A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a retirement savings plan that small businesses with 100 or fewer employees can implement. Simplicity and low setup and maintenance costs are hallmarks of this plan. Employees can make contributions through payroll deductions, and employers can either match the employee’s contributions up to 3% of their salary or contribute 2% of the employee’s salary whether or not the employee contributes. The funds in a SIMPLE IRA grow tax-deferred until retirement, at which time they are taxed as income upon withdrawal.
1. Who can contribute to a SIMPLE IRA?
Both employers and employees can contribute to a SIMPLE IRA. Employees may make salary deferral contributions while employers are obliged to make either matching contributions or non-elective contributions.
2. How much can you contribute to a SIMPLE IRA?
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For 2021, salary deferral contributions are capped at $13,500. Those who are age 50 or older can make additional catch-up contributions of $3,000. Employer matching or non-elective contributions may vary.
3. What happens when I withdraw money from my SIMPLE IRA?
Funds withdrawn from a SIMPLE IRA are generally included in taxable income. Additionally, if you withdraw funds before age 59½, you might face an additional 10% early withdrawal tax penalty.
4. Can I roll over my SIMPLE IRA to another IRA?
Yes, you can roll over your SIMPLE IRA to another IRA without incurring taxes or penalties, however, if the rollover occurs within two years of first participation in the plan, special rules may apply.
5. How does a SIMPLE IRA differ from a traditional or Roth IRA?
The main differences involve contribution limits, tax treatment, and employer involvement. SIMPLE IRAs typically have higher contribution limits than traditional or Roth IRAs and require employer contributions. Unlike Roth IRAs, contributions to SIMPLE IRAs are not made with after-tax dollars, and distributions are taxable.