The SIMPLE IRA is ideal for self-employed individuals and small business owners. The SIMPLE allows both employer and employee contributions. The participant may contribute up to 100% of the compensation with a maximum of $12,500. Employees over 50 may be able to contribute an additional “catch-up” amount of $3,000.
Employers can select between two different contribution methods.
1. Matching Option: Employer matches participant’s contributions up to 3% of compensation with a maximum of $12,500 for the 2015-2016 plan year. The employer may reduce the employer’s match to 1% of participant’s compensation for any two years in a five-year period.
2. Non-Elective Contribution Option: Employer contributes 2% of employee’s compensation each year regardless of whether the participant contributed or not. The maximum annual compensation on which contributions can be based is $255,000 for 2013.
The Simple IRA has had the following features: (check with www.irs.gov and your tax advisor for current and complete information)
- Employee contributions avoid current income taxation.
- All contributions grow tax-deferred until withdrawn.
- You are 100% immediately vested.
- Withdrawals from SIMPLE IRA are subject to a 25% tax penalty during the first two years if under 59½; 10% penalty after two years and under 59 ½.
- If you withdraw assets gradually, instead of as a lump sum, your balance will continue to grow tax deferred.
- Employers must contribute at least 1% of your salary to a SIMPLE account each year.