SIMPLE IRA Plans
A SIMPLE IRA plan is a small business retirement plan for companies with 100 or fewer employees. SIMPLE IRA plans are less expensive and less complex than 401(k) plans or pension plans. SIMPLE IRA plans are regulated by the IRS.
Money contributed to an employee's SIMPLE IRA by a business is tax deductible for the company. Employee contributions are made with pretax dollars and are not included in the employee's income for tax purposes. Furthermore, all money invested inside of a SIMPLE IRA grows tax-deferred.
A SIMPLE must be established by a business. Contributions to employees are deposited into IRA accounts attached to the plan, and known as SIMPLE IRAs. Each employee owns his own SIMPLE IRA account. A business may not place any restrictions on withdrawals from a SIMPLE IRA, nor make contributions to the account a condition of employment.
However, withdrawals from a SIMPLE IRA are considered income and subject to ordinary income taxes. In addition, withdrawals made before the account owner is 59 1/2 may be subject to a 10 percent tax penalty. Like a tradtitional IRA, SIMPLE IRA accounts are subject to required minimum distributions. When the account owner reaches age 70 1/2 a minimum withdrawal, known as an RMD, must be taken each year from the account.
There is no loan provision or provision for hardship distributions in a SIMPLE IRA. This is different than 401k plans which may offer a hardship distribution provision or may offer employees a 401k loan provision.