Otherwise known as a Savings Incentive Match for Employees IRA, a SIMPLE IRA is a retirement plan small companies can offer to employees.

If you have a SIMPLE IRA, you know that it works much like a 401(k). Contributions are made from pretax paycheck withdrawals, and the money grows tax deferred until retirement.

How it Works

The employer establishes individual Traditional IRA accounts for each of their employees.  Both the company and the employees can then contribute to these accounts, earning tax benefits both at the time of the contribution and by deferring the taxes that would be owed on the profits earned in the account. The employees are 100% vested immediately into their Simple IRA accounts, meaning that if they leave their job, they can take the money with them.

Requirements to Establish a Simple IRA

For an employer to establish a Simple IRA plan, they typically need to meet three conditions:

  1. Currently have 100 or fewer employers.
  2. Complete just one or two forms.
  3. There cannot be any other retirement plans currently offered.

Advantages of a Simple IRA

The administrative cost of establishing and maintaining a Simple IRA plan are very low relative to the other alternatives.

A Simple IRA program is easy to setup. Employees covered by a Simple IRA can contribute to their individual Simple IRA account through regular payroll deductions. They will receive a tax deduction and the investments in the account can grow tax-deferred until withdrawn at or after retirement.

The employer who started the Simple IRA program can choose to either match the employee contributions to their individual Simple IRA accounts or they can contribute a fixed percentage of all eligible employees’ pay to each account. Specifically, the employer can choose either to match their employees’ contribution dollar-for-dollar up to 3% of pay or they can choose to contribute a regular, non-elective 2% for each eligible employee. If they choose the latter, that means that even employees that don’t save anything from their own paycheck must receive the 2% deposit into their Simple IRA.

The employer who sponsors a Simple IRA plan generally has no filing requirements with the IRS. The financial institution that handles the investments for the Simple IRA typically does most of the work.

Simple IRAs do not permit loans. They also have lower contribution limits than a 401(k) plan. Employers should weigh the benefits and drawbacks of these plans before deciding which approach best fits their needs.

Simple IRA Contribution Limits

For business owners who want to save more for retirement, you may find that the Simple IRA contribution limits are more generous than the other retirement account options. That’s because both the company and the individual can contribute, meaning that even self-employed people get to benefit because they can effectively match their own contribution, giving them the ability to contribute almost double the amount of a traditional IRA retirement account. The contribution limits are set annually by the IRS.  For 2015, the contribution limit is $12,500.

Simple IRA Withdrawals

It is possible to make Simple IRA withdrawals but there can be serious repercussions if taken too early. First, any Simple IRA withdrawals are included in the account holder’s income and are subject to regular income taxes. On top of that, there is a special 10% early withdrawal penalty for all Simple IRA withdrawals before the age of 59 ½ years old, except under certain circumstances. In addition, if the withdrawals are made within the first two years of participation in the Simple IRA plan, the 10% penalty tax is increased to 25%.

If you would like more information about a SIMPLE IRA, please call Kades-Margolis at (800) 433-1828, ext. 4, or click this link, fill out the form and submit. We will have one of our associates contact you.

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