Form of Salary Reduction Plan that qualifying small employers may offer to their employees. Simple stands for Savings Incentive Match Plans for Employees. Employers with no more than 100 employees earning $5,000 or more in a year who do not offer any other retirement plan can offer Simiple Iras. Self-employed workers also are eligible to establish these accounts.
Workers offered a Simiple Ira may contribute up to $10,000 per year into the account. Employees age 50 or older can contribute up to $12,500. Employee contributions are excluded from taxable pay on Form W-2 and are not subject to income tax withholding, although Social Security taxes are paid on those earnings. While the employer may pick the financial institution in which to deposit the simple IRA funds, employees have the right to transfer the funds to another financial institution of their choice without cost or penalty.
Employers must make either a matching contribution or a fixed "non-elective" contribution to their employees' accounts each year. If the employer chooses matching contributions, the employer must match the amount the employee contributes up to 3% of compensation. Or the employer may make a non-elective contribution of 2% of wages for each eligible employee.
Distributions from simple IRAs follow the same rules as regular IRAs, with one exception. If premature distributions are taken before the employee reaches age 591⁄2 and during the first two years after the employee starts participating in the plan, the penalty is 25%, not the usual 10%. After the first two years, the regular 10% penalty applies to pre-age 591⁄2 withdrawals. Withdrawals taken after age 591⁄2 are fully taxable at regular income tax rates, and mandatory withdrawals must begin at age 701⁄2, according to IRS life expectancy tables.
Assets inside simple IRAs can be invested like any other IRAs, in stocks, bonds, mutual funds, bank deposits, annuities, or precious metals.
The simple IRA replaced the Salary Reduction Simplified Employee Pension plan (known as SARSEP) in 1997. SARSEPs may be continued only by employers who established them before 1997. See also Simplified Employee Pension (SEP) Plan.
