SIMPLE IRA

Savings Incentive Match Plan for Employees Individual Retirement Account

A SIMPLE IRA is a type of tax-deferred employer-provided retirement plan .

That allows employees to set aside money and invest it to grow for later use. Specifically, it is a type of Individual Retirement Account (IRA) that is set up to be an employer-provided plan. It is an employer sponsored plan, like better-known plans such as the 401(k) (profit-sharing plans) and 403(b) (Tax Sheltered Annuity plans), but offers simpler and less costly administration rules.

Like a 401(k) plan, the SIMPLE IRA is funded by a pretax salary reduction. Like other salary reduction contributions, these deductions are subject to social security, medicare, and Federal Unemployment Tax Act taxes.

Contribution Limits: 

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Limited:

Only an "eligible employer" may establish a SIMPLE IRA. An eligible employer is one with no more than 100 employees. An employer who has already established a SIMPLE IRA may continue to be "eligible" for two years after crossing the 100 employee limit.   

The SIMPLE plan can be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), since the lower contribution limits of the SIMPLE are required as is the expensive extra administration of the 401(k).

 Unlike a 401(k), a SIMPLE IRA cannot be rolled over to a Traditional IRA without a waiting period (two years from the date the employee first participated in the plan).      

Early withdrawal penalty:

If a participant under the age of 59 1/2wishes to take a distribution and it has been less than two years since their first contribution into the plan, they could be penalized up to a 25% (10% if more than two years) by the Internal Revenue Service. This rule also applies to Rollovers from the Simple IRA. The amount withdrawn, regardless of age would also be subject to income taxes for the year in which the distribution is made.