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What is a Simple IRA?

Article Details
  • Written By: Margo Upson
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 September 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A simple IRA is an IRA plan meant for small companies. Simple, or Savings Incentives Match Plan for Employees, Individual Retirement Accounts are meant for companies with fewer than 100 employees. These IRA plans are also ideal for self-employed individuals.

Simple IRAs are generally set up one of two ways. The first requires employers to match all employee contributions up to 3% of the employee’s income. In this plan, employees must contribute for their employer to add money to their IRA account. The second requires employers to contribute a flat 2% of their employee’s annual income, regardless of the level of employee contribution. If an employee chooses not to contribute money to their IRA, the company still has to.

With simple IRAs, the only way an employee can contribute is through money being taken from their paychecks. This is usually done by percentages, usually 2-5% of each paycheck. The money is tax-free, being removed from the check before taxes are calculated. Employees cannot make contributions outside of this. The total amount that can be contributed to a simple IRA annually is $11,500 US Dollars (USD). Employees over 50 years of age can contribute an extra $2,500 USD a year as a catch-up, to help save for their impending retirement.

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Employers must have fewer than 100 employees to continue their simple IRA plan. If this number is exceeded, they have up to two years to transfer to another IRA, such as traditional. Also, employers cannot have a different type of IRA plan already if they are applying for a simple IRA for their employees. An IRA must be available to all employees who meet the minimum requirements set by the company, and the company must contribute an equal percentage to all employees who take part in the plan.

The funds in a simple IRA account can be removed at any time; however there is usually added tax for any money withdrawn before the employee turns 59 ½ years old. This tax is generally 10%, unless the money is withdrawn within the first two years of the IRA being opened, in which case the tax is 25%. The money in the IRA can be taken out as one lump or received as regular payments. Employees must begin withdrawals before they turn 70 ½ years old, to prevent the Internal Revenue Service (IRS) from seizing a percentage of the funds.

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