“SIMPLE IRA” stands for Savings Incentive Match Plan For Employees Individual Retirement Account. SIMPLE IRA plans are typically offered in workplaces that have no more than 100 employees.
There are two ways in which the employer may contribute to the retirement savings of each of the employees:
- Through matching contributions dollar for dollar
- By adding 2 percent of the annual salary to the account
If matching contributions dollar for dollar, the employer’s contributions must not exceed more than 3 percent of the employee’s annual salary. Each year, employees younger than 50 years of age have the option to contribute up to $13,500 to the SIMPLE IRA account.
If 50 years of age or older, employees can contribute up to $16,500 annually.
A traditional IRA does not require taxes on contributions. When starting out with your IRA, it is important to perform an IRA calculation to give you an idea of what you can realistically afford to put away and how this will grow by the time your retirement comes around.
Employees with a SIMPLE IRA plan may withdraw from the account at any time. However, they will have to pay a tax when withdrawing. Generally, the tax will be 10 percent of the amount that the employee withdraws.
However, if the employee withdraws money from a SIMPLE IRA account within the first two years of starting the account, the tax penalty will be a steeper 25 percent. Once the employee is 59-and-a-half years or age or older, he or she will not have to pay any tax penalty.