Significance

• A SIMPLE IRA allows you to contribute to your retirement much like a 401k plan does. However, the SIMPLE plan is simplified for the employer when compared to a 401k plan. Your annual contribution limit for a SIMPLE IRA is $11,500, as of 2011, if you are under age 50, and it is $14,000 if you are 50 or over. This means you are allowed to contribute this money from your paycheck directly into your SIMPLE IRA on a tax-deferred basis. Your employer also contributes to your SIMPLE plan. Your employer must either contribute 2 percent of your total compensation for the year or match your contribution $1 for $1 up to 3 percent of your annual compensation.
  
  

Benefit

• The benefit of a SIMPLE plan is that your employer is obligated to help you save for your retirement under the plan requirements. For the 2 percent contribution, this contribution is non-elective. This means that your employer makes a contribution regardless of whether you make a contribution to your IRA or not. The matching contribution is guaranteed to be $1 for $1, which may be more than you would otherwise get from other retirement plans offering matching contributions.
  
  

Disadvantage

• The disadvantage of a SIMPLE plan is that you cannot take loans from this plan. A 401k plan usually allows loans at the administrator's discretion. Such loans do not incur early-withdrawal penalties. This may make access to your SIMPLE IRA costly, because most withdrawals from your IRA incur a penalty of 10 percent plus income tax.
  
  

Consideration

• Before participating in a SIMPLE plan, review the plan documents to determine how your employer is going to be making the contributions. If you don't expect to make contributions to the plan or plan on making few contributions to the plan, the 2 percent non-elective contribution benefits you. If you plan on making substantial contributions to the plan, the $1 for $1 match is better suited to your situation.
  
  You also may consider contributing to another type of IRA, called a Roth IRA, or you may want to look for non-qualified retirement plans in addition to your employer plan. This is because all distributions from the SIMPLE IRA will be taxed at ordinary income tax rates. By having money in a Roth IRA or a non-qualified plan, such as an annuity, you reduce or eliminate your tax when making withdrawals during retirement, because contributions to those plans are made with after-tax money. This may help to compensate for being taxed on all withdrawals from your SIMPLE IRA.