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What Are Tax Rules for SIMPLE IRAs?

By    |   Tuesday, 26 May 2015 03:10 PM

A SIMPLE IRA is a common retirement plan for employees of small businesses. It stands for Savings Incentive Match PLan for Employees Individual Retirement Account(IRA).

SIMPLE IRAs differ from other IRA and retirement plans primarily in that the employer must contribute to the account whether the employee contributes or not. If an employee contributes to the account, the employer must match the contribution up to three percent of the employee’s pay, according to Investopedia.

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The employer can also choose to make “nonelective contributions.” Instead of the three percent match, these contributions are two percent of the employee’s compensation and must be made for all employees, regardless of whether they contributed that year or not.

In terms of the contribution limits, an employee can contribute up to $12,500 ($15,500 if older than 50) in 2015. The contribution limits change every year and are laid out on the IRS website.

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All contributions to this plan are tax-deferred. This means the money is taxed when it is dispersed to the retiree. However, like most retirement plans, there may be tax penalties if money is taken out before an individual turns 59 ½ years old, the IRS website explains. Typically, this is a 10 percent additional tax for early withdrawal.

Furthermore, a SIMPLE plan must include all employees who earned a minimum of $5,000 and are expected to earn at least that much during the upcoming calendar year. Employees must participate in the plan if it is what the business owner selects; however, since salary reduction contributions are optional, they may choose not to contribute for that year.

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A SIMPLE IRA is a common retirement plan for employees of small businesses. It stands for Savings Incentive Match PLan for Employees Individual Retirement Account(IRA.
retirement, SIMPLE IRA, account
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2015-10-26
Tuesday, 26 May 2015 03:10 PM
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