A Roth IRA and a Simple IRA are two separate retirement accounts with different rules
A Roth IRA and a Simple IRA are not the same thing. They are different account types with different purposes, different contribution limits, and different tax treatment. A Simple IRA is designed for small business owners and their employees. A Roth IRA is a personal retirement account anyone with earned income can open at a bank or brokerage firm. The choice between them depends on whether you are self-employed or work for a small employer, and how you want your money taxed in retirement.
The most important difference: a Simple IRA is an employer plan, and a Roth IRA is not. Your employer sets up a Simple IRA and contributes to it on your behalf. You open a Roth IRA yourself, and you contribute your own money. You cannot have a Simple IRA without an employer who offers one.
Key Takeaways
- A Simple IRA is an employer retirement plan for small businesses; a Roth IRA is a personal account you open yourself.
- Simple IRA contributions are made by your employer and come out of your paycheck; Roth IRA contributions come from your own after-tax income.
- Simple IRA withdrawals are taxed as ordinary income; Roth IRA withdrawals of contributions are never taxed, and earnings may be tax-free if you meet withdrawal rules.
- Simple IRA contribution limits are lower than Roth IRA limits, but your employer may match or contribute to your Simple IRA automatically.
- You can have both a Simple IRA and a Roth IRA at the same time, but contribution limits across all IRAs are coordinated.
Who can open each account type
A Simple IRA is opened by your employer, not by you. Your employer must have 100 or fewer employees and must offer the plan to all employees who have earned at least $5,000 in the past two years. You cannot open a Simple IRA on your own. If your employer does not offer one, you do not have access to one.
A Roth IRA you open yourself at any bank, credit union, brokerage firm, or investment company. You need earned income from a job or self-employment, and your income cannot exceed certain limits set by the IRS each year. For 2024, you can contribute to a Roth IRA if your income is below $161,000 (single filer) or $240,000 (married filing jointly). These limits change each year.
How contributions work and who pays
With a Simple IRA, your employer takes money out of your paycheck and puts it into your account. You decide how much to contribute, up to an annual limit. For 2024, you can contribute up to $16,000 per year. Your employer must also contribute: either a 2 percent nonelective contribution (your employer puts in 2 percent of your salary whether you contribute or not) or a 3 percent matching contribution (your employer matches what you put in, up to 3 percent of your salary).
With a Roth IRA, you contribute your own after-tax money. No employer is involved. For 2024, you can contribute up to $7,000 per year if you are under age 50. Your employer does not contribute anything, and there is no employer match. The money comes entirely from you.
Because your employer contributes to a Simple IRA, the total money going into your account is usually higher than what you could put into a Roth IRA on your own. However, you have no choice about how much your employer contributes — that is set by the plan rules.
Tax treatment of contributions and withdrawals
Simple IRA contributions are tax-deductible. The money you and your employer put in reduces your taxable income for the year. When you withdraw money in retirement, you pay ordinary income tax on the full amount — both your contributions and the earnings.
Roth IRA contributions are made with after-tax money. You do not get a tax deduction when you contribute. However, when you withdraw money in retirement, you pay no tax on your contributions or the earnings, as long as you have held the account for at least five years and you are age 59½ or older (or meet another exception like disability or first-time home purchase).
This is the biggest practical difference. If you expect to be in a higher tax bracket in retirement, a Roth IRA may save you more money overall. If you expect to be in a lower tax bracket in retirement, a Simple IRA's immediate tax deduction may be more valuable.
Withdrawal rules and early withdrawal penalties
Both account types charge a 10 percent penalty if you withdraw money before age 59½, with some exceptions. However, the exceptions differ.
With a Simple IRA, the penalty is 25 percent (not 10 percent) if you withdraw within the first two years of opening the account. After two years, the standard 10 percent penalty applies. Exceptions to the penalty include disability, medical expenses over 7.5 percent of your income, and a few others — but not first-time home purchase.
With a Roth IRA, you can withdraw your contributions (not earnings) at any time without penalty or tax. You can also withdraw earnings penalty-free for a first-time home purchase (up to $10,000 lifetime), disability, or medical expenses. The five-year holding period applies only to earnings, not to contributions.
Can you have both at the same time
Yes, you can have a Simple IRA and a Roth IRA at the same time. However, your total contributions across all IRAs in a single year are limited. For 2024, the limit is $7,000 per year (or $8,000 if you are age 50 or older). This limit applies to all IRAs combined — Simple, Roth, traditional, and SEP IRAs.
Your Simple IRA contributions do not count toward this $7,000 limit. Only your Roth IRA contributions do. So if your employer contributes $10,000 to your Simple IRA, you can still contribute $7,000 to a Roth IRA in the same year. However, if you also have a traditional IRA, your contributions to the traditional IRA and Roth IRA combined cannot exceed $7,000.
Comparing the two side by side
| Feature | Simple IRA | Roth IRA |
|---|---|---|
| Who sets it up | Your employer | You |
| Who contributes | You and your employer | You only |
| 2024 contribution limit (employee) | $16,000 | $7,000 |
| Employer contribution | Yes (2% or 3%) | No |
| Tax deduction on contributions | Yes | No |
| Tax on withdrawals | Ordinary income tax on all withdrawals | No tax on contributions; earnings may be tax-free |
| Early withdrawal penalty | 25% within 2 years; 10% after | 10% on earnings only (contributions anytime) |
| Income limits | None | Yes ($161,000–$240,000 depending on filing status) |
Frequently Asked Questions
Can I roll a Simple IRA into a Roth IRA?
Yes, but there are rules. You can convert a Simple IRA to a Roth IRA, but you must pay income tax on the full amount you convert. You also cannot convert within the first two years of opening the Simple IRA. After two years, you can convert at any time. Speak with a tax professional before converting, because the tax bill can be substantial.
What happens to my Simple IRA if I leave my job?
Your Simple IRA stays yours. Your employer no longer contributes, but the money already in the account remains invested. You can leave it there, roll it into a new employer's Simple IRA if your new employer offers one, or roll it into a traditional IRA or Roth IRA (subject to the two-year conversion rule). You cannot move it to a Roth IRA within the first two years.
If my income is too high for a Roth IRA, can I use a Simple IRA instead?
Only if your employer offers one. A Simple IRA has no income limits, but you cannot open one yourself — your employer must set it up. If your income exceeds Roth IRA limits and your employer does not offer a Simple IRA, you might explore a SEP IRA (if you are self-employed) or a backdoor Roth conversion strategy with a tax professional.
Do I have to contribute to a Simple IRA if my employer offers one?
No. Contributing to a Simple IRA is optional. However, your employer's contribution (2 percent or 3 percent) is usually automatic unless you specifically decline it. Check your plan documents or ask your HR department about opting out.