About SIMPLE IRAs
A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a tax-advantaged retirement plan for small and growing businesses.
A SIMPLE IRA is available to any business that:
- Is a sole proprietorship, partnership, corporation, or tax-exempt organization
- Employs 100 or fewer employees who each received at least $5,000 in compensation from the company during the previous year
- Does not currently maintain another company-sponsored retirement plan
SIMPLE IRAs allow you to provide a retirement program for yourself and your employees while minimizing the administrative expenses, government reporting requirements, and complexity associated with other types of retirement plans.
There are advantages for both employers and employees:
- Employer contributions to a SIMPLE IRA are considered a business expense and are tax-deductible for the business.
- Employee contributions reduce their taxable income by the amount of their salary deferral, and earnings grow tax-deferred. Employees do not pay taxes on contributions until they begin to withdraw money from the plan.
A SIMPLE IRA is funded through a combination of employee and employer contributions. Employers are required to make annual contributions and must notify all eligible employees by November 1 of which contribution method will be used the following year.
Employer contributions are required in one of two methods
- Up to a 3% matching contribution
- Employers match each eligible employee's contribution, dollar for dollar, up to 3% of his or her annual compensation or $16,000 for 2016, whichever is less.
- A match between 1% and 3% of total compensation may be elected in any two years in a five-year period.
- A 2% nonelective contribution
- Employers contribute 2% of each eligible employee's compensation. If you choose this option, you will need to make a contribution for all eligible employees, whether or not they elect to contribute to the plan.
2016 employee contribution limits
- Contributions can be up to 100% of compensation, or a maximum of $12,500.
- Those age 50 and over can contribute up to $15,500.
- Employers must establish new plans by October 1 of the first plan year.
- Salary deferrals must be deposited within 30 days after the end of the month in which the amount would otherwise have been payable to the employees in cash.
- Employer contributions may be made through the business’ tax filing due date, including extensions.
Withdrawals by employees can begin as early as age 59½ and must begin by age 70½. Taxes are payable on distributions when they are withdrawn. For early withdrawals by individuals under age 59½, the IRS imposes a 25% penalty if a distribution is taken within the first two years of participating in the plan. After two years, the penalty for anyone under age 59½ who takes a distribution is 10%, except under certain circumstances. Those exceptions include:
- Medical expenses in excess of 7.5% of adjusted gross income
- Health insurance premium payments if unemployed for 12 consecutive weeks
- Qualifying higher education expenses
- Qualifying first-time home purchase ($10,000 lifetime limit)
- Qualified military reservist
- Substantially equal payments made over life expectancy
Any tax or legal information on this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Wells Fargo Funds Management, LLC; Wells Fargo Funds Distributor, LLC; or any of their representatives may not give legal or tax advice.