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There are many types of employer-sponsored retirement plans.

One that may appeal to small businesses and to self-employed individuals is the savings incentive match plan for employees (SIMPLE) because, as the name implies, it is easy to set up and administer, and employers are allowed to take a tax deduction for the contributions that are made.

SIMPLEs can be established by small businesses that have 100 or fewer employees (who were paid at least $5,000 or more in compensation during the previous year) and do not maintain other retirement plans. They can be structured as an IRA for each eligible individual or as part of a qualified cash or deferred arrangement such as a 401(k) plan. Typically, they are structured as SIMPLE IRAs.

Eligible employees (those who earned at least $5,000 in compensation during any two years before the current calendar year and expects to receive at least $5,000 during the current year) can make pre-tax contributions to their plans each year. Participants may contribute 100 percent of their salaries up to $13,500 in 2021. Those who are age 50 or older during the year can elect to make $3,000 in 2021 catch-up contributions. These amounts are indexed annually for inflation. SIMPLE 401(k) plans may also allow employees to make Roth contributions.

Administrators of SIMPLE IRAs are required to make either matching contributions equal to employee contributions (a dollar-for-dollar match up to 3 percent of an employee’s salary) or nonelective contributions, which set a flat 2 percent contribution rate for each eligible employee. Employees are immediately 100 percent vested in contributions made by the employer, and they generally direct their own investments.

Distribution rules are similar to most IRA plans. Withdrawals are taxed as ordinary income and are subject to a 10 percent federal income tax penalty if withdrawn prior age 59½, unless an exception applies. Required minimum distributions also must generally begin after the participant reaches age 72.

An additional rule for SIMPLE plans is that there is a two-year waiting period after the date when an employee enrolls in the plan to transfer contributions to another IRA on a tax-deferred basis. Any withdrawals taken during the first two years of an employee’s participation in the plan are subject to a 25 percent tax penalty in addition to ordinary income taxes. After the first two years, early withdrawals are generally subject to the 10 percent early-withdrawal penalty prior to age 59½. Of course, the IRS sometimes allows exceptions under special circumstances.

SIMPLE IRAs may be a good choice for small-business owners because the responsibility for funding the plan is shared between the employer and the employee. The start-up and maintenance costs also may be lower than for other qualified plans. If you are considering whether to establish a retirement plan for your business, you may want to make it SIMPLE.

What Is an IRA Rollover?

If you leave a job or retire, you might want to transfer the money you’ve invested in one or more employer-sponsored retirement plans to an individual retirement account (IRA). An IRA rollover is an effective way to keep your money accumulating tax deferred.

Using an IRA rollover, you transfer your retirement savings to an account at a private institution of your choice, and you choose how you will invest the funds. To preserve the tax-deferred status of retirement savings, the funds must be deposited in the IRA within 60 days of withdrawal from an employer’s plan. To avoid potential penalties and a 20 percent federal income tax withholding from your former employer, you should arrange for a direct, institution-to-institution transfer.

You are able to roll over assets from an employer-sponsored plan to a traditional IRA or a Roth IRA. Because there are no income limits on Roth IRA conversions, everyone is eligible for a Roth IRA conversion; however, eligibility to contribute to a Roth IRA phases out at higher modified gross income levels. Keep in mind that ordinary income taxes are owed (in the year of the conversion) on all tax-deferred assets converted to a Roth IRA.

An IRA can be tailored to your particular needs and goals and can incorporate a variety of investment vehicles.  Although IRAs typically provide more investment choices than an employer plan, your plan may offer certain investments that are not available in an IRA. Further, the cost structure for the investments offered in the plan may be more favorable than those offered in an IRA. In addition, tax-deferred retirement savings from multiple employers can later be consolidated.

Over time, IRA rollovers may make it easier to manage your retirement savings by consolidating your holdings in one place. This can help cut down on paperwork and give you greater control over the management of your retirement assets.

Keep in mind that you may be able to leave your funds in your previous employer plan, if it is allowed by the plan. You may be able to transfer the funds from your previous employer plan to a new employer plan (if it accepts rollover funds). While you can withdraw the funds from your employer plan as a lump sum, you could incur a potentially sizeable income tax liability in the tax year of the withdrawal and your funds would not be able to continue growing tax-deferred.

Distributions from traditional IRAs are taxed as ordinary income and may be subject to a 10 percent federal income tax penalty if taken prior to reaching age 59½. Just as with employer-sponsored retirement plans, you must begin taking required minimum distributions from a traditional IRA each year after you turn age 72.

Qualified distributions from a Roth IRA are free of federal income tax (under current tax laws) but may be subject to state, local, and alternative minimum taxes. To qualify for a tax-free and penalty-free withdrawal of earnings, a Roth IRA must meet the five-year holding requirement and the distribution must take place after age 59½ or due to death, disability, or a first-time home purchase ($10,000 lifetime maximum). The mandatory distribution rules that apply to traditional IRAs do not apply to original Roth IRA owners; however, Roth IRA beneficiaries must take mandatory distributions.

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