Whether you own a small business or work at one, you may be investing (or interested in investing) in a SIMPLE IRA. The plan's name is an acronym that stands for savings incentive match for employees. And how much you can contribute to this type of plan changes every year or two with inflation.
SIMPLE IRA Contribution Limits 2014
In 2014, the contribution amount for SIMPLE IRAs remained $12,000. Of course, this limit could vary according to your employer's plan. You may also have access to a catch-up contribution if you are 50 years old or older. In 2014, this catch-up contribution limit remains $2,500. If you are contributing to another plan in addition to a SIMPLE in 2014, the combined total you can put away must not exceed $17,500, which also happens to be the 401(k) maximum contribution limit in 2014.
How Does a SIMPLE Compare to Other Plans?
SIMPLE IRAs are just one of several types of self-employed and small business retirement plan options. In many ways, it works like a typical workplace plan like a 401(k). You invest in the plan with your pre-tax salary, and contributions are invested in mutual funds, stocks, bonds, or other investments that you choose. The account is tax-deferred, meaning no taxes are taken on your investment growth until the money is withdrawn. If you take it out before age 59 1/2, you will pay taxes plus, in most cases, you will be subject to a 10% penalty.
There are differences in how a SIMPLE IRA works. If you have ever had a 401(k), you know what a nice perk it is to have an employer match. With a SIMPLE IRA, the match is built in, up to 3% of salary. The employer may reduce this match to at least 1% in a given year, but not for more than two years in a five year period. And your employer must give you advance notice if they plan to reduce the contribution for the year.
The other option for employers is to make nonelective contributions of 2% across the board. Nonelective means that even if you the employee makes no contribution, your employer still adds 2% of your salary to the account each year. Employers may limit eligibility for 2% nonelective contributions to those employees with at least $5000 in their SIMPLE IRA. The salary limit for these contributions in 2014 is $260,000.
SIMPLE IRA rollovers are also a bit more complicated that other types of rollovers. When you leave your job, you can only move a SIMPLE IRA if you have been in the plan for more than two years. If you've participated in the SIMPLE IRA for less than two years, you must either leave it where it is, or do a rollover into another SIMPLE IRA.
As you can tell, sometimes a SIMPLE IRA is anything but SIMPLE. But if you contribute to one through work, it's a fine place to save for retirement for the built-in match alone. For employers, a SIMPLE IRA could be the right choice only if you plan to match employee contributions.
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