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SIMPLE IRA Plans: An Introduction & Guide

What is a SIMPLE IRA?

A SIMPLE IRA, or Savings Incentive Match PLan for Employees, is a type of retirement plan that allows employees and employers to contribute to traditional IRA's setup for employees. In general, it is designed for smaller retirement plans and companies with fewer than 100 employees. Similar to a Traditional 401(k) plan, SIMPLE IRAs allow employees to make before tax contribution that will grow tax deferred until distributions are made at a future date, primarily in retirement. 

Important Information about SIMPLE IRA Accounts

In general, if you expect to earn at least $5,000 in the current calendar year AND you’ve earned at least $5,000 during any two prior calendar years, you’re eligible to participate in your company’s SIMPLE IRA plan. Your employer may have less restrictive requirements, which would be outlined in your plan’s Summary Description.

Your contributions
You decide how much of your pay, up to IRS limits,* you want to contribute. Your contributions will be deducted directly from your paycheck. You can make:

• Before-tax contributions. Because you’re contributing money from your paycheck before income taxes are deducted, you reduce your annual taxable income in the
year the contributions are made. Before-tax contributions allow your savings to accumulate tax-deferred. In other words, you don’t pay taxes on what you save or on your assets as they grow until you take the money out at retirement.
• Additional catch-up contributions. If you’re 50 or older, you can contribute an additional amount* before taxes.

• Maximum Annual Contribution Limits:

*For 2020: $13,500 per year or $ 15,500 per year if you are 50 or older.

Your employer’s contributions
As described in your plan’s Summary Description, your employer will make one of two types of contributions:
Matching. Your employer may match any contributions you make, dollar for dollar, up to 3% of eligible compensation.
Nonelective. Your employer may contribute up to 2% of your eligible compensation to your SIMPLE IRA account — regardless of whether you make any contributions. Review the Notification to Eligible Employees for the maximum compensation amount used to calculate contributions.

The money that you and your employer contribute to the plan is vested immediately — in other words, it’s yours to keep. Your investment options You’re in control: You select the American Funds you believe are most appropriate for your financial needs and goals. When choosing your investments, it’s a good idea to consult your financial advisor.

Any money you take out of your SIMPLE IRA is subject to ordinary income tax, and if you withdraw the money before you reach 59½, a 10% federal tax penalty may apply. If withdrawals are made during the first two years of participation in the plan and you’re under 59½, a 25% tax penalty may apply.

 For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. 

Videos to help you better understand SIMPLE IRA accounts and what to do next:

Ok, enough reading the high level information about SIMPLE IRA accounts. Lets dig into what you need to know about enrolling into a retirement plan and how to get started. Click each link below for a video on the specific topic you would like to learn about. If you are new to your retirement plan, we recommend that you want each video as they are all very helpful guides to your retirement future!

Step 1 - A Guide to SIMPLE IRA Plans

Step 2 - The Importance of Saving for Retirement

Step 3 - Investing: How To Get Your Savings Working For You

Step 4 - Enrolling Into The Plan

Why Enroll in a SIMPLE IRA? - American Funds Short Video