How a Simple IRA Grows

by Tim Plaehn Google
SIMPLE IRA plans are designed for small businesses.

SIMPLE IRA plans are designed for small businesses.

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The SIMPLE IRA plan is a type of employer-sponsored retirement plan available to small businesses. If your employer offers a SIMPLE IRA plan, the majority of the growth of your account will come from the portion of your wages you choose to contribute into the plan. A couple of other features of this type of retirement plan will help your retirement account grow faster.

SIMPLE IRA Overview

Savings Incentive Match Plan for Employees of Small Employers -- SIMPLE IRA -- plans provide companies with less than 100 employees a ready-to-go retirement plan that includes salary deferrals and employer matching contributions. With a SIMPLE IRA, each participating employee has her own IRA account -- where both employer and employee deposit contributions. The Internal Revenue Services offers two plan document forms. With one choice, the employer picks the custodian for the employee IRA accounts. The other option for a SIMPLE IRA lets employees pick their own IRA custodians.

Salary Deferral Election

With a SIMPLE IRA, employees elect to defer a portion of salary or wages into individual IRA accounts linked to the plan. How fast an account grows depends on how much an employee chooses to defer out of his wages and into the account. At the time of publication, the maximum annual deferral amount is $12,000. Employees over age 50 can make catch-up contributions of $2,500, bringing the total maximum employee contribution amount to $14,500.

Employer Matching Funds

The SIMPLE IRA rules require an employer to select one of two matching contribution strategies. The employer can choose to pay 2 percent of salary for every eligible employee into each employee's IRA account or pay a dollar-for-dollar match up to 3 percent of salary an employee chooses to defer. Under the second option, the employees who choose to defer 3 percent of wages or more will max out the matching contributions. Matching contributions add to the growth of the account of every employee participating in a SIMPLE IRA plan.

Investment Results

Besides the contributions into a SIMPLE IRA account, the value of the account generates growth from the investments selected. Over the long term, the investment growth could be as much or more than the amount of contributions. For example, $5,000 a year saved for 30 years totals $150,000. If that account earned 5 percent per year, the total value would be worth over $330,000 after 30 years. How much a SIMPLE IRA account actually grows depends on the types of investments chosen and the results from those investments.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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