A simple IRA is a type of retirement account that is commonly used with small businesses. Here are the basics of a simple IRA and how it works.

Simple IRA

A simple IRA is an account that is offered by an employer for the benefit of its employees. With this type of account, employees are allowed to make contributions. Contributions are made on a pretax basis. This allows employees to take money directly out of their paychecks before the taxes are deducted. Employees can contribute as much as $11,500 per year. When they reach the age of 50, they can start contributing as much as $14,000 per year.

Employer Contributions

In addition to money being contributed by the employees, the employer can contribute money to the accounts. Employers are allowed to contribute the equivalent of as much as 3 percent of an employee's annual salary to the account. Employer contributions can also be done on a mandatory dollar-for-dollar match depending on how much the employee contributed. Contributing money to these types of accounts can provide the employer with a nice tax benefit. For each dollar that you contribute to an employee's retirement account, you get to deduct that amount from your taxable income at the end of the year.

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