A Savings Incentive Match Plan for Employees Individual Retirement Account, commonly known by the abbreviation "SIMPLE IRA", is a type of tax-deferred
employer
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
-provided
retirement plan
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
that allows employees to set aside money and
invest
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
it to grow for retirement. Specifically, it is a type of
Individual Retirement Account
An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's ear ...
(IRA) that is set up as an employer-provided plan. It is an employer sponsored plan, like better-known plans such as the
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
and
403(b)
In the United States, a 403(b) plan is a U.S. tax-advantaged retirement savings plan available for public education organizations, some non-profit employers (only Internal Revenue Code 501(c)(3) organizations), cooperative hospital service organiza ...
(Tax Sheltered Annuity plans), but offers simpler and less costly administration rules, as it is subject to
ERISA
The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax eff ...
and its associated regulations. Like a 401(k) plan, the SIMPLE IRA can be funded with pre-tax salary contributions, but those contributions are still subject to Social Security, Medicare, and
Federal Unemployment Tax Act
The Federal Unemployment Tax Act (or FUTA, ) is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service. ...
taxes.
Contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans as compared to conventional defined contribution plans like Section 402(g), 401(k), 401(a), and 403(b) plans.
Rules
*Only an "eligible employer" may establish a SIMPLE IRA. An eligible employer is one with no more than 100 employees. An employer who has already established a SIMPLE IRA may continue to be "eligible" for two years after crossing the 100-employee limit.
*Employees are not required to make regular IRA contributions to their SIMPLE IRA account.
*A SIMPLE IRA requires a certain minimum contribution from the employer. The employer may either:
** Match the contributions of each employees dollar-for-dollar up to 3% of the employee's compensation (or a smaller percentage in certain cases); or
** Contribute a flat 2% of the compensation for each employee with at least $5,000 in compensation for the year, regardless of the amount the employee contributes.
*Employees who are not yet age 50 are allowed to contribute up to $14,000 in 2022.
Participants who are age 50 or older are allowed to contribute $17,000 for 2022.
These limits are different from the limits that apply to 401(k), 403(b), and
457 plans.
*The SIMPLE plan can technically be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), because the lower contribution limits of the SIMPLE are required as is the expensive extra administration of the 401(k).
*An employee is allowed to make a direct rollover from a SIMPLE IRA into a Traditional IRA after at least two years has passeed from the date the employee first participated in the plan.
*An employee is allowed to make a direct rollover from an IRA, a 401(k), or a 403(b) into a SIMPLE IRA after two years of participation. An employee is allowed to make a direct rollover from another SIMPLE plan into a SIMPLE IRA during the first two years of participation in a SIMPLE IRA.
[SIMPLE IRA Plans for Small Businesses]
. ''Internal Revenue Service''. 2020.
If a participant, who is not yet 59½ years old, wishes take a distribution and it has been less than two years since their first contribution into the plan, they could be required to pay a penalty of up to 25% (10% if more than two years) to the Internal Revenue Service. This two-year rule applies to all distributions, including rollovers from the SIMPLE IRA. Any amount withdrawn and not rolled over, regardless of age, is also subject to ordinary income tax for the year in which the distribution is made.
Annual contribution limits
See also
*
Form 1099-R
In the United States, Form 1099-R is a variant of Form 1099 used for reporting on distributions from pensions, annuities, retirement or profit sharing plans, IRAs, charitable gift annuities and Insurance Contracts. Form 1099-R is filed for each p ...
*
List of finance topics
The following outline is provided as an overview of and topical guide to finance:
Finance – addresses the ways in which individuals and organizations raise and allocate monetary resources over time, taking into account the risks entailed in ...
*
Personal finance
Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.
When planning personal fi ...
References
Additional references
*
*
* {{URL, https://www.law.cornell.edu/uscode/text/26/408#p, Internal Revenue Code Section 408(p)
Individual retirement accounts
0408p
Retirement plans in the United States