SIMPLE IRA is an acronym for savings incentive match plan for employees individual retirement accounts. A SIMPLE IRA is a type of traditional IRA that is designed for small businesses with 100 or fewer employees. To be eligible for a SIMPLE IRA, an employee must have received at least $5,000 in compensation in the previous two calendar years and expect to receive at least that much in the present calendar year.
As an employee with a SIMPLE IRA, you can contribute pre-tax dollars to your plan through “elective deferrals,” either in cash or as a salary reduction contribution. The latter can be a specified dollar amount or a percentage of your salary. While the IRS does not require employees to contribute, it prohibits employees from opting out of receiving non-elective contributions from their employers.
The IRS requires that your employer makes a contribution on your behalf. This can be either a dollar-for-dollar match of up to 3% of your salary or a flat 2% of pay. Employers must contribute regardless of whether the employee elects to.
An employers’ matching contributions are tax deductible as a business expense. Compared to many other workplace retirement plans, SIMPLE IRAs are cheaper for employers to set up and easy to administer.
Each year, SIMPLE IRA participants can make employee contributions up to a certain amount. For 2018, the figures are the same as they were in 2017. Workers younger than 50 have a $12,500 maximum contribution. Those 50 or older can get a $3,000 catch-up contribution, making the overall maximum $15,500.
Those limits are subject to change year to year. Check out the SIMPLE IRA contribution limits for 2017 and 2018 below. An employee cannot contribute more than $12,500 to a SIMPLE IRA in 2017 and 2018. Employees age 50 or over can contribute an extra $3,000 as a catch-up contribution.
This information is not intended to be tax or legal advice, and it may not be relied
on for the purpose of avoiding any federal tax penalties. You are encouraged to seek
tax or legal advice from an independent professional advisor.