Skip navigation.
Go to the Principal Funds home page
Principal Funds - For Investors
Secure  Account Login

Select login type:

Quick Links
For Businesses

Retirement: For Businesses: SIMPLE IRA

Overview

A SIMPLE IRA plan is a written arrangement established under Section 408(p) of the Code that provides a simplified tax-favored retirement plan for small employers. Employees are permitted to make salary deferral contributions to the plan. An employer that chooses to establish a SIMPLE IRA plan must make either matching contributions or nonelective contributions. All contributions under a SIMPLE IRA plan are made to SIMPLE IRA accounts.

Eligibility

Just about any business with fewer than 100 employees can establish a SIMPLE Plan. This includes:

  • Sole proprietors
  • Partnerships
  • S corporations
  • C corporations
  • Nonprofit organizations

Contribution Limits (for tax-year 2013)

Salary Deferral: 100% of eligible compensation up to a maximum of $12,000.
Employer: There are two options:

  • Matching: 100% up to 3% of eligible compensation, up to a maximum of $12,000.
  • Nonelective: 2% of eligible compensation up to a maximum of $5,100 (based on $255,000 compensation cap).

Catch-Up Contributions

For 2013, participants who have attained the age of 50 may contribute an additional $2,500 as a catch-up contribution. For subsequent years, the catch up contribution amount is indexed for inflation.

Distributions

Distributions from a SIMPLE IRA generally are includible as income for the year received. Withdrawals prior to age 59½ may be subject to a 10% additional tax. However, the additional tax is increased to 25% if the funds are withdrawn within two years of beginning participation.

Deadlines

The deadline to establish a SIMPLE IRA is October 1 in the year for which the SIMPLE plan is to be effective. In addition, there is a requirement to provide a summary description of the SIMPLE IRA plan at least 60 days prior to the beginning of the plan year (usually November 1).

How to Establish a SIMPLE IRA with Principal Funds

  1. Request the required paperwork to establish a SIMPLE IRA from your financial professional or from Principal Funds.
  2. The employer must complete the Adoption Agreement and the Participation Notice & Summary Description.
  3. The Participation Notice needs to be distributed to all employees covered by the plan.
  4. Each employee must complete a Principal Funds SIMPLE IRA Application and Salary Deferral Agreement.
  5. All paperwork should be returned to your financial professional.

Frequently Asked Questions

Do employees have to be included in the plan?
Any employee who meets the eligibility requirements must be included in the plan.

Does the employer have to make a contribution each year?
If the matching option is chosen and any eligible employee makes a contribution, then the employer must make a matching contribution.

If the employer adopted the plan with a nonelective employer contribution, then a contribution of 2% of eligible compensation must be made for each eligible employee.

Can an employer reduce the matching percentage amount?
Yes, the employer can lower that matching contribution amount to as low as 1% for two out of every five years, provided that employees are properly notified of the change in a timely manner.

Can a participant contribute to their own traditional IRA if they have a SIMPLE IRA?
Yes, an individual may still contribute the lesser of the applicable limit or 100% of compensation to an IRA. However, as a participant in the SIMPLE IRA, the individual would be considered covered by an employer-sponsored plan. This means that the deductibility of the IRA contribution may be limited.

I have a client who is a sole proprietor, has no employees, and makes $60,000 a year. Could the SIMPLE IRA be the right plan?

There are a number of variables. See table below:

 

SEP IRA

SIMPLE IRA

Solo 401(k)

Deadline to set up

Tax filing deadline, plus extensions

October 1

December 31

Multiple employees allowed?

Yes

Yes

No

Maximum contribution

Employee: $0
Employer: 25%1 x $60,000 = $15,000
TOTAL: $15,000

Employee: $12,000
Employer: 3% x $60,000 = $1,800
TOTAL: $13,800

Employee: $17,500
Employer: 25% x $60,000 = $15,000
TOTAL: $32,500

Administration and expense

Administration is simple and cost is low.  Funding cost depends on number of employees and level of contributions.

Administration is simple and cost is low.  Funding cost depends on number of employees and level of contributions.

Funding cost depends on employer options; generally more expensive than SEPs and SIMPLEs.

1 If you contribute to your own SEP IRA, you must make a special computation to figure your maximum deduction for these contributions. Generally, the computation must take into account the deduction for one-half of your self-employment tax as well as the deduction for your own contributions. See IRS Publication 560 for more information.

t13071103i5


 

To obtain a prospectus, download online or call Customer Service at 1.800.222.5852

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Customer Service at 1.800.222.5852.

A mutual fund's share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

This Web site was created and is maintained by Principal Funds Distributor, Inc. exclusively, and not by the Directors of the funds.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.

Not FDIC or NCUA/NCUSIF insured - May lose value - No bank guarantee - Not a deposit - Not insured by any federal government agency

Copyright © , Principal Financial Services, Inc.
Disclosures and Terms of Use | Privacy and Security