What is a SIMPLE IRA?

A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

Pros and Cons:

• Easy and inexpensive to set up and operate

• Employees share responsibility for their retirement

• No discrimination testing required

• Inflexible contributions

• Lower contribution limits than some other retirement plans

Who Contributes: Employer must contribute and employee may contribute.

Contribution Limits: Total contributions to each employee's SIMPLE IRA are limited.

Filing Requirements: An employer generally has no filing requirements.

Participant Loans: Not permitted. The assets may not be used as collateral.

In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59-1/2. Also, if withdrawals are made within the first two years of participation, the 10% additional tax is increased to 25%.

What additional taxes may apply to SIMPLE IRA withdrawals?

Unless you qualify for an exception, you'll have to pay an additional 10% tax on the amount you withdraw from your SIMPLE IRA. This additional tax increases to 25% if you make the withdrawal within 2 years from when you first participated in the SIMPLE IRA plan.

You don't have to pay the additional 10% or 25% tax if:

• You're age 59½ or older when you withdraw the money

• Your withdrawal is not more than:

  • Your unreimbursed medical expenses that exceed 10% of your adjusted gross income for 2021 (7.5% for 2017-2020),

  • Your cost for your medical insurance while you're unemployed,

  • Your qualified higher education expenses, or

  • The amount to buy, build or rebuild a first home (up to $10,000)

• Your withdrawal is in the form of an annuity

• Your withdrawal is a qualified reservist distribution

• You're disabled

• You're the beneficiary of a deceased SIMPLE IRA owner

• The withdrawal is the result of an IRS levy
  

To learn more, scroll to the bottom of the page for two documents that go into greater detail, or click below for the SIMPLE IRA information page and FAQ from the IRS website.