Savings Incentive Match Plan for Employees (SIMPLE) individual retirement accounts are employer-sponsored plans offered through small businesses. You can participate in a SIMPLE IRA and make contributions to a traditional IRA. However, your income level and your involvement in your firm's SIMPLE IRA plan may complicate the tax status of your IRA contributions.
You can participate in a SIMPLE IRA if you work for a business that employs no more than 100 workers that earn more than $5,000 per year. You and your employer can make contributions to the account, but unlike other retirement plans, your employer's contributions are not subject to vesting schedules. This means the money belongs to you right away, whereas employer deposits into 401k plans often become vested or your property over the course of five years. As of 2012, you can contribute up to $11,500 into a SIMPLE IRA. People age 50 and older can make an additional annual contribution of $2,500. You deposit the money on a pre-tax basis and it grows tax deferred.
You can deposit money into an IRA regardless of your income level and your involvement with other retirement plans. As of 2012, your cumulative annual contributions to both traditional and Roth IRAs cannot exceed $5,000 unless you are 50 or older, in which case you can contribute up to $6,000. As with SIMPLE IRAs, traditional IRAs grow on a tax-deferred basis. Generally, withdrawals before the age of 59 1/2 incur a 10 percent tax penalty as well as ordinary income tax assessment.
Your SIMPLE IRA contributions do have an impact on your traditional IRA if you fund your IRA on a pre-tax basis. Tax-deductible contributions to traditional IRAs are subject to income restrictions if funds were deposited during the same tax year into a retirement plan such as a SIMPLE IRA. As of 2012, single taxpayers earning $68,000 or more cannot participate in a SIMPLE IRA and deposit pre-tax funds into a traditional IRA. For married couples filing jointly, you cannot make pre-tax contributions if your adjusted gross income exceeds $111,999 and you have access to a SIMPLE IRA. If you fund a SIMPLE IRA and are married but file taxes separately, you cannot deduct IRA contributions from your taxes if your income exceeds $9,999.
You do not have to make contributions to IRA or SIMPLE IRA plans every year. The fact that you or your employer contributed to a SIMPLE IRA in a prior tax year has no impact on your ability to fund an IRA with pre-tax contributions during the current year. If you leave your job, you can roll your SIMPLE IRA money into your traditional IRA. However, you must wait two years from the date your employer established the account before you roll the funds into a regular IRA. Withdrawals before the two-year mark incur a 25 percent tax penalty and regular income tax assessment.
- Internal Revenue Service: Retirement Plans FAQs Regarding SIMPLE IRA Plans
- Internal Revenue Service: Are You Covered By an Employer's Retirement Plan?
- Internal Revenue Service: 2012 IRA Contribution and Deduction Limits -- Effect of Modified AGI on Deductible Contributions If You Are Covered by a Retirement Plan at Work
- tax forms image by Chad McDermott from Fotolia.com