A SIMPLE IRA is an individual account that you hold as part of a small employer's retirement plan. You contribute to the account via payroll deductions, and the employer also contributes with a match. The major difference between a SIMPLE IRA and a traditional IRA is the amount you can contribute.
How Does a SIMPLE IRA Work? With a SIMPLE IRA, you and your employees can put a percentage of pay aside for retirement. The money will grow tax-deferred until it's withdrawn at retirement. So, you won't have to pay taxes on your investment growth, but you will have to pay income taxes when you take out money.
The SIMPLE 401(k) plan is a cross between a SIMPLE IRA and a traditional 401(k) plan and offers some features of both plans. For both the SIMPLE IRA and the SIMPLE 401(k), eligible employers must have no more than 100 employees who have received at least $5,000 in compensation from the employer for the previous year.
SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan.
SIMPLE IRAs provide a convenient alternative for small employers who don't want the bureaucratic and fiduciary complexities that come with a qualified plan. Employees still get tax and savings benefits, plus instant vesting of employer contributions.
Withdrawals from SIMPLE IRAs
Generally, you have to pay income tax on any amount you withdraw from your SIMPLE IRA. You may also have to pay an additional tax of 10% or 25% on the amount you withdraw unless you are at least age 59½ or you qualify for another exception.
SIMPLE IRA contributions are not subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Matching and nonelective contributions are not subject to these taxes. Reporting employer deductions of contributions.
A 401(k) has a higher contribution limit than an IRA. A 401(k) may provide an employer match, but an IRA does not. An IRA generally has more investment choices than a 401(k).
Two Plans, One Year
Employers can't offer both at the same time, although they can make separate arrangements for employees covered by a collective bargaining agreement. Nonetheless, as an employee, you might be able to contribute to both plan types in one year if you change employers.
You can legally roll over SIMPLE IRA assets into a 401(k) plan. However, the tax treatment of the rollover will be dictated by the rollover date. If you want to avoid paying taxes, wait for two years from the date of plan participation before you carry out the rollover to a 401(k).
NerdWallet's Best IRA Accounts of May 2021
Tax benefits — Employer contributions qualify as a tax-deductible business expense. Affordable cost — A $10 one-time setup fee and an annual $10 fee, both per participant.
The amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $13,500 in 2020 and 2021 ($13,000 in 2019 and $12,500 in 2015 – 2018).
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