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What is Form 5304 SIMPLE?

A SIMPLE IRA is one of the best retirement benefits a small business can offer their employees. To qualify to offer this retirement plan, a small business must meet two criteria: employ 100 or fewer employees that have earned at least $5k over the tax year and not have another retirement plan in place. Thousands of small business owners qualify for this retirement plan, so if you own a business and don’t offer a retirement perk, consider this one.

When you do have an active SIMPLE IRA plan, then Form 5304 SIMPLE may need to be filed with your annual taxes. If employees have the option to select the financial institution that holds their SIMPLE IRA, then this is the form that will need to be filed. If you as the business owner will select the financial institution, then you will need to file Form 5305 SIMPLE instead.

What Are the Advantages of Saving in a SIMPLE IRA?

This type of IRA offers individuals and employers a streamlined, simplified manner of contributing to a retirement plan. Not only does it reduce taxes, but it becomes a benefit that can attract more applications to open positions. It also offers lower start-up costs for employers who want to start a retirement plan and the annual costs are lower as well.

In short, a SIMPLE IRA is easier to operate, saves everyone money, and let’s everyone contribute to a comfortable retirement. Here are some of the other advantages to consider if you’re looking to start this type of IRA for your employees.

  • Financial institutions handle most of the details. You won’t need to have a dedicated HR manager handling this retirement benefits. Almost all of the work is handled by your chosen financial institution or the one an employee may choose.
  • Employees are allowed to contributed. SIMPLE IRA contributions can be setup through payroll deductions on a tax-deferred basis. This makes it extremely easy for every employee to set aside something back for their retirement every time they get paid.
  • Employers have flexibility. An employer can choose to contribute a matched amount or a fixed percentage to every employee that is eligible. All of the amounts must be the same, so a $1 per dollar match up to 3% of an employee’s salary or a 2% nonelective employer contribution are both allowed.
  • Tax credits may apply. A small business owner may qualify for a tax credit of up to $500 each year for the first three years after they start a SIMPLE IRA plan for their employees. This is designed to offset the costs of starting the plan in the first place.
  • No financial reports are required. You won’t have to spend hours putting together the records that are needed to report a pension plan or other retirement benefits that are available today. Add in the lower administration costs and you’ll have a retirement plan that everyone is going to love.

The rules for a SIMPLE IRA are a little different than other IRA products as well. This will give your employees another added advantage.

Employees Can Contribute Up to $12,500 In 2015

Although the IRA rules apply to this retirement product, there are exceptions in regards to how much money can be contributed. Catch-up contributions are allowed of an additional $3,000 above the total contribution levels that are allowed. Cost of living adjustments also apply, so the $12,500 cap is $500 higher than what employees could contribute in 2013 and 2014. The one change is that transfers are not allowed out of a SIMPLE IRA until 2 years have passed.

Small businesses can open these IRAs on October 1 of the current year. The employee funding deadline occurs on either the last day of the year or the last paycheck of the year, depending on the business structure that is in place. Employers have more flexibility in their funding of this retirement plan, having a deadline based on when they need to file their taxes. If a small business receives an extension to file their taxes, then they’ll also receive an extension to contribute to the SIMPLE IRA plans.

What If My Employer Offers a Recommended Option?

Some employers that offer a 5304 SIMPLE IRA may offer a recommended retirement option. They might even offer a pre-filled tax form to make the process of setting up the plan as simple as possible. Because it is a 5304 plan, however, you have the option of choosing your own financial institution. This means you will need to fill out the 5304 SIMPLE to get your plan started.

Employers can change their SIMPLE IRA from a 5304 designation to a 5305, but they must provide all employees with a 60 day notice of this change. The one thing that you’ll want to watch out for with the financial institutions that manage these plans are high fee rates. Anything above 1.5% on a 5304 SIMPLE IRA is a high fee and it is not uncommon to see fees as high as 2.25%. You can avoid these fees by going with a money market savings plan, but with interest rates hovering around 1% for nearly a decade, that won’t provide you with a lot of growth.

High fees are going to eat away at your portfolio, especially on tough investment years. If you have a 2.25% fee and your return is 4% on your investments, then you’ve really just achieved 1.75% growth. The financial institution is making more money than you. Is that really what a good retirement plan should be?

It is important to remember that a 5304 SIMPLE allows employees to choose their financial institution. They will always be able to select how aggressively they want to invest their income. To provide the best possible benefit, it is advisable to give employees the most control possible over their retirement. In doing so, you’ll manage costs as an employer and employees will be able to save effectively for their retirement.

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