What is a SIMPLE IRA?

A SIMPLE IRA is an employer-sponsored retirement plan and is typically offered at small businesses with 100 or fewer employees..

SIMPLE is the acronym for “savings incentive match for employees”. Small businesses may choose SIMPLE accounts because they are a less expensive and less complicated alternative to a 401(k) plan. However, there are some rules to follow.

With a SIMPLE ANGER, the matching employer is automatically added to the plan. Employer must match contributions employees make to your plan, up to 3% of salary. There is also the possibility of the employer making contributions for employees of a fixed 2% of salary, whether or not the employee chooses to participate in the plan.

This differs from the plans 401k. An employer that offers a 401(k) plan can choose whether to match employee contributions. Many do, but in tough economic times, matching programs are often among the first benefit cuts. Employers who choose to offer SIMPLE IRAs are generally required to match, dollar for dollar, between 1% and 3% of the employee’s salary.

A SIMPLE IRA works much like a 401(k) plan.. Contributions to the plan are made on a pre-tax basis, and the money in the plan accumulates tax-deferred until withdrawn at retirement. If the money is withdrawn before the age of 59.5, a 10% penalty must be paid..

Within a SIMPLE ANGER, your employer will likely offer a wide variety of stock and bond mutual funds. If you are a small business employer, the decision to offer a SIMPLE ANGER compared to a 401k It often has less to do with the size of your company or the number of employees, but with the amount of money that you, as the owner, want to contribute to the plan. The contribution limits for a SIMPLE IRA are different from the 401(k) contribution limits..

Contribution limits

In 2020, employees can contribute up to $13,500 to a SIMPLE ANGER. The catch-up contribution limit for the 2015 – 2020 period is $3,000, making the contribution limit for the SIMPLE ANGER be $16,500 for participants age 50 and older.

This means that if you’re age 50 or older and your employer allows catch-up contributions, you can put an additional $3,000 into the SIMPLE ANGER. Contact your employer to confirm these amounts.

if you have one SIMPLE ANGER and you participate in any other type of employer retirement plan during the year (such as a 401k, for example), the limit on how much you can contribute to all plans is $19,500 in 2020.

With a 401k, individuals can save $19,500 in 2020 or up to $63,500 with a catch-up contribution. So, as you can see, there is a big difference in the amount that can be saved on a 401(k) plans.

Small business owners who are highly paid professionals, such as doctors, dentists, or lawyers, tend to favor plans 401k for small businesses instead of accounts SIMPLE ANGER due to the higher contribution limits offered with a 401k.

Transfers with SIMPLE IRAs

IRA rollovers are less straightforward if you’ve been invested in the plan for less than two years.

If two years have passed since you joined the plan, you can roll over the money into a rollover IRA or 401(k) from a new employer.

If you have participated for less than two years, you can only transfer it to another SIMPLE IRA or leave the money in the previous employer’s plan.

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