A SIMPLE IRA is a retirement savings plan that small employers set up for their workers

A SIMPLE IRA is a retirement account that a small business owner or self-employed person creates to let employees save for retirement. The employer sets it up through a financial institution — a bank, brokerage, or insurance company — and employees contribute money from their paychecks before taxes are taken out. The employer is required to make contributions too, either by matching what employees put in or by adding a fixed percentage for everyone.

The name stands for Savings Incentive Match Plan for Employees. It exists because regular 401(k) plans are expensive and complicated for small businesses to run. A SIMPLE IRA has lower setup costs, simpler paperwork, and fewer compliance rules. The tradeoff is that you can contribute less money per year than you could to a 401(k).

The money grows tax-deferred, meaning you do not pay income tax on the earnings until you withdraw it in retirement. You can start taking money out at age 59½ without penalty. If you take money out earlier, you owe a 25% penalty in the first two years of the plan, and 10% after that, plus regular income tax on the withdrawal.

Key Takeaways

  • A SIMPLE IRA is set up by an employer and funded through payroll deductions, with the employer required to contribute money on your behalf.
  • For 2024, you can contribute up to $16,000 per year to a SIMPLE IRA, and employers must match or contribute a set percentage.
  • Money in the account grows without being taxed until you withdraw it, usually in retirement after age 59½.
  • A SIMPLE IRA is designed for businesses with 100 or fewer employees and costs less to operate than a traditional 401(k).
  • You can roll a SIMPLE IRA into another retirement account, but there are time restrictions and rules about how to do it.

Who can have a SIMPLE IRA and who sets it up

An employer sets up a SIMPLE IRA, not the employee. The business owner chooses the financial institution that will hold the accounts and handle the paperwork. Employers with 100 or fewer employees are allowed to offer a SIMPLE IRA. If your employer has more than 100 employees, they cannot use this plan type.

Self-employed people can also set up a SIMPLE IRA for themselves if they have no employees, or for themselves and their employees if they do. A sole proprietor with one part-time worker can open a SIMPLE IRA. A freelancer with no staff can open one too.

Once the plan is set up, your employer gives you the paperwork and enrollment instructions. You decide whether to participate and how much to contribute from each paycheck. Participation is optional — your employer cannot force you to join — but if you do not join, you miss out on the employer contribution, which is assistance programs.

How much you can contribute and what your employer must add

For 2024, you can contribute up to $16,000 per year to a SIMPLE IRA through payroll deductions. If you are 50 or older, you can add an extra $3,500 per year as a catch-up contribution, bringing your total to $19,500. These limits change most years, so check with your plan administrator or the IRS website if you are planning for a future year.

Your employer must make a contribution too. They have two options: they can match what you contribute, dollar for dollar, up to 3% of your salary, or they can contribute 2% of your salary for everyone in the plan, whether or not you contribute anything yourself. If your salary is $50,000 and your employer chooses the 2% option, they add $1,000 to your account each year regardless of what you put in.

The employer contribution is not optional. Federal law requires it. This is one reason SIMPLE IRAs exist — they give small businesses a way to offer retirement benefits without the cost and complexity of a 401(k).

How the money grows and when you can take it out

Once money is in your SIMPLE IRA, it sits in whatever investments you choose — usually mutual funds, stocks, bonds, or money market funds, depending on what the financial institution offers. You do not pay tax on the earnings each year. The balance grows year after year without being reduced by taxes. This is called tax-deferred growth.

You can withdraw money starting at age 59½ without owing a penalty. You will owe regular income tax on the withdrawal, but not the 10% early withdrawal penalty that applies to most retirement accounts. If you withdraw money before age 59½, you owe income tax plus a penalty. In the first two years after you open the account, the penalty is 25%. After two years, it drops to 10%.

There are narrow exceptions to the early withdrawal penalty — disability, medical expenses above a certain threshold, and a few others — but the income tax still applies. You must start taking money out by April 1 of the year after you turn 73, and the amount is calculated based on your age and account balance.

Moving money from a SIMPLE IRA to another account

You can move money from a SIMPLE IRA to another retirement account, but the rules depend on how long you have had the SIMPLE IRA. During the first two years after you open it, you can only roll the money into another SIMPLE IRA. You cannot move it to a traditional IRA, a Roth IRA, or a 401(k) without owing taxes and penalties.

After two years, you can roll the money into a traditional IRA, a Roth IRA, or another employer plan like a 401(k), if that plan accepts rollovers. A rollover means the money moves directly from one account to another without you touching it. If you withdraw the money yourself and deposit it later, you have 60 days to complete the transfer, or it counts as a taxable withdrawal.

Rolling into a Roth IRA is allowed but has tax consequences. The money you roll over is treated as income in that tax year, so you owe income tax on the full amount. This is different from rolling into a traditional IRA, where the money stays tax-deferred.

SIMPLE IRA versus other retirement plans

A SIMPLE IRA is simpler and cheaper than a 401(k), but it has lower contribution limits. For 2024, a SIMPLE IRA caps out at $16,000 per year for most people, while a 401(k) allows up to $69,000. If you are self-employed, a Solo 401(k) or a SEP IRA might let you save more money. A SEP IRA has no employer match requirement, but you can contribute up to 25% of your net self-employment income, which is often more than a SIMPLE IRA allows.

A traditional IRA, which you open on your own without an employer, has a $7,000 contribution limit for 2024 and no employer match. A Roth IRA has the same limit but offers tax-free withdrawals in retirement instead of tax-deferred growth. A SIMPLE IRA is designed specifically for small business owners who want to offer retirement benefits to employees without the administrative burden of a 401(k).

The choice depends on your situation. If you are an employee, you have no choice — your employer decides which plan to offer. If you are self-employed or a business owner, you should compare the contribution limits, employer match requirements, and administrative costs of each option.

What happens to your SIMPLE IRA if you change jobs

When you leave a job, your SIMPLE IRA stays yours. The money does not go back to your employer. You can leave it where it is, move it to a new employer's plan if they accept rollovers, or roll it into an IRA you open yourself. Your employer has no say in what you do with the account after you leave.

If you leave within the first two years of the plan, remember that you can only roll the money into another SIMPLE IRA. After two years, you have more options. Some people leave the money in the old SIMPLE IRA and open a new one at their new job. Others consolidate everything into a single IRA to make it easier to track.

Your new employer cannot require you to move the money or close the old account. The decision is entirely yours. However, if you do not roll the money over and instead withdraw it, you owe taxes and penalties unless an exception applies.

Frequently Asked Questions

Can I have a SIMPLE IRA and a regular IRA at the same time?

Yes. You can contribute to both a SIMPLE IRA through your employer and a traditional or Roth IRA that you open yourself. However, if you contribute to a traditional IRA, you may not be able to deduct those contributions on your taxes if your income is above a certain level and you are covered by a SIMPLE IRA at work. The income limits change each year, so check the IRS website or ask a tax professional.

What happens to my SIMPLE IRA if my employer goes out of business?

Your SIMPLE IRA is held by the financial institution, not by your employer, so the money is yours regardless of what happens to the business. The employer's obligation to make contributions ends, but your account and any money already in it remain untouched. You keep the account and can continue to manage it or roll it to another institution.

Can I borrow money from my SIMPLE IRA?

No. SIMPLE IRAs do not allow loans. A 401(k) sometimes does, but a SIMPLE IRA does not. If you need money before retirement, your only option is to withdraw it, which triggers taxes and penalties unless you meet a narrow exception like disability or a may have access to medical expense.

Do I have to contribute to a SIMPLE IRA if my employer offers one?

No, participation is optional. However, if you do not contribute, you also do not receive the employer contribution. If your employer uses the 2% automatic contribution option, you get that money whether you contribute or not. If they use the 3% match, you only get it if you contribute.

What if I am over 50 — can I contribute more?

Yes. If you are 50 or older, you can make catch-up contributions of an additional $3,500 per year on top of the regular $16,000 limit, for a total of $19,500 in 2024. Your employer's contribution requirement stays the same — they still match up to 3% or contribute 2% for everyone.