SIMPLE IRA Facts & Information

Summary: When an employer has less than 100 employees and wants an alternative to a 401(k) plan that is simple and less expensive to install, a SIMPLE IRA may be a good choice. Under a SIMPLE plan, both qualified employees and employers can make contributions to traditional IRA's set up in their name(s).

Eligibility: An employer who has less than 100 employees. Registrant employees must be under age 70.5.

Contribution Limits: 2012

• Employee Deferral: $11,500 plus $2,500 catch-up for age 50+ 
• Employer Contribution: Employers are generally required to match the employee's contribution on a dollar-for-dollar basis, up to 3% of the employee's compensation. Employers may also elect to make "non-elective" contributions equal to 2% of the employee's annual compensation. 

Deductibility: Contributions are deductible for the employer, deferrals are deductible for the employee.

Distribution Rules: All withdrawals are taxed at the ordinary income tax rate of the IRA holder. Withdrawals before the age of 59.5 are normally subject to an additional 10% penalty. A unique rule applies to SIMPLE IRA distributions called "the two-year rule": The 2-year period begins on the date on which the employee first participated in any SIMPLE IRA plan maintained by their employer. If an employee takes an early distribution within this 2-year period, then the additional tax penalty is raised from 10% to 25%.

Required Minimum Distribution: The IRS requires that you withdraw at least a minimum amount - known as a Required Minimum Distribution - from your SEP IRA annually, starting the year you turn age 70-1/2.