UNDERSTANDING SIMPLE IRA
SIMPLE stands for Savings Investment Match Plan for Employees where self-employed individuals and small businesses can establish tax-advantaged retirement plans.
Eligibility Criteria
To participate in the plan, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year.
Contributions & Withdrawals
For employers
A SIMPLE IRA is funded by employer contributions and elective employee income deferral. An employer is generally required to either:
- Match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation, or
- Make non-elective contributions of 2% of the employee’s compensation
Employer contributions are deductible as business expenses. Employers must continue to make matching or non-elective contributions to employees’ SIMPLE IRAs even after an employee reaches age 72. Employers may not exclude employees from participating in a SIMPLE IRA plan based solely on their age.
For employees
A SIMPLE IRA follows the same investment, distribution, and rollover rules as traditional IRAs. <br><br>Each eligible employee may make a salary reduction contribution and the employer must make either a matching contribution or a non-elective contribution. No other contributions may be made under a SIMPLE IRA plan. A salary reduction contribution is an amount an employee elects to have contributed to his or her SIMPLE IRA, rather than paid in cash.
Employees can contribute a maximum of amount annually; the maximum is increased periodically to account for inflation. Check with your tax advisor for current contributions.
Those nearing retirement, ages 50 and older, may make an additional catch-up contributions in addition to the annual limit.
There are tax benefits to contributions as well as tax-deferred growth potential for participants/employees.
Withdrawals, Distributions and Exceptions
Your employer cannot require you to retain any portion of the contributions in your SIMPLE IRA or otherwise impose any withdrawal restrictions. The rules for withdrawal for SEP are the same as for a Traditional IRA, meaning, withdrawals can be made at any time, however a 10% early withdrawal penalty may apply if you are under the age of 59½. This penalty increases to 25% tax if you withdraw within 2 years from the time you first participated in the plan. Exceptions in which the additional 10% or 25% tax doesn’t apply are:
- You are age 59 ½ or older.
- Your withdrawal is not more than:
- Your unreimbursed medical expenses that exceed 10% of your adjusted gross income (7.5% if you or your spouse is age 65 or older),
- Cost for your medical insurance while you’re unemployed,
- Your qualified higher education expenses, or
- First time home buying, building or rebuilding (up to $10,000)
- Your withdrawal is in the form of an annuity
- Your withdrawal is a qualified reservist distribution
- You’re disabled
- You’re the beneficiary of a deceased SIMPLE IRA owner
- The withdrawal is the result of an IRS levy
Rollover and Transfer Rules
Tax-free rollovers and transfers of funds from a SIMPLE IRA to another retirement account are allowed to:
- Another IRA (except a Roth IRA if you’ve participated for less than 2 years), or
- An employer-sponsored retirement plan (such as a 401(k), 403(b), or governmental 457(b) plan).
However, during the 2-year period beginning when you first participated in your employer’s SIMPLE IRA plan, you can only transfer money to another SIMPLE IRA. Otherwise, you’re considered to have withdrawn the amount and you must:
- Include the amount in your gross income, and
- Pay an additional 25% tax on this amount (unless you qualify for an exception (see above)).
After the 2-year period, you can also rollover SIMPLE IRA money into a Roth IRA, but you must include it in your income.
