Both deductible and non-deductible contributions (up to a combined maximum of $3,000) can be made to traditional IRAs. The contributions are provided by the individual and cannot be made once he or she has reached age 70 ½. Once the funds are contributed into an IRA account they grow on a tax-deferred basis, meaning that no taxes are paid on these funds until they are withdrawn. As with other IRAs, distributions received prior to age 59 ½ are generally subject to a 10% tax penalty (excise tax) imposed by the IRS for premature withdrawals. But once the owner reaches age 70 ½, he or she must begin taking required minimum distributions. If, however, no distribution is taken or if the distribution is not large enough (as determined by using an age-based IRS distribution table), the IRS imposes a tax penalty equal to 50% of the amount by which the required minimum distribution amount exceeds the actual amount distributed. Other qualified plans and deferred annuities can be rolled into a traditional IRA.

SEPs provide a simplified method for an employer to make contributions to a tax-favored retirement plan for his or her employees. Instead of setting up a profit-sharing or money purchase plan with a trust, an employer can adopt a SEP agreement and make contributions directly to an individual retirement account or an individual retirement annuity set up for each eligible employee (including himself or herself). (It is important to note that SEPs cannot be designated as Roth IRAs.) Employers can deduct contributions they make for their employees. And if he or she is self-employed, his or her personal contributions can be deducted as well. Contributions made to a SEP cannot exceed the lesser of 15% of the employee’s compensation or $40,000. 

As with other IRAs, distributions received prior to age 59 ½ are generally subject to a 10% tax penalty (excise tax) imposed by the IRS for premature withdrawals. But once the owner reaches age 70 ½, he or she must begin taking required minimum distributions. If, however, no distribution is taken or if the distribution is not large enough (as determined by using an age-based IRS distribution table), the IRS imposes a tax penalty equal to 50% of the amount by which the required minimum distribution amount exceeds the actual amount distributed.

 

A SIMPLE plan is another way for an employer to help his or her employees contribute to a tax-favored retirement account. (It is important to note that SIMPLE IRAs cannot be designated as Roth IRAs.) SIMPLE plans can be set up by an employer who has100 or fewer employees that receive at least $5,000 annually in compensation from the employer. Under this plan, employees can choose to make salary reduction contributions. In addition, the employer will contribute matching or nonelective contributions. The maximum amount employees can choose to have an employer contribute on their behalf is $7,000. Furthermore, participants who are at least age 50 can make a catch-up contribution of up to $500 annually. The contributions to a SIMPLE plan can be deducted, and employees can exclude these contributions from their gross income.    

As with other IRAs, distributions received prior to age 59 ½ are generally subject to a 10% tax penalty (excise tax) imposed by the IRS for premature withdrawals. But once the owner reaches age 70 ½, he or she must begin taking required minimum distributions. If, however, no distribution is taken or if the distribution is not large enough (as determined by using an age-based IRS distribution table), the IRS imposes a tax penalty equal to 50% of the amount by which the required minimum distribution amount exceeds the actual amount distributed.