Can I Contribute to a SIMPLE IRA From a Non-Self-Employed Income?

by Cindy Quarters

A savings incentive match plan for employees individual retirement account, usually called a SIMPLE IRA, is a type of savings plan that allows account owners to set money aside for future use. There are specific rules about how much may be placed in a SIMPLE IRA, when it can be distributed and penalties for early withdrawal. The individual account holder is allowed to choose what financial institution will hold her SIMPLE IRA, and her employer may not stop her from withdrawing funds.

SIMPLE IRA Basics

A SIMPLE IRA is designed for use by self-employed individuals and small employers. An individual under the age of 50 is limited to placing $11,500 in the plan per year as of 2011, but this amount is subject to change each year. If the account holder is 50 or over an additional $2,500 may be added each year, an amount that is also subject to change. Contributions may be from either self-employment income or from work done for an employer that offers SIMPLE IRAs to employees.

SIMPLE IRA Benefits

Contributions made to a SIMPLE IRA are made as pre-tax dollars, thus reducing the amount of salary that is taxable. Employers are required to make matching contributions to each employee’s SIMPLE IRA account, up to a limit of 3 percent of the employee’s salary. This amount is not usually vested immediately, but after a period of time it belongs to the employee. This has the dual effect of quickly building the employee’s IRA account while also providing the employer with a write-off, since the cost of matching funds is a business expense and may be deducted from the employer’s taxes.

Withdrawing Funds

Because a SIMPLE IRA is designated as a retirement account, funds are intended to be used only after the employee reaches the minimum retirement age of 59 1/2. Money is taxed as regular income for the year in which it is distributed. Any distribution of money taken from the account before the age of 59 1/2 also triggers an additional penalty of a 10 percent excise tax levied by the IRS. If the money is withdrawn during the first two years the account is open the penalty is 25 percent instead of 10 percent.

Rollovers

The exception to the rule regarding taxes and penalties is when the funds in a SIMPLE IRA are rolled over into another qualified retirement account. During the first two years the account is open it must roll over into another SIMPLE IRA, but after that it can roll over into any IRS-qualified account. Moving it directly from one retirement account to another avoids the need to pay taxes on the money until it is distributed.

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