SIMPLE IRA Rules
February 27th, 2008
If you are the employer setting up a SIMPLE IRA plan, you must know all the SIMPLE IRA rules. If you are an employee participating in the employer’s SIMPLE IRA plan, you should also know the SIMPLE IRA rules. SIMPLE IRA rules are thought of as more complicated than SEP IRA rules because SEP IRA rules are very similar to traditional IRA rules whereas SIMPLE IRA rules are considered more of a 401k type of retirement plan.
Understanding SIMPLE IRA rules
A SIMPLE IRA Plan is a tax favored retirement plan for small employers and self employed business owners. When an employer wants to offer some type of retirement plan or benefits for his or her employees and a 401k plan is too large and complicated, a SIMPLE IRA plan may be just the solution.
Rules of SIMPLE IRA contributions
There are many ways an employer can set up his or her SIMPLE IRA plan for the employees. Contributions for the SIMPLE IRA plan can be in the form of:
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salary deduction contributions
Employees can choose to have their salary deducted and contributed in the SIMPLE IRA plan for retirement. Salary reduction contributions are often referred to as “elective deferrals”.
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matching contributions
Unless the employer chooses to make nonelective contributions to the SIMPLE IRA plan, the employer must make contributions which are equal to the salary reduction contributions the employees choose. Each employee can choose different percentages of salary reduction and SIMPLE IRA Contribution amounts.
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nonelective contributions
Nonelective contributions to SIMPLE IRA Plans are sometimes preferred to matching contributions. Nonelective contributions to SIMPLE IRA Plans can result in less money out of the employer’s pocket.
What are the SIMPLE IRA rules on taxable distributions?
Generally, distributions or withdrawals from a SIMPLE IRA account are fully taxable as ordinary income. Any early withdrawal amounts or early distributions will be subject to tax as well as penalties the same way other types of IRA accounts are subject to.
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