SIMPLE IRAs and 403b plans are two types of employer sponsored defined contribution plans. Funds in both account types grow on a tax-deferred basis. SIMPLE IRAs are only available through employers with no more than 100 employees. You can only participate in a 403b if you work for the public school system, are a self-employed minister or work for certain other tax-exempt organizations. While the accounts provide the same opportunity for tax-sheltered growth, the two account types are subject to different tax rules.
SIMPLE IRAs contain pre-tax money which means that withdrawals from these plans are fully taxable. Neither you nor your employer can contribute money to a SIMPLE IRA on an after-tax basis. Typicallly, 403b plans are also funded with pre-tax earnings, and withdrawals are fully taxable. However, some employers allow you to make contributions with your already taxed earnings. Such plans are known as 403b Roth accounts. You do not have to pay federal income tax on Roth 403b withdrawals as long as you hold the account for five years or more and do not withdraw any money before reaching the age of 59 1/2.
As of 2011, you can contribute the lesser of 100 percent of your annual wages or $11,500 to your SIMPLE IRA. If you are aged 50 or older you can contribute up to $14,000. Your employer can make a matching contribution of up to 3 percent of your salary to the account. Alternatively, your employer can make contributions on behalf of every employee of up to 2 percent of each employee's salary whether or not employees deposit any of their own money into the account. Both employer and employee contributions are pre-tax. The 403b plan requirements place a limit on all annual additions to the plan, meaning it is a combined limit on employer and employee contributions. The limit for employee elective contributions can be increased for those with 15 or more years of service. If this exceeds the annual additions limit for that year, the employer may allow the employee to make after-tax additions.
When you leave your job some employers let you maintain your 403b account, but many require you to roll your 403b money into an Individual Retirement Arrangement, another 403b plan or another retirement plan such as a 401k. The money remains tax-sheltered during and after the rollover. When you have a SIMPLE IRA and leave your job, you can keep your money in the SIMPLE IRA because, although your employer created the account, the account belongs to you. You can also roll it into a new SIMPLE IRA with your new employer. You cannot roll the money into any other IRA or another type of retirement account unless you have held your SIMPLE IRA for at least two years. If you attempt to rollover funds prior to the two year mark, the Internal Revenue Service forces you to accept the funds as a taxable withdrawal, and you cannot reinvest the money in a retirement account.
You usually incur a 10 percent withdrawal penalty if you withdraw pre-tax funds from a 403b before reaching age 59 1/2, although the IRS does not impose the penalty if you use the money for certain qualified expenses such as paying medical bills. You pay no penalty for withdrawing your principal from a Roth 403b. The same premature withdrawal penalties apply to SIMPLE IRAs except that you pay a 25 percent penalty if you access funds that you have held in the account for less than two years. The penalty drops to 10 percent thereafter.
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