What is a SIMPLE IRA?
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a type of retirement account designed for small businesses and self-employed individuals. It allows employees to save for retirement while benefiting from tax advantages. The SIMPLE IRA is relatively easy to set up and manage compared to other retirement plans.
Eligibility
Any business with 100 or fewer employees can establish a SIMPLE IRA. Both employers and employees can contribute to the account. Employees must earn at least $5,000 in the previous year to be eligible for participation.
Contribution Limits
For 2023, employees can contribute up to $15,500 to their SIMPLE IRA, with an additional catch-up contribution of $3,500 for those aged 50 and older. Employers must either match employee contributions up to 3% of their salary or contribute a fixed 2% of employee salaries, regardless of employee contributions.
Tax Advantages
Contributions to a SIMPLE IRA are made pre-tax, reducing the employee's taxable income for the year. Taxes on the contributions and earnings are deferred until withdrawals are made during retirement, providing potential growth over time.
Withdrawals
Early withdrawals from a SIMPLE IRA (before age 59½) incur a 10% penalty, which increases to 25% if withdrawn within the first two years of participation. After reaching retirement age, withdrawals are taxed as ordinary income.