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A Savings Incentive Match Plan for Employees (SIMPLE IRA) is a retirement plan for owners of small businesses with less than 100 employees. Employers have the option of contributing matching contributions to their employees as well as non-elective contributions. The maximum contribution for employees is $14,000 for 2022, with an over 50 catch up provision of $3,000. Unlike creating a 401k, creating a SIMPLE plan is relatively easy to establish. For employees to participate in the plan, they must have made at least $5,000 in any 2 previous calendar years with the expectation to earn at least $5,000 this year.
Once established, employers MUST contribute to each of their employee's plan each year, although they can choose between 2% non-elective or 3% matching contributions. Unlike a SEP or 401k, employees must wait 2 years after they have first joined the plan to roll it into an IRA. Contribution limits are also lower than that of a 401k or SEP IRA. Anyone can contribute to an IRA, regardless of level of income. This differs from a Roth IRA, which has phaseouts that disallow contributions for those who make over a certain amount of income. Whether or not the contributions to an IRA can be used as income tax deductions depend on two things: whether you or your spouse is covered by a Qualified Employer Sponsored Plan AND if so, income must be under certain limits. Those limits change yearly. All distributions from an IRA are subject to income tax. If taken out of the IRA before 59 ½, the distribution would be subject to an additional 10% penalty. There are several exceptions to the 10% penalty for individuals under 59 ½ years of age, one being $10,000 exemption for a first-time home buyer.
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