SIMPLE IRA Rules

An Individual Retirement Account (IRA) is a type of investment vehicle which employed individuals could give contributions into, and this will serve as a retirement savings fund. There are rules and regulations for such investment vehicle, and it is important that the investors must be familiar with such rules. Learning the IRA basics will surely help the investors enjoy the most benefits of his retirement plan.

There are several types of IRA plans, and though the most popular plans are often limited to the Traditional and Roth IRAs, there are other plans that must also be considered such as the SIMPLE (Simplified Incentive Matched Plan for Employees) and SEP (Simplified Employee Pension) IRAs. Just as with Roth and Traditional IRAs, there are various IRA rules and regulations for both SEP and SIMPLE IRAs as well. Some of the SEP IRA rules may be different with those rules for SIMPLE, just as the Roth IRA rules are also different from those of Traditional IRA.

Eligibility

In order to be eligible for a SIMPLE IRA, the investor’s employer must first offer the plan to its employees. The employer must have no more than 100 employees who are earning income of $5,000 or more in the prior year. The employer is not allowed to offer another qualified plan, such as a 401k. Thus, many small businesses opt to get a SIMPLE IRA as a retirement solution. For employees who wish to participate in their employer’s SIMPLE IRA plan, they must have received at least $5,000 in compensation for the past two years, and they must be paid at least $5,000 compensation for the current year.

Contributions

The 2011 SIMPLE IRA rules for contribution allows the participating employees for a contribution limit of $11,500. For those 50 years old and older, they are allowed for catch-up contributions of $2,500. Investors who are aged at least 59 and 1/2 years are allowed for qualified distributions, or also known as normal withdrawals, from a SIMPLE IRA.

Withdrawals

SIMPLE IRAs follow the Traditional IRA withdrawal rules, including the exceptions. However, there is one unique rule, also known as the “2-year period rule”, that is only applicable to SIMPLE IRAs. The 2-year period starts on the exact date on which the employee first participated in any type of SIMPLE IRA plan which is maintained by the employer. This must also be the first day on which a contribution is made by the investor’s employer which was deposited into the investor’s SIMPLE IRA fund. However, if this employee or investor takes an early distribution within this 2-year period, the additional tax penalty is then raised from 10% to 25%.

Rollover

For a SIMPLE IRA rollover, there are IRA rollover rules that must be followed. Most rollovers from a SIMPLE IRA plan are not considered taxable distributions, but these are also subject to a two-year rule. This means that the employee must wait 2 years before the SIMPLE IRA can be rolled over into any other qualified plan or IRA. But if the employee wants to have a tax-free rollover before the 2-year holding period has expired, this must just be rolled over to another SIMPLE IRA account.

  • Bob43barth

    As a retiree working part tine, being eligible to contribute $6000, I contributed 4889 in 2011. Later in 2012 I computed my total income tax to be under 2000. Only about 3000 dollars of this contribution was useful as a tax credit. If I take it all back as a distribution of 28,000 dollars total, in 2012, is the entire distribution taxable next year, or is there an allowance for a previous contribution not completely creditable?

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