Deadline for SIMPLE IRA Plan fast approaching

With harvest and seeding upon us, retirement plans are probably the last thought on anyone’s mind, however one deadline is fast approaching for 2016.

This option available for owners of businesses, including those that have employees, is a SIMPLE IRA Plan. Please note that SIMPLE does not mean easy, it stands for savings incentive match plan for employees of small employers (SIMPLE) because, as the name implies, it is easy to set up and administer, and employers are allowed to take a tax deduction for the contributions that are made. The deadline to establish a SIMPLE IRA is Oct. 1.

SIMPLE IRA plans can be established by small farm or ranch businesses that are sole proprietors, partnerships, or corporations as long as they have 100 or fewer employees (who were paid at least $5,000 or more in compensation during the previous year) and do not maintain other retirement plans.

Eligible employees (those who earned at least $5,000 in the preceding year) can make pre-tax contributions to their plans each year. Participants may contribute 100 percent of their salaries up to $12,500 in 2016. Those who are 50 or older during the year can elect to make $3,000 catch-up contributions.

Employers are required to make either matching contributions equal to employee contributions (up to 3 percent of employee compensation or $12,500, whichever is less) or non-elective contributions, which set a flat 2 percent contribution rate for all eligible employees up to $5,000 for 2016. The employer contributions you make on behalf of your employee are immediately 100 percent vested and the employee has full ownership of the money.

Distribution rules on SIMPLE IRA plans are similar to most IRA plans. Withdrawals are taxed as ordinary income and are also subject to a 10 percent federal income tax penalty if withdrawn prior age 59 1/2, unless you qualify for an exception to the rule as outlined by the IRS.

Required minimum distributions also must begin after the participant reaches age 70 1/2.

There are additional rules for SIMPLE IRA plans that state there is a two-year waiting period after the date when an employee enrolls in the plan to transfer contributions to another IRA on a tax-deferred basis.

Also, any withdrawals taken during the first two years of an employee’s participation in the plan are subject to a 25 percent tax penalty in addition to ordinary income taxes. After the first two years, early withdrawals are generally subject to the 10 percent early-withdrawal penalty prior to age 59 1/2.

SIMPLE IRAs may be a good choice for small-business owners because the responsibility for funding the plan is shared between the employer and the employee. Also, if an owner of a business has no employees that want to contribute, the plan can still be established and you as the owner can contribute and also provide a matching contribution from the business.

Even though the SIMPLE IRA contributions you make as the employee are tax deductible, those contributions may qualify one’s self for a tax credit on taxes owed. This is known as the “Retirement Savings Contribution Credit” (Savers Credit). As the taxpayer, if you meet the criteria outlined in the IRS publication 590, you may receive a tax credit up to $1,000. A tax credit is a dollar for dollar reduction in the amount of taxes owed.

Because of the cost effectiveness of a SIMPLE IRA plan compared to other qualified plans and the fact that it is relatively easy to implement, the SIMPLE IRA provides a valuable benefit to small business owners, including farms and ranches, and their employees when it comes to retirement planning.