A SIMPLE IRA is a retirement savings account for small business owners and their employees

A SIMPLE IRA is a retirement plan that small employers set up to let workers save for retirement. The employer opens and manages the account, but the money belongs to the employee. The name stands for Savings Incentive Match Plan for Employees — it is designed to be simpler and cheaper to run than a traditional 401(k), with lower paperwork and fewer compliance rules.

The employer can contribute to the account in two ways: by matching what the employee saves (up to 3 percent of pay), or by putting in a fixed amount for all workers regardless of whether they save anything. Employees can contribute their own money, and those contributions reduce their taxable income for the year. The money grows tax-deferred until withdrawal.

A SIMPLE IRA is not the same as a regular IRA that an individual opens on their own. It is a workplace plan, which means the employer sets it up and handles the administrative work. However, it has fewer rules and lower costs than a 401(k), making it common among businesses with fewer than 100 employees.

Key Takeaways

  • A SIMPLE IRA is a workplace retirement plan that small employers set up; employees own the accounts and can contribute their own money.
  • Employers must either match employee contributions up to 3 percent of pay or contribute a fixed 2 percent for all workers.
  • Contribution limits are lower than a 401(k) — for 2024, employees can save up to $16,000 per year, or $19,500 if age 50 or older.
  • Money in a SIMPLE IRA grows tax-deferred, and withdrawals before age 59½ usually trigger a 25 percent penalty in the first two years, then 10 percent after that.
  • Only businesses with 100 or fewer employees can offer a SIMPLE IRA, and they cannot have another retirement plan at the same time.

Who can set up a SIMPLE IRA

Any business with 100 or fewer employees can set up a SIMPLE IRA. This includes sole proprietors (one-person businesses), partnerships, and corporations. The business must not have any other retirement plan — you cannot run a SIMPLE IRA alongside a 401(k) or a traditional pension plan.

Self-employed people can set up a SIMPLE IRA for themselves and any employees they have. If you are a sole proprietor with no employees, you can still open one. The IRS requires that you offer the plan to all employees who earned at least $5,000 in the prior two years and are reasonably expected to earn $5,000 in the current year.

Once a business reaches 101 employees, it can no longer use a SIMPLE IRA and must close the plan or move workers to a different type of retirement account. Some employers transition to a 401(k) at that point.

How much employees and employers can contribute

Employee contribution limits change each year. For 2024, workers can contribute up to $16,000 of their own money. Employees age 50 and older can add an extra $3,500 "catch-up" contribution, for a total of $19,500. These limits apply to the calendar year, not the plan year.

The employer contribution is separate. The employer must choose one of two paths before the plan year begins and stick with it for the whole year. The first option is to match what employees contribute, up to 3 percent of their gross pay. The second option is to contribute 2 percent of pay for all employees, whether or not they save anything themselves. Some employers choose the 2 percent route because it is simpler — they do not have to track individual employee savings.

If an employer chooses the matching route, they can reduce the match to as low as 1 percent in up to two of every five years, but they must notify employees in writing before the plan year starts. The 2 percent non-elective contribution cannot be reduced.

How money grows and when you can withdraw it

Money in a SIMPLE IRA grows tax-deferred, meaning you do not pay income tax on the growth until you take the money out. Investment choices depend on the financial institution holding the account — some offer mutual funds, stocks, bonds, or money market funds. The account owner decides how to invest the balance.

You can withdraw money at any time, but withdrawals before age 59½ usually trigger a penalty. During the first two years you own the account, the penalty is 25 percent of the amount withdrawn. After two years, the penalty drops to 10 percent. You still owe income tax on the withdrawal in addition to the penalty.

There are exceptions to the early withdrawal penalty: disability, medical expenses that exceed 7.5 percent of adjusted gross income, health insurance premiums paid while unemployed, and a few other narrow circumstances. Withdrawals after age 59½ have no penalty, though you still owe income tax.

You must begin taking withdrawals by April 1 of the year after you turn 73. The amount is calculated based on your age and account balance, and the IRS publishes tables each year to determine the required minimum distribution.

SIMPLE IRA versus other retirement plans

A SIMPLE IRA has lower contribution limits than a 401(k). For 2024, a SIMPLE IRA caps employee contributions at $16,000 (or $19,500 with catch-up), while a 401(k) allows up to $69,000 (or $76,500 with catch-up). A 401(k) also lets employers contribute more in total.

A SIMPLE IRA requires less paperwork and lower administrative costs than a 401(k). There is no annual tax filing requirement (Form 5500), no need for a written plan document in some cases, and fewer compliance rules. This makes it attractive to small employers who want to offer retirement savings without the burden of a larger plan.

A regular IRA that an individual opens on their own has the same contribution limits as a SIMPLE IRA but is not tied to an employer. If your employer offers a SIMPLE IRA, you can still open a regular IRA, but your ability to deduct regular IRA contributions may be limited depending on your income and whether you are covered by a workplace plan.

How to set up a SIMPLE IRA

An employer sets up a SIMPLE IRA by choosing a financial institution — a bank, credit union, brokerage, or insurance company — to hold the accounts. The employer then adopts a plan document, which can be a model form provided by the financial institution or the IRS, or a custom document drafted by an attorney. Many financial institutions provide model documents at no cost.

The employer must notify all employees who are may be able to access to participate and give them information about how the plan works, what they can contribute, and what investment options are available. Employees then decide whether to contribute and how much.

The employer must set up the plan by October 1 of the year it is to take effect, though some employers can get an extension. Contributions for a given year can be made until the tax filing deadline (usually April 15 of the following year, plus extensions).

Tax treatment and reporting

Employee contributions to a SIMPLE IRA reduce taxable income for the year they are made. If an employee contributes $10,000, their taxable income is reduced by $10,000. The employer does not withhold income tax on the contribution, but does withhold Social Security and Medicare taxes.

Employer contributions are tax-deductible for the business. The employer reports contributions on the business tax return and on Form 5498, which is sent to employees and the IRS.

When money is withdrawn, the account holder owes income tax on the full amount withdrawn (both employee and employer contributions, plus all growth). The financial institution issues a Form 1099-R showing the withdrawal amount, and the account holder reports it on their tax return.

Frequently Asked Questions

Can I move money from a SIMPLE IRA to a regular IRA?

Yes, but only after you have owned the SIMPLE IRA for at least two years. After two years, you can roll the balance into a traditional IRA or another SIMPLE IRA without penalty. Rolling over within the first two years triggers the 25 percent early withdrawal penalty. The rollover itself is not taxed if done correctly — the money moves directly from one institution to another.

What happens to my SIMPLE IRA if I leave my job?

The account stays yours and continues to grow. You can leave the money where it is, roll it to an IRA at another financial institution, or roll it to your new employer's retirement plan if they accept rollovers. You cannot access the money penalty-free until age 59½, unless an exception applies.

Can my employer change the contribution formula during the year?

No. The employer must choose between matching contributions or a 2 percent non-elective contribution before the plan year starts and must stick with that choice for the entire year. The only exception is reducing the match to 1 percent in up to two of every five years, but this must be announced in writing before the year begins.

Do I have to participate in my employer's SIMPLE IRA?

Participation is voluntary. Your employer cannot force you to contribute. However, if you are may be able to access (earned at least $5,000 in the prior two years), your employer must offer you the chance to participate. You can choose not to contribute and still receive any employer contributions they make on your behalf.

What if my employer stops offering the SIMPLE IRA?

Your account remains yours and does not disappear. The employer must notify you that the plan is being terminated. You can roll the balance to a regular IRA or another retirement account. The employer may be required to make a final contribution depending on the timing and reason for termination.