Contribution limits: You may contribute up to $12,500 of your profit each year, or up to $15,000 if you are age 50 or older. (These are the 2017 limits.) You don’t have to contribute the maximum in any year.
Deadlines: Unlike any other IRAs, you must establish a SIMPLE IRA at least 90 days before the end of the calendar year (October 1st). The deadline to make a contribution is April 15 of the following year, or up to October 15 if you file a tax extension.
Tax deductability: Contributions to a SIMPLE IRA are tax deductible. When you withdraw money after age 59 1/2, you will owe income tax on both your contributions and your earnings on your investment.
Penalty: There is a more severe early withdrawal penalty for removing money from a SIMPLE IRA before age 59 1/2. The penalty is 25% if you withdraw money in the first two years. (The penalty for all other IRAs is 10%.)
If you set up a SIMPLE IRA for yourself, you may have to make a retirement contribution to your employees’ SIMPLE IRA. This will be required if the employee has earned at least $5,000 in any of the two preceeding years, and if the employee is reasonably expected to earn at least $5,000 in the current tax year.
Therefore, if you have employees, or plan to have employees in the near future, you should consider whether or not a SIMPLE IRA is for you.
One big advantage of the SIMPLE IRA is your ability to contribute more than any other type of IRA, other than a 401(k) plan.
I will discuss other IRA options in future articles: SEP IRA, and the self-employed 401(k) plan.
Tom Copeland – www.tomcopelandblog.com
Image credit: newirarules.com
I’ve written much more about IRAs in my book: Family Child Care Money Management and Retirement Guide.