Those looking to save for retirement may want to consider an Individual Retirement Account. But which is better: a SIMPLE IRA or a traditional one? As is the case with nearly all retirement plans, it depends on everyone’s unique situation. Over at SmartAsset, personal finance expert Sarah Sharkey walks readers through the key differences between SIMPLE and traditional IRAs and the benefits of both.
A Savings Incentive Match Plan for Employees Individual Retirement Account, or SIMPLE IRA, is a type of IRA that small business owners can open if they have 100 employers or less. A small business owner can set up a SIMPLE IRA for themselves and their employees. Like a 401(k), employees can choose to make elective deferrals, which means they can choose to put a part of their paycheck into this vehicle pre-tax.
With a SIMPLE IRA, an employer can either match up to 3% of their employee’s contributions or choose a non-elective contribution, which isn’t tied to how much an employee contributes in a given year. Employers can deduct their contributions made to employees’ SIMPLE IRAs as a business expense and use this vehicle to reduce their tax obligations.
Meanwhile, a traditional IRA can be opened by an individual without their employer’s involvement. Although that eliminates an employer-match option, it still provides a tax-advantaged retirement saving option. And like a SIMPLE IRA, the contributions are tax-deferred.
Sharkey noted a few key differences when deciding between a SIMPLE IRA and a traditional IRA. For one thing, the SIMPLE IRA contribution limit is much higher. While up to $14,000 can be contributed to a SIMPLE IRA in 2022, the contribution limit for a traditional IRA is only $6,000.
Required employer matches are also a key difference. With a SIMPLE IRA, an employer must match part of their employee’s contribution. But that’s not the case with a traditional IRA, where no employer contribution is required.
The early withdrawal penalties associated with SIMPLE and traditional IRAs also come with slightly different rules. Withdrawing funds from a SIMPLE IRA within the first two years of participation can result in a steep early withdrawal penalty of 25%. Meanwhile, a SIMPLE IRA’s early withdrawal penalty matches that of a traditional IRA after the two-year mark.
“Investing in an IRA is a smart move for your retirement savings. But choosing between a SIMPLE IRA and a traditional IRA will vary based on your unique situation,” writes Sharkey. “If you want guidance on the best choice for your individual situation, consider working with a financial advisor. A qualified financial advisor can help you choose the best option.”
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