What is a SIMPLE IRA?

SIMPLE IRAs were introduced by the Small Business Job Protection Act of 1996. They first became effective in 1997, replacing the SARSEP plan. A SIMPLE IRA can be adopted by an employer with under 100 employees as long as no other retirement plan is maintained in the same calendar year (other than one for a union, which is subject to a collective bargaining agreement).

What do SIMPLE IRAs offer?

Pre-tax Savings – SIMPLE IRA account contributions are tax deductible for eligible employees.

Tax-deferred Growth Potential – Taxes on SIMPLE IRA investment earnings are deferred, meaning you need not pay taxes on anything that your SIMPLE IRA earns until you retire or take a distribution. For many people, that time is years away, allowing for long-term investment growth. Withdrawals are taxed as ordinary income in the year distributed.

Mandatory Employer Contributions: An employer must make a contribution to the SIMPLE IRA plan – either a 3% matching contribution or a 2% non-elective contribution. The most restrictive an employer can be in determining eligibility is requiring an employee to earn at least $5,000 with the employer in any two of the last five years and to be reasonably expected to make $5,000 in the current year.

Distributions – SIMPLE IRA assets can be withdrawn without penalty after age 59½.1 Upon withdrawal, ordinary income taxes will apply. Distributions must begin no later than April 1 of the calendar year following the calendar year in which you attain age 70½, even if you are still working.

1Distributions from a traditional retirement account are subject to ordinary income taxes in the year distributed. Distributions prior to age 59½ may incur an additional 10% penalty.

Lincoln Investment and its affiliates do not provide tax information or advice. 

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