Dollars & Sense: Establishing Financial Goals Series (Prioritizing Our Retirement Plans, Pt. 3)

Last week, we begin with an introductory discussion of the different types of retirement plans, more specifically IRAs. This week, we will be discussing SIMPLE IRA Plans.

What is a SIMPLE IRA? It is a retirement savings plan that allows employees to contribute to a traditional IRA plan.

According to the Internal Revenue Service, “a SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees to contribute to traditional IRAs set up for employees.” The purpose of the SIMPLE IRA plan was to be an initial “start-up retirement savings plan for small employers (generally 100 or fewer employees) not sponsoring a retirement plan.” Eligible employees are always 100% vested and are able to contribute a portion of their pre-tax income to this plan, meaning that taxes are deferred until the money is distributed

Employers are required to make either a matching contribution or nonelective contribution to the plan for eligible employees. Matching contributions are employer contributions that are comparable to the employee’s elective deferral contribution up a maximum of 3% of the employee’s compensation. This amount is not limited by the annual compensation limit. Nonelective  contributions are funds employers contribute to an eligible employee’s plan regardless of whether the employee makes contributions to the plan. The main distinction between the two is the nonelective contribution is not deducted from the employee’s salary and the amount must be at least 2% of the employee’s compensation up to the annual limit of $275,000.

Employees can contribute a percentage of their compensation up to the maximum amount for the current year, which in this case would be $12,500 for 2018. for persons under the age of 50. Persons who are 50 years of age and older are provided with an extra incentive to contribute an additional $3,000 per year as a “catch up” contribution. Most often, when employees older than 50 years of age make this additional contribution, it is the result of beginning to invest in a retirement plan at a later date in life. At other times, the individual is planning ahead to prevent having to work beyond the age of retirement wherein they would be eligible to receive retirement benefits.

The diagram above shows some of the benefits of establishing a SIMPLE IRA plan.

One major rule of thumb for investing in a SIMPLE IRA plan is to regularly review the federal regulations regarding them. As with many things, rules are subject to change and to ensure that you are receiving the maximum benefit for your contributions, educating yourself on recent law changes is an important part of establishing and maintaining the retirement plan. As soon as you recognize an error, make every effort to correct it as soon as possible as it may save you from additional problems in the future. The IRS has a system called the Employee Plans Compliance Resolution System (EPCRS) that offers three programs for correcting plan errors: 1) Self-Correction Program (SCP), 2) Voluntary Correction Program (VCP), and 3) Audit Closing Agreement Program (Audit CAP). EPCRS is designed to remedy mistakes and avoid the consequences of plan disqualification.

Initially, planning for and researching the various types of retirement plans may appear to be overwhelming. However, the time you are willing to invest will be well worth the effort once you arrive at the moment wherein you transition into this phase of life. Next week, we will continue discussing the third financial goal of prioritizing our retirement accounts. In the upcoming weeks, we will continue to discuss the various ideas which could possibly assist each of us in attaining financial independence. I would appreciate any feedback from anyone as this is a community effort to living our best life in honor of the One Who has given us this life to live. Love God…love others….love yourself!

Sean Mungin, author of “The Thorn In The Flesh”

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