What Are the Pros and Cons of a SIMPLE IRA Plan?

The SIMPLE IRA plan is a type of retirement plan that small companies can use for their employees. This type of retirement plan is different from the traditional 401k that many companies have. One of the best things about this retirement plan is that it is very easy to set up. There are not hundreds of pages of documents that you will have to fill out in order to get things started. In most cases, you can simply make a phone call to a financial brokerage and they will get the process going. 

Easy Maintenance

When it comes to ongoing maintenance, this type of IRA is also very simple to handle. Your year end IRS statements will be easy to understand and complete. In addition, there are not very large fees that you will have to pay to maintain this type of account with your broker.

With this type of retirement account, the employer will match a certain percentage of the contributions of the employee. This helps both the employee and the employer. The employee benefits from this contribution because it provides them with extra money towards their retirement account for free. The employer benefits because they are allowed a tax deduction from their taxable income for every dollar that they contribute. This is a win-win for both parties.

Small Companies Only

One of the biggest advantages of this type of retirement plan is that it is only for small companies. This type of IRA plan is only available for companies with less than 100 employees. There is no wiggle room and there is no option for big companies.

Large Penalty

Perhaps the biggest disadvantage of the SIMPLE IRA is the large penalty that is associated with taking out money. With most retirement accounts, if you withdraw money before you are retirement age, you will only have to pay a 10 percent early distribution penalty. With the SIMPLE IRA, this is not the case. Instead, you may be hit with a penalty as high as 25 percent of the balance. 

If you take money out anytime within the first two years, you will be subject to this penalty. With the SIMPLE IRA, you cannot transfer your money into any other type of account either. For example, if you change employers within two years of starting your contributions and you want to roll your money into a new 401k account, you could not do so within the first two years. If you roll it over, you would be hit with the 25 percent early distribution penalty which would significantly eat into your retirement savings.

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