IRA stands for individual retirement account. It covers a wide range of plans that provide tax benefits when it comes to savings for retirement. IRAs first came out in the 1970s with the enactment of the law known as the Employee Retirement Income Security Act. Taxpayers can choose to give a contribution of up to $1,500. In return they can reduce the size of their income that is taxable. The amount of the reduction of their taxable income would be dependent on the size of their contribution. During the early years IRAs were exclusively for the employees who are not covered by an employer provided retirement plan. That changed in the 80s with the enactment of the Economic Recovery Tax Act. This law provided that all taxpayers who are below 70 and a half years of age are eligible to make contributions to IRAs and this time it does not matter whether they are qualified under a different retirement plan from their employer. That law also raised the yearly contribution amount to $2,000 and it also created a provision where in a taxpayer can add an additional $250 on behalf of his/her spouse.
There are several types of IRA. There’s the Roth IRA, the Traditional IRA, SEP IRA, and then the Simple IRA. The Simple IRA or the Simplified Employee Pension Plan is created both by the contribution of the employer and the employee. It has many similarities with a 401k plan, but their main difference is that a Simple IRA has lower contributions. Simple IRA Contribution Rules are actually easier to follow than those of other similar retirement plans.
-Simple IRA Contributions are paid through tax deductions, which makes it subject to social security, Federal taxes, and even medicare.
-The limits for Simple IRA is a lot lower though. As of 2010 it is set at $11,500 which is a lot lower than the $16,500 that you can expect from other employee provided retirement plans.
-Only employers who have 100 employees and below can establish a Simple IRA plan. Once an employer goes beyond that limit they will continue to be eligible for after two years.
-There is no requirement for employees to keep on making regular contributions to their Simple IRA account.
- The employer has options on how he can make contributions to the Simple IRA account of their employee. They can choose to match the contribution of the employee, or they can provide 2% of the employees compensation.
- There are heavy penalties for early withdrawal in SImple IRAs, so it is not encouraged. A contributor whose age will not go over 59 and a half years, and who has made his first contribution for less than two years can be penalized by as much as 25%. Those who have made their contribution for more than two years can be penalized for as much as 10%. As you can see that would be taking substantial amount from your plan. That means a significant part of your retirement money will be going down the drain.
These are just some of the facts and rulings that are behind the Simple IRA.