SEP IRA

Posts Tagged ‘SIMPLE IRA Rules’

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:

• 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”.

• 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.

• 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.

Question: Can a person make maximum contributions to a SIMPLE IRA and a 401k in the same year?

The person works for two employers, one has a 401k, the other has a SIMPLE IRA.

Answer: There is a maximum you can contribute to your 401(k) and a maximum you can contribute to an IRA. The two have separate limits and one does not affect the other.

Also, if you are contributing to a 401(k) it is generally a good idea to contribute to a Roth IRA as opposed to a traditional IRA unless you need the immediate tax write off.

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Question: IRS Rules about substantially equal premature IRA withdrawals???

Hypthetical situation: I’m 45 and have enough money in my Roth IRA to retire. Is it really as simple, as using the life expectancy table and dividing my balance by that number each year to withdraw from my Roth so I can never work again? No penalty for early distribution, and no taxes since it is a Roth?

Answer: That is generally correct. Of course, with IRS rules there are additional hoops to go through.

Read the details in IRS Publication 590 (Individual Retirement Arrangements), Roth IRAs, starting with “Are Distributions Taxable?” (starting on p. 65)

http://www.irs.gov/pub/irs-pdf/p590.pdf

What is a SIMPLE IRA? By John Colegrove