Guide to SIMPLE IRAs Key Terms

Understand the terminology associated with SIMPLE IRAs

By Mary Yamin-Garone

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A Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Account (IRA) is one of the more widely used IRAs. It's popular with small businesses and self-employed business owners, and contributions are tax-deferred until the monies are withdrawn. At the same time, employers benefit from the deductions received for their employees’ contributions. What differentiates a SIMPLE IRA from the others is that employers also must contribute to the IRA on behalf of their employees whether or not the employee is contributing. Employers’ contributions can be a dollar-for-dollar match or a flat 2% of the employee’s salary. Understanding some of the key terms associated with SIMPLE IRAs will help you make an informed decision when it comes to investing your money.

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Tax deferred

A tax-deferred contribution allows an individual to avoid paying taxes on any interest the contribution incurs until he or she withdraws the funds. Tax-deferred IRAs allow investors to earn more money on their dollar in less time.

I recommend: Find more information about a tax-deferred IRA at Fidelity Investments.

SEP IRA

Simplified Employee Pension (SEP) IRAs are investment plans created with small businesses, such as sole proprietors and partnerships, and self-employed individuals in mind. A SEP IRA differs from a SIMPLE IRA in that it has an annual contribution limit of $46,000 and can be set up for businesses with one or more employees.

I recommend: Beacon Capital Management Advisors has a detailed overview of SEP IRAs that includes benefits, contribution limits and frequently asked questions.

Matching contributions

SIMPLE IRAs call for employers to make a non-elective or matching contribution to any employee enrolled in one of these retirement accounts. Matching contributions may be 3 percent of an individual's salary or 1 percent in two out of any five years and 3 percent in the remaining years. If an employee decides not to participate in a SIMPLE IRA, the employer does not have to contribute.

I recommend: The Small Business Retirement Glossary defines some of the more common investment terms.

Non-elective contributions

Employers exercising this option are required to contribute two percent of their eligible employees' salaries regardless of whether the employee is contributing.

I recommend: State Farm Insurance offers insights into an employer’s SIMPLE IRA contribution options.

Rollover

When a SIMPLE IRA has been in place for two years an individual may "rollover" or transfer the accounts' assets into a different eligible retirement account.

I recommend: Investopedia details the various distribution methods associated with SIMPLE IRAs.

Contribution limits

Individuals eligible for SIMPLE IRAs are permitted to contribute a restricted amount of their "before taxed" salary to their IRA. Limitations also are placed on an employer's matching or non-elective contributions made on behalf of their employees.

I recommend: Mutual Funds Advisor charts the SIMPLE IRA contribution limits for employees and employers.