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You can set up a SIMPLE IRA Plan on your own by using IRS Form 5304-SIMPLE IRA PLAN or Form 5305-SIMPLE IRA PLAN, but most people turn to financial institutions. SIMPLE IRA Plans are offered by the same financial institutions that offer IRAs and 401(k) plans.

You can expect the institution to give you a plan document (approved by IRS or with approval pending) and an adoption agreement. In the adoption agreement you will choose an "effective date", which is the beginning date for payments out of salary or business earnings. Remember, that date can't be later than October 1 of the year you adopt the plan, except when a business is formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE IRA Plan. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE IRA Plan may also be provided. You will also be establishing a SIMPLE IRA Plan account for yourself as participant.

There's no legal barrier to withdrawing amounts from your SIMPLE IRA Plan, whenever you please. There can be a tax cost, though: Besides regular income tax, the 10 percent penalty tax on early withdrawal (generally, withdrawal before age 59 1/2) rises to 25 percent on withdrawals in the first two years the SIMPLE IRA Plan is in existence.

Those with relatively modest earnings will find that a SIMPLE IRA Plan lets them contribute (invest) and deduct more than other plans. With a SIMPLE IRA Plan, you can put in and deduct some or all of your self-employed business earnings. The limit on this "elective deferral" is $12,000 in 2014 (same as 2013). This limit is expected to be adjusted for inflation in future years.

If your earnings exceed that limit, you could make a modest further deductible contribution--specifically, your matching contribution as employer. Your employer contribution would be 3 percent of your self-employment earnings, up to a maximum of the elective deferral limit for the year. So employee and employer contributions for 2014 can't total more than $24,000 ($12,000 maximum employee elective deferral, plus a maximum $12,000 for the employer contribution.)

Catch up contributions. Owner-employees age 50 or over can make a further deductible "catch up" contribution as employee of $2,500 in 2014 (same as 2013).

Example: An owner-employee age 50 or over in 2014 with self-employment earnings of $40,000 could contribute and deduct $12,000 as employee plus an additional $2,500 employee catch up contribution, plus a $1,200 (3 percent of $40,000) employer match, for a total of $15,700.

Low-income owner-employees in SIMPLE IRA Plans may also be allowed a tax credit up to $2,000 in 2014 for single filers ($4,000 married filing jointly). This is known as the "Saver's Credit" and income must not be more than $60,000 for married filing jointly, $30,000 for singles, and $45,000 for heads of household.

SIMPLE IRA plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.

If living expenses are covered by your day job (or your spouse's job), then you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE IRA plan retirement investments.

An individual 401(k) plan however, could allow you to contribute more, often much more, than SIMPLE IRA Plan. For example, if you are less than 50 years old with $50,000 of self-employment earnings in 2014, you could contribute $12,000 as employee to your SIMPLE IRA PLAN plus an additional 3 percent of $50,000 as an employer contribution, for a total of $13,500. A 401(k) plan would allow a $30,000 contribution.

With $100,000 of earnings, the total for a SIMPLE IRA Plan would be $15,000 and $42,500 for a 401(k).

SIMPLE IRA plans contemplate contributions in two steps: first by the employee out of salary, and then by the employer, as a "matching" contribution (which can be less than the employee contribution). Where SIMPLE IRA Plans are used by self-employed persons without employees - as IRS expressly allows - the self-employed person is contributing both as employee and employer, with both contributions made from self-employment earnings. (One form of SIMPLE IRA plan allows employer contributions without employee contributions. The ceiling on contributions in this case makes this SIMPLE IRA Plan option unattractive for self-employed individuals without employees.)

Note: To establish a SIMPLE IRA Plan you:

• Must have 100 or fewer employees.
• Cannot have any other retirement plans.
• Need to annually file a Form 5500.
• Employees must earn $5,000 a year.

A quick list of pros and cons:

• Plan is not subject to the discrimination rules that everyday 401(k) plans are.
• Employees are fully vested in all contributions.
• Straightforward benefit formula allows for easy administration.
• Optional participant loans and hardship withdrawals add flexibility for employees.
• No other retirement plans can be maintained.
• Withdrawal and loan flexibility adds administrative burden for the employer.