- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Plans Funded by Both You and Your Employer
The most popular plans that are funded by both the employer and employee are the SIMPLE IRA and SIMPLE 401(k) plans. SIMPLE plans, or savings incentive match plan for employees, are tax-sheltered retirement plans for small businesses (businesses that have fewer than one hundred employees) or for individuals that are self-employed. In SIMPLE plans, an employer provides some matching funds; SIMPLE plans are similar to company-matching 401(k) plans. There are two different types of SIMPLE plans: SIMPLE-IRAs and SIMPLE 401(k) plans.
In a SIMPLE-IRA, both you and your employer take part in funding your retirement. To be eligible for a SIMPLE-IRA, you cannot have another qualified plan. You can contribute up to 100 percent of your annual income to a maximum of $10,500 in tax-deferred funds in 2007 (see Table 30.4). Since contributions are tax deferred, there is a penalty for early withdrawals. Money withdrawn within two years of establishing the account incurs a 25 percent penalty, and money withdrawn before you reach age fifty nine and a half incurs a 10 percent penalty and is taxed as ordinary income.
With a SIMPLE-IRA, your employer must match your contributions (usually 2 to 3 percent of your annual income) unless you make non-elective or optional contributions. The employer is required to make a minimum contribution of 2 percent to your SIMPLE-IRA each year. Any contributions you make to your SIMPLE-IRA are tax deductible, and any contributions your employer makes are tax deductible. Compared with other small-business plans, SIMPLE-IRA plans are easy to set up and administer.
Table 4 SIMPLE Plan Contribution Limits
| Year | Contribution | Limit Catch-up* |
| 2005 | $10,000 | $2,000 |
| 2006 | $10,000 | $2,500 |
| 2007 | $10,500 | $2,500 |
| 2008 | Indexed | Indexed |
| 2009 | Indexed | Indexed |
* Catch-up contributions are available for those over age fifty.
A SIMPLE 401(k) plan is a qualified retirement plan; it is very similar to a SIMPLE-IRA and has the same contribution limits and matching requirements. However, a SIMPLE 401(k) plan requires more time and resources to establish. If you are making contributions to a SIMPLE 401(k) plan, your employer must match 1 to 3 percent of your elective annual contributions or contribute at least 2 percent of your annual income as a non-elective contribution.
