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Among the stable of various types of IRAs American savers for retirement can take advantage of is a less common plan called the SIMPLE IRA. These kinds are a combination of traditional IRAs and employer offered plans like 401(k)s. The word SIMPLE in this case is actually an acronym that stands for Savings Incentive Match Plan for Employees. This is the most common name for the employer offered tax deferred retirement savings account.
SIMPLE IRAs were created to help smaller employers who have 100 or less employees. The idea was for them to offer their workers retirement plans. The IRS knew that the bigger packages of benefits all too often involved long and difficult opening procedures with mountains of complicated paperwork. Smaller employers simply did not have the time or resource capacity to complete and maintain these types of plans.
Among the advantages of SIMPLE IRAs is that they are not governed by ERISA, the Employee Retirement Income Security Act. This means that they are able to sidestep substantial expenses and significant amounts of paperwork in establishing them. The contributions to these kinds of IRA accounts are also fairly straightforward. Employers must make specific minimum amount contributions to the accounts of the employees.
They can accomplish this by establishing a match program at a minimum of 3% of their employee contributions. Alternatively they might set a 2% of his or her salary flat rate and offer it to every employee who participates.
When employees become part of a company SIMPLE plan, they are basically establishing a traditional IRA via their employing company. A significant disadvantage to these types of IRAs centers on their lower contribution limits. These are less than comparable 401(k) plans or other plans which employers sponsor. The limits amount to $12,500 for a single year in tax years 2015 and 2016.
Rolling over from these types of IRAs is also more complicated. They can not be started without a waiting period first being observed. Once employees start their participation with the plans, they can not do a rollover for generally two years on from their participation dates. The only exception to this rule pertains to transfers between SIMPLE IRAs.
These can be done at any time since they are considered to be a tax free transfer from one trustee to another. In the even of any other type of transfer within the two years waiting period, these are deemed as distributions by the IRS. While most penalties for tax deferred plans are set at 10% withdrawal penalties, these particular IRAs carry a more punishing 25% withdrawal tax penalty.
After the conclusion of the two year time frame, individuals may then move their funds from the SIMPLE plan to a different kind of IRA. The only restriction is that they can not move them to a Roth IRA which is funded with pre-taxed dollars. The current SIMPLE plan as well as the new plan must also allow for the transfer to occur.
As with any kind of retirement plan, early withdrawal penalties apply. If any withdrawals occur before the official retirement age of 59 ½ is attained, the early withdrawal penalties of up to 25% will be assessed against the account withdrawals.
When rollovers are done, direct rollovers are much preferred to indirect rollovers. If account holders pursue indirect rollovers there are tax withholding requirements. It is also possible that the account owner will inadvertently fail to complete the transfer in time or at all and then suffer from the substantial early withdrawal tax penalties of up to 25%.