What Is a SIMPLE IRA
A SIMPLE IRA is a retirement savings plan designed for small employers and their employees. The name stands for Savings Incentive Match Plan for Employees. It allows employees to contribute part of their pay to a tax-advantaged retirement account, while requiring the employer to make contributions as well.
The plan is commonly used by small businesses that want to offer retirement benefits with minimal administrative complexity and lower costs than larger plans like 401(k)s.
Related:
Retirement Plans for Self-Employed Individuals
SEP IRA Explained: Rules, Limits, And Benefits For Small Business Owners
Solo 401(k) Explained: Retirement Plan Guide For Self Employed Business Owners
Who Can Offer a SIMPLE IRA
A SIMPLE IRA is intended for smaller organizations and has specific eligibility rules.
Employers that may offer a SIMPLE IRA include:
- Businesses with 100 or fewer employees who earned at least $5,000 in compensation during the applicable testing period
- Employers that do not sponsor another retirement plan in the same calendar year
- Self-employed individuals with net self-employment income, even if they have no employees
Employees generally become eligible once they meet the plan’s minimum compensation requirements, which are typically easy to satisfy.
How Employee Contributions Work
Employees contribute to a SIMPLE IRA through salary deferrals made directly from their paychecks.
Key features include:
- Contributions are made on a pre-tax basis, reducing current taxable income
- Annual contribution limits are set by the IRS and are lower than 401(k) limits
- Employees age 50 or older may make catch-up contributions
Once contributed, funds are invested according to the options offered by the plan provider.
Employer Contribution Requirements
Employer contributions are mandatory under a SIMPLE IRA.
Employers must choose one of two contribution methods each year:
- A matching contribution based on employee deferrals, up to a specified percentage
- A non-elective contribution made for every eligible employee, even if the employee does not contribute
This structure ensures that employees receive employer-funded retirement contributions each year the plan is active.
SIMPLE IRA vs Other Retirement Plans
A SIMPLE IRA differs from other common retirement plans in several important ways:
- It is simpler and less costly to administer than a 401(k)
- Contribution limits are higher than traditional or Roth IRAs, but lower than 401(k)s
- Employer contributions are required annually, unlike SEP IRAs where contributions are discretionary and may vary year to year
These differences make SIMPLE IRAs appealing for some employers while less suitable for others.
Withdrawal Rules and Penalties
Withdrawals from a SIMPLE IRA follow specific tax rules:
- Withdrawals before age 59½ are generally subject to income tax and penalties
- A higher early withdrawal penalty applies during the first two years of participation
- Required minimum distributions must begin at the applicable retirement age
These rules are designed to encourage long-term retirement savings.
Tax Advantages of a SIMPLE IRA
A SIMPLE IRA offers tax benefits for both employees and employers:
- Employee contributions reduce taxable income in the year they are made
- Investment earnings grow on a tax-deferred basis
- Employer contributions are generally tax-deductible business expenses
When a SIMPLE IRA Makes Sense
A SIMPLE IRA is often a strong option for small organizations seeking a simple retirement plan.
It may be a good fit when:
- Predictable contribution rules are preferred
- Employees value payroll-based retirement savings
- Administrative simplicity is a priority
Understanding how a SIMPLE IRA works helps both employers and employees make informed long-term financial decisions.