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A SIMPLE IRA, or Savings Incentive Match Plan for Employees Individual Retirement Account, is a type of retirement account that is offered by many small businesses in the United States. It allows both employees and employers to contribute to a retirement savings account.

SIMPLE IRAs are generally easier to administer than other types of retirement plans, like 401(k)s or 403(b)s, which is why they’re often chosen by small businesses. Under a SIMPLE IRA, an employer must either match employee contributions up to 3% of their compensation or make a fixed contribution of 2% of compensation for all eligible employees, even if these employees choose not to contribute themselves.

For employees, contributions are made pre-tax, meaning they lower the individual’s taxable income. The money then grows tax-deferred until retirement, at which point withdrawals are taxed as ordinary income. The contribution limit for a SIMPLE IRA was $13,500 per year for employees under 50, with an additional $3,000 “catch-up” contribution allowed for those over 50.

Like other types of retirement accounts, there are penalties for withdrawing money before reaching the age of 59.5. Specifically for SIMPLE IRAs, withdrawals within the first two years of participation are subject to a 25% early withdrawal penalty, which is higher than the 10% penalty that applies to most other types of retirement accounts. After two years, the early withdrawal penalty drops to 10%.

It’s important to note that tax laws and regulations can change, so for the most current information, it’s best to check with a tax professional or the Internal Revenue Service (IRS).