A simple plan is the best

Published 7:01 pm Thursday, October 2, 2008

In recent months, the unemployment rate has stood at slightly over 4

percent _ the lowest in three decades. Consequently, good workers can

basically “pick and choose” the best

opportunities. This means that recruiting and retaining high-quality employees has

become a significant challenge.

As a small-business owner, you may need to review the benefits and

incentives you can provide prospective employees _ particularly in the area of

retirement planning. If a 401 (k) is not appropriate for your business, you

can offer your workers a SIMPLE IRA (Savings Incentive Match Plan for

Employees). This plan is available for any type of business with 100 or fewer

eligible employees _ those who earned at least $5,000 in compensation for the

previous year.

A SIMPLE IRA can truly be a “win-win” situation for you and your

employees. Here are some of the key advantages:

• Tax benefits _ You and your eligible employees can defer up to

$6,000 of salary per year. All contributions are tax deductible and earnings grow tax

deferred until withdrawal.

• Ease of administration _ A SIMPLE IRA is one of the cheapest

and easiest retirement plans to administer and maintain. You will have virtually

no setup costs, no administrative fees and no discrimination tests.

• Funding flexibility _ You are generally required to match your

employees’ elective contributions on a dollar-for-dollar basis, up to 3 percent of

their compensation. However, you can make a lower matching contribution (not

less than 1 percent) for up to two of every five years. Also, instead of making

a match, you can contribute 2 percent of each eligible employee’s

compensation, up to the indexed limit of $160,000.

• Range of investment options _ You can fund a SIMPLE IRA with almost

any investment vehicle available. For example, you could choose a family

of mutual funds, thus allowing your employees to diversify their retirement

dollars according to their individual goals and tolerance for risk.

• Contributions to other IRAs allowed _ If you set up a SIMPLE

IRA, you cannot have another tax-qualified plan for your business. However,

you and your employees can still contribute up to $2,000 a year to a traditional

or Roth IRA. Although the traditional Ira contributions may not be tax

deductible, they will still grow on a tax-deferred basis. (Roth IRA contributions are

not tax deductible, but earnings grow tax-free, provided you meet certain

conditions.)

Although a simple IRA offers many benefits, you need to make

sure your employees understand that this plan is intended for retirement _ not for

short-term goals. In fact, anyone under age

59 ½ who withdraws money from a SIMPLE IRA within two years of

making their initial contribution will be subject to a 25 percent penalty, in

addition to regular income taxes. After the first two years, distributions taken before

age 59 ½ will incur a 10 percent penalty, although there are some exceptions.

A SIMPLE solution … Before you launch a SIMPLE IRA, consult

with your tax adviser.

ELAINE WEBBER is an investment representative for Edward Jones

S.E., Snoqualmie. She can be reached at (425) 831-5026.