SIMPLE IRA and Tax

The SIMPLE IRA accounts are also available, and these are salary reduction retirement plans intended for small businesses. As many as 36 million people working for companies with 100 or fewer employees benefits from the small business pension plan, called SIMPLE. Employees can make tax deductible contributions of up to $10,000 ($12,000 for participants age 50 or older) per tax year according to the SIMPLE plan. Employers match the contribution. The money isn't taxed until withdrawn.

A SIMPLE plan can be maintained by an employer who in the previous calendar year had no more than 100 employees who earned compensation of $5,000 or more and does not maintain any other retirement plan. The employee must reasonably be expected to earn $5,000 or more to be eligible to contribute towards this IRA plan, provided at least $5,000 of earnings was received by the employee in any two prior tax years. Employees make elective salary reduction contributions of up to $10,000 and employers make either a matching contribution or a fixed non-elective contribution, according to the plan. All contributions are then fully vested and non-forfeitable when made. Employee contributions are subject to FICA tax withholding. If an employer chooses matching contributions the employee's contribution is matched by the employer up to 3% of the employee's compensation. If an employer chooses the non-elective contribution the employer must contribute 2% of the employee's compensation.