Employees may also choose to have their employer make matching contributions to their accounts.
One of the main benefits of a simple IRA is that employees can withdraw their money without penalty if they are 59.5 years old or older. Additionally, employees are allowed to borrow money from their accounts if they need it for emergency purposes.
Employers must set up a retirement plan for their employees if they don’t already have one. Employees can contribute to any retirement plan established by an employer, whether it’s a 401(k) or SIMPLE IRA. Employers that maintain SIMPLE IRA plans can choose to match employee contributions with money from the employer. They may also decide how much to contribute.
Employers can choose not to match employee contributions, but it must be on their written plan document. Employees aren’t allowed to take out any of the employer matching funds unless there is a financial hardship.
SIMPLE IRA plans require employees to set up their accounts with banks or financial institutions that are approved by the federal government. Unlike other retirement plans, employers are not allowed to require employees to invest their money in specific funds or securities.
Employees must have earned income from an employer eligible to contribute to a SIMPLE IRA plan. They are also required to be 21 years old before they can make contributions unless they are active members of the military. Employees who are age 50 or older can contribute more money to their accounts than workers under that age.
Any company with at least two employees can establish a SIMPLE IRA plan, if they haven’t already established another type of retirement plan, like a 401(k). There is no minimum number of employees that must participate in the plan. Employers can choose to match contributions or not, and they may choose whether to cover part-time employees.
How Contributions Work
Eligible employees may contribute up to $12,500 to their accounts each year if they are under age 50, or $14,000 per year if they are age 50 or older. Employers can choose to allow employees less than that amount, but they are not allowed to let employees contribute more.
Employees must also have earned income from the employer. They may make additional contributions of up to $3,000 with money from their traditional IRA accounts.
Maximum Tax Benefit
Contributions are made on a pre-tax basis, so the money is not taxed until it’s withdrawn. The maximum benefit for 2017 is $5,500 if under age 50, or $6,500 if age 50 or older. To qualify for these benefits, employees must have earned at least that amount from their employer.
Contributions made by employees are tax-deductible, while employer contributions may be treated as taxable income.
Employees can withdraw all of their account balance after they have reached the age of 59.5 years old without penalty, but they will have to pay income taxes on any money that’s withdrawn before then.