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What Is a SIMPLE IRA?

By    |   Thursday, 21 May 2015 04:12 PM

A SIMPLE IRA (Savings Incentive Match PLan for Employees) is a specific type of IRA (Individual Retirement Account) for small businesses and those who are self-employed that requires employers to make certain minimum contributions towards their employees’ accounts, if any employees exist.

According to the IRS, under the SIMPLE IRA, employers may either choose to match their employees’ personal contributions up to 3 percent of their compensation, or to give a flat 2 percent in compensation for their employees with a minimum of $5,000 for the year.

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One thing that distinguishes SIMPLE IRAs from SEP IRAs (Simplified Employee Pension) is that it allows employees to make their own contributions to their own accounts. Furthermore, SIMPLE IRAs allow for contribution limits that are higher than both Roth IRAs and traditional IRAs.

Because many standard retirement plans require rules and regulations that may be hassle for both employees and employers to handle, many small businesses have chosen the SIMPLE IRA because these plans are less complicated and have fewer rules to master.

SIMPLE IRAs’ key benefits listed on Investopedia include tax-deferred savings, tax credit for employers, tax credit for employee contributions, reasonably high contribution limits, multiple investment choices, and others.

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One of the cons of SIMPLE IRAs, however, is a large penalty for taking out money anytime within the first two years of setting up the plan. According to Financial Web, this penalty can be as high as a 25 percent of the balance if someone withdraws money from the account prior to retirement. Another con is that money cannot be transferred from the SIMPLE IRA account to any other account.

It’s also a good idea for employees with SIMPLE IRA accounts to know their personal maximum contribution limits, to recognize their tax advantages, to track their employer’s contributions to the account, and to consider their other investment options under the plan, Financial Web said.

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A SIMPLE IRA (Savings Incentive Match PLan for Employees) is a specific type of IRA (Individual Retirement Account) for small businesses and those who are self-employed that requires employers to make certain minimum contributions towards their employees’ accounts, if any employees exist.
what, is, simple ira
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2015-12-21
Thursday, 21 May 2015 04:12 PM
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