Are SIMPLE IRAs tax deductible?

Also available are "SIMPLE" IRA accounts, which are salary reduction retirement plans intended for small businesses. As many as 36 million people working for companies with 100 or fewer employees could benefit from the small business pension plan, called SIMPLE, for Savings Incentive Match Plan for Employees. Employees can make tax deductible contributions of up to $11,500 ($14,000 for participants age 50 or older) per tax year. Employers match the contribution. The money isn't taxed until withdrawn.

A SIMPLE plan can be maintained by an employer that meets the two (2) following qualifications:


in the previous calendar year had no more than 100 employees who earned compensation of $5,000 or more; and


does not maintain any other retirement plan.

To be eligible to contribute to a SIMPLE IRA an employee must reasonably be expected to earn $5,000 or more; provided at least $5,000 of earnings was received by the employee in any two prior tax years. Employees make elective salary reduction contributions of up to $11,500 and employers make either a matching contribution or a fixed non-elective contribution. All contributions are fully vested and non-forfeitable when made. Employee contributions are subject to FICA tax withholding.

If an employer chooses matching contributions the employee's contribution is matched by the employer up to 3% of the employee's compensation. If an employer chooses the non-elective contribution the employer must contribute 2% of the employee's compensation.

Simple IRA Distributions
Distributions from SIMPLE IRAs are subject to the regular distribution tax rules. However, during the first two (2) years the early distribution penalty tax is 25%.

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