While Unproblematic IRAs are in some ways similar to their cousins, traditional and Roth IRAs, they likewise share some features with workplace retirement plans such every bit 401(k)s. Understanding your plan'south rules is crucial for getting the nigh out of it and avoiding common fees.

Here'southward a closer await at some of the near important rules surrounding SIMPLE IRA eligibility, contributions, and withdrawals.

Unproblematic IRA eligibility rules

A SIMPLE IRA is available to self-employed individuals and small businesses with 100 or fewer employees and no other workplace retirement program. Employees automatically authorize if they have earned at to the lowest degree $5,000 in compensation from the business in two prior years (which practise not have to exist consecutive) and await to earn at least $5,000 in the current calendar yr. Employers can also allow employees who don't encounter these criteria to participate if they'd like, only they can't create their own more stringent eligibility requirements.

SIMPLE IRA written with a thick black marker on a white piggy bank.

Prototype source: Getty Images.

However, employers tin exclude employees covered past a union agreement if they cull, even if they meet the above criteria, also every bit nonresident conflicting employees who do not receive U.S. wages from the employer.

Uncomplicated IRA contribution rules

Yous may contribute up to $xiv,000 to a Simple IRA in 2022. This is a piddling lower than the contribution limits for other workplace retirement plans, like 401(k)s, and is much higher than traditional IRA contribution limits for traditional and Roth IRAs. Those 50 and older may also make an extra $3,000 per twelvemonth in catch-up contributions.

This is a picayune less than half the $6,500 catch-up contribution immune to workers with 401(1000)due south. As with all retirement plans, you lot cannot contribute more than y'all earned during the year, and so if you didn't earn at least $fourteen,000 from your employer, your maximum contribution is 100% of your income for the year.

Your contributions reduce your taxable income for the year, so the more you put away in the account, the lower your annual tax bill will be this year. But that ways y'all owe taxes when you lot make withdrawals. More than on that below.

If yous program to participate in your company's Elementary IRA, you must make your contributions within thirty days after the end of the month in which your employer paid you. Commonly you can set it upwardly so the funds are automatically withheld from your paycheck; that mode, you don't have to remember to set aside the money.

Yous must look for an annual election period if you wish to modify your contribution levels. The authorities requires all SIMPLE IRA plans to accept an annual election flow between Nov. 2 and December. 31 every yr, only your employer may choose to have additional election periods throughout the year as long as they are at least threescore days long and the company provides y'all with prior notice virtually the upcoming election period. Talk to your employer if you're unsure when you can make changes to your contribution levels.

You lot don't have to put any money into your SIMPLE IRA if you lot don't want to or cannot beget to. But recollect carefully before you make the determination to stop your contributions. If you do, your employer can prevent you from making new contributions to the business relationship until the start of the side by side calendar year if it doesn't have another annual election period besides the ane required past law.

SIMPLE IRA employer matching rules

Simple IRAs are rare in that they require employers to brand contributions to their employees' accounts, although they may choose between elective and nonelective contributions. Elective contributions are a dollar-for-dollar match of upwardly to 3% of an employee's salary. You get this match only if you personally contribute coin to your Uncomplicated IRA. Otherwise, you forfeit information technology.

If employers aren't able to provide a 3% match for some reason, they may reduce their elective contribution matching percentage. Withal, they may not drib it below 1%, nor tin they drop it below three% for more than two out of v years.

Employers that cull a nonelective contribution must set bated the equivalent of 2% of their employees' compensation, regardless of whether the employee puts any money into their Elementary IRA. For most employees, the 2% contribution is based on actual bacon, but this may not exist the case for high earners. The IRS requires only that employers match two% of the beginning $305,000 the employee earns in 2022, so those who earn more may actually become a smaller lucifer.

Whichever matching formula your employer chooses, the money it contributes to your Elementary IRA on your behalf is always yours to continue immediately with no vesting menstruation. That means y'all take it all with you, even if you leave the visitor afterwards a calendar month. Simply you may non run across this money appear in your account right abroad since your employer has until the tax filing deadline to make its matching contributions.

Simple IRA withdrawal rules

The rules for withdrawing funds from a SIMPLE IRA are similar to the rules for traditional IRA withdrawals. You pay taxes on your money when it comes out of your account, and if you make a withdrawal at younger than 59 1/ii without a qualifying reason, such as the need to pay a big medical bill, you must also pay a 10% early withdrawal penalty. All the same, unlike traditional IRAs and well-nigh other retirement accounts, SIMPLE IRAs charge a 25% early withdrawal punishment if you take coin out within the commencement two years of owning the business relationship.

You likewise have to wait two years if you'd like to roll your Elementary IRA funds over into a traditional IRA without paying any taxes. However, you can roll these funds over to some other Uncomplicated IRA at any time without worrying about tax penalties.

You lot cannot take loans from a Uncomplicated IRA, so if yous are going to tap your retirement savings early on, you must be prepared to face the consequences described in a higher place. It'southward best if yous can avoid early on withdrawals altogether because the fees and the lost investment earnings could hamper your retirement savings, making the chore of saving plenty more difficult.

Equally with any retirement plan, the key to getting the virtually out of your SIMPLE IRA lies in understanding the rules and making regular contributions to your account. If you lot have any questions about how your specific programme operates, don't hesitate to reach out to your employer for clarity.