Heads up! SIMPLE IRA is not simple!

My employer provides a SIMPLE (Savings Incentive Match Plan for Employees) IRA retirement plan and I am starting to learn a lot about the rules and regulations. It got the name "SIMPLE" because it is easy for an employer to administer. However, it can be a bit complicated for the owner of the account as I have found.

Here are some major differences between a SIMPLE and Traditional IRA Accout:

• Contribution limits. You can put up to $11,500 (age 49 & under) in tax year 2009 versus only $5,000 (age 49 & under) in a Traditional IRA.
• Time: 2 years is the magic number for a SIMPLE IRA. If you take an early withdrawal (that is not qualified) within the first 2 years of having the account you get nailed with a 25% penalty PLUS normal income taxes. Ouch! Traditional IRA is 10% penalty no matter how old the account is.
• You get employer matching in a SIMPLE IRA account much like a 401(k) plan. There is no vesting period so the money is yours on Day 1. The matching is mandatory under IRS rules.

Most everything else is essentially the same as a Traditional IRA. The contributions are from before tax dollars. You can invest in anything the broker holdling the account offers. After the 2 year period is over you can convert to a Roth IRA if you wish. This is good for younger people as the tax payoff over the long term can be huge.