- Can an Employee Deduct SIMPLE IRA Contributions?
- Can I Claim SIMPLE IRA Contributions on My Taxes?
- Can an Employee Make Contributions to Both a 401(K) & an IRA?
- Can a Profit Sharing Plan Be Transferred to an IRA?
- Can I Deduct My IRA Employer Contributions?
- The Tax Differences for SIMPLE IRA & 403(b)
A savings incentive match plan for employees individual retirement account, which is usually known as a SIMPLE IRA, provides small employers with an investment plan in which they may contribute to their employees’ retirement. The plan, which is designed to be easy to administer, sometimes serves as a small business’s alternative to a traditional 401k plan. Although SIMPLE IRAs approximate 401ks, the Internal Revenue Service applies much different rules – including those that concern employee loans – to each type of retirement account.
SIMPLE IRA Basics
Because the IRS classifies SIMPLE IRAs as straightforward IRAs and not profit-sharing plans such as 401ks, employees receive the benefit of pretax contributions to the plan as with all other qualified plans. Similarly, employees can’t access funds for an emergency loan from a SIMPLE IRA or any other IRA-based retirement plan without incurring a penalty as if it were an early, unqualified distribution. In some circumstances, employees may receive a loan from the balance of their 401k, however.
Early Distribution Penalty
Funds contributed to a SIMPLE IRA aren’t locked away until an employee reaches qualifying retirement age, 59-1/2, but the IRS places heavy penalties on any distribution made from the account before the beneficiary reaches that age. An investor who receives a nonqualified distribution must pay a 10-percent excise tax on the distribution. In addition, as with distributions from all pretax retirement accounts, the amount received is taxed as if it were earned income, and the investor pays taxes at his marginal tax rate. For example, if an employee takes an early distribution of $10,000 from his SIMPLE IRA in lieu of an emergency loan, and is in the 25 percent tax bracket, he will owe $3,500 in income taxes and penalties on the withdrawal.
401k Loans to Employees
Employees may only receive loans from their 401k balances, not IRA-based plans, and only if the plan is structured to permit loans. The IRS allows investors to borrow up to $50,000 from their 401k – though individual plans may reduce that amount – which must be repaid with fair market interest within five years or the loan goes into default, and payments must be made on at least a quarterly basis to avoid default. The IRS treats a 401k loan that’s gone into default as an early distribution and assesses a 10-percent penalty and any income taxes, if applicable.
Employer Contributions and Vesting
Even though an employee can’t tap into her SIMPLE IRA for a loan without incurring a penalty, in most cases her employer can’t prevent her from withdrawing money from the SIMPLE plan. Employer contributions to SIMPLE accounts vest immediately, meaning they become employees’ property as soon as an employer makes them. Employees may rollover SIMPLE IRA funds any time two years after the first contribution is made.