Savings Incentive Match Plan For Employees (S Definition:

An individual retirement account for owners of businesses with 100 employees or less that's similar to a 401(k)

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)."

More From Investing

Individual Retirement Account (IRA)

An interest-earning retirement savings account in which the allowable contributions and earnings aren't taxed until the funds are withdrawn, after age 59 1/2.

Dollar-Cost Averaging

To invest, as in shares of stock, fixed amounts of money at regular intervals so as to buy more at lower prices ad less at higher prices

Due Diligence

A reasonable investigation of a proposed investment deal and of the principals offering it before the transaction is finalized to check out an investment's worthiness; generally performed by the investor's attorney and accountant.

Roth IRA

A personal retirement savings vehicle created by the Tax Payer Relief Act of 1997. A Roth IRA allows certain investors to make non-deductible contributions of up to $4,000 annually and, provided certain requirements are met, offers tax-free and penalty-free withdrawals for important financial needs in addition to retirement.