A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a type of retirement savings plan that is designed for small businesses with 100 or fewer employees. It allows for both employer and employee contributions, and it has relatively lower contribution limits compared to a SEP IRA but higher than traditional IRA.
This type of IRA is not practical to use as a self-employed individual, sole proprietor, or single-member LLC. It is recommended instead to use a SEP IRA, or Solo 401k.
If your employer does offer a SIMPLE IRA, some key things to know about how the SIMPLE IRA works include:
Contributions: Employers and employees can make contributions to a SIMPLE IRA. Employers are required to either match employee contributions dollar-for-dollar up to 3% of their salary or make a 2% non-elective contribution for all eligible employees.
Eligibility: Any employee who received at least $5,000 in compensation from the employer during any two preceding years and is reasonably expected to receive at least $5,000 during the current year is eligible to participate in a SIMPLE IRA plan.
Deductibility: Employer and employee contributions to a SIMPLE IRA are tax-deductible.
Investment options: SIMPLE IRA funds can be invested in a variety of options, including stocks, bonds, mutual funds, and ETFs.
Rollovers: Funds from other qualified retirement plans such as 401(k) and traditional IRA can be rolled over into a SIMPLE IRA, but rollovers from other SIMPLE IRA plans are not permitted during the first two years of participation.
Deadlines: Employers are required to set up a SIMPLE IRA plan by October 1st of the year for which the plan is effective.
Withdrawals: Withdrawals from a SIMPLE IRA before age 59 1/2 may be subject to a 25% penalty in addition to income taxes for the first two years of participation, and 10% penalty for subsequent years. After age 59 1/2, you can withdraw funds without penalty, but you will have to pay income tax on the amount withdrawn.
RMDs: Required Minimum Distributions (RMDs) must begin at age 72.
Simplicity: One of the benefits of a SIMPLE IRA is its simplicity, as it has fewer reporting and disclosure requirements than other types of retirement plans.
The contribution limit is $13,500 for 2021 and 2022 with a catch-up contribution of $3,000 for those over age 50. Withdrawals before age 59 1/2 may be subject to a 25% penalty in addition to income taxes for the first two years of participation, and 10% penalty for subsequent years.