A SIMPLE IRA, or "Savings Incentive Match Plan for Employees Individual Retirement Account", is a type of tax-deferred employer-provided retirement plan in the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 that allows employees to set aside money and invest

Investment

Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

 it to grow for later use. Specifically, it is a type of Individual Retirement Account

Individual Retirement Account

An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...

 (IRA) that is set up to be an employer-provided plan. It is an employer sponsored plan, like better-known plans such as the 401(k)

401(k)

A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...

 (profit-sharing plans) and 403(b)

403(b)

A 403 plan, also known as a tax-sheltered annuity, is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers , cooperative hospital service organizations, and self-employed ministers in the United States...

 (Tax Sheltered Annuity plans), but offers simpler and less costly administration rules. Like a 401(k) plan, the SIMPLE IRA is funded by a pretax salary reduction. Like other salary reduction contributions, these deductions are subject to social security, medicare, and Federal Unemployment Tax Act

Federal Unemployment Tax Act

The Federal Unemployment Tax Act is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service...

 taxes. Contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans: $11,500 for 2010, as compared to $16,500 for convention defined contribution plans (Section 402(g) limit) like 401(k), 401(a), and 403(b) plans.

Contribution Limits

Year	Under Age 50	Age 50 or Older
2005	$10,000	$12,000
2006	$10,000	$12,500
2007	$10,500	$13,000
2008	$10,500	$13,000
2009	$11,500	$14,000
2010	$11,500	$14,000
2011	$11,500	$14,000

Technicalities

• Only an "eligible employer" may establish a SIMPLE IRA. An eligible employer is one with no more than 100 employees. An employer who has already established a SIMPLE IRA may continue to be "eligible" for two years after crossing the 100 employee limit.
• Employees are not required to make regular IRA contributions to their SIMPLE IRA account.
• The plan requires a certain minimum contribution from the employer. The employer may either (see http://www.irs.gov/retirement/article/0,,id=108941,00.html) match the contributions of employees dollar for dollar up to 3% of the employee's compensation (subject to certain rules that allow for lower contributions—see IRC
  Internal Revenue Code
  The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
  
   Sec. 408) or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year, regardless of the amount the employee contributes.
• The employee contribution limit is $11,500 for 2010, and $11,500 for 2011.
• A catch-up provision is available for participants over the age of 50. The extra catch-up contribution allowed remains $2,500 for years 2009 and 2010, as compared to $5,500 catch up available in a 401(k), 403(b), and 457 plan
  457 plan
  The 457 plan is a type of non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis...
  
  s.
• The SIMPLE plan can technically be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), since the lower contribution limits of the SIMPLE are required as is the expensive extra administration of the 401(k).
• Unlike a 401(k), a SIMPLE IRA cannot be rolled over to a Traditional IRA without a waiting period (two years from the date the employee first participated in the plan).
• SIMPLE IRAs allow for smaller contribution limits than 401(k) or Deferred Contribution Plans.
• SEP IRA
  SEP IRA
  A Simplified Employee Pension Individual Retirement Arrangement is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration...
  
  s and Traditional IRA
  Traditional IRA
  Established by the Tax Reform Act of 1986, . A Traditional IRA is an individual retirement account in the United States...
  
  s (among other retirement plans) cannot be "rolled over" into a SIMPLE IRA.

Early withdrawal penalty

If a participant under the age of 59.5 wishes to take a distribution and it has been less than two years since their first contribution into the plan, they could be penalized up to a hefty 25% (10% if more than two years) by the Internal Revenue Service. This rule also applies to Rollovers from the Simple IRA. The amount withdrawn, regardless of age would also be subject to income taxes for the year in which the distribution is made.

External links

• Retirement Plans FAQs regarding SIMPLE IRA Plans