Individual Retirement Accounts may be a great option for those looking to save for retirement. How do SIMPLE IRAs compare to traditional IRAs? Retirement plans depend on the individual’s unique situation, as is the case for nearly all of them. In this article we provide some explanations on the key differences between traditional IRAs and SIMPLE accounts, as well as their benefits.
SIMPLE IRA vs. traditional IRA
SIMPLE IRAs, or Savings Incentive Match Plan for Employees Individual Retirement Accounts, are types of IRAs that can be opened by small business owners with 100 employees or less. Small business owners and their employees can each establish their own SIMPLE IRA. Elective deferrals, like a 401(k), allow employees to defer some of their paychecks pre-tax, meaning that they may invest some of their money in this vehicle.
A SIMPLE IRA allows employers to match up to 3% of their employees’ contributions or make a non-elective contribution, regardless of how much contributions are made each year. SIMPLE IRAs are an excellent vehicle through which employers can reduce their tax obligations by deducting their contributions as business expenses.
The traditional IRA, on the other hand, can be opened independently by an individual. Even though employer matches are eliminated, it provides a tax-advantaged retirement saving option. IRA contributions are tax-deferred, just like those made to a SIMPLE IRA.
A SIMPLE IRA differs from a traditional IRA in a few key ways, according to Sharkey. A SIMPLE IRA has a much higher contribution limit than a traditional IRA. In 2022, SIMPLE IRAs may be funded up to $14,000, but traditional IRAs are only permitted up to $6,000.
There are also differences in the employer matches required. A SIMPLE IRA requires employers to match a portion of their employees’ contributions. Unlike traditional IRAs, where employers aren’t required to contribute, traditional IRAs do not require employer contributions.
A Platform Of Two IRAs
Traditional and SIMPLE IRAs have slightly different rules when it comes to early withdrawal penalties. SIMPLE IRA participants may face a steep 25% early withdrawal penalty if they withdraw funds within the first two years of participation. After two years, an early withdrawal penalty for a SIMPLE IRA is the same as for a traditional IRA.
Your retirement savings are better served by investing in an IRA. You should consider your unique situation when choosing between SIMPLE IRAs and traditional IRAs. Consult with a financial advisor if you would like guidance on the best course of action for your unique situation. An advisor will be able to provide guidance for you.
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