What Is a SIMPLE IRA?

A SIMPLE IRA is a retirement savings option for the owners and employees of small businesses. True to its name, the SIMPLE IRA is easy to set up and administer. If you’re a business owner, a SIMPLE IRA lets you save for both yourself and your employees. People who work with their spouses can even double their retirement savings by using a SIMPLE IRA. If you want to boost your retirement savings, a financial advisor can help you create a financial plan for your needs and goals.

SIMPLE IRA Definition and Rules

SIMPLE IRA (also sometimes written as Simple IRA) stands for Savings Incentive Match Plan for Employees Individual Retirement Account. A SIMPLE IRA is similar to a traditional IRA, but it has higher contribution limits.

Here’s how it works: A small business owner with fewer than 100 employees, along with the sole proprietor or partner in a business, can set up a SIMPLE IRA for herself and her employees. Per IRS rules, all employees who, in the previous two calendar years, received at least $5,000 in compensation from the employer and who are expected to receive at least as much during the present calendar year are eligible.

Eligible employees can decide to make “elective deferrals,” just like with a 401(k). That means that employees can choose to save a certain percentage of their pre-tax income. The employer then contributes to the SIMPLE IRA on behalf of each eligible employee.

Employer contributions can be either matching (up to 3% of the employee’s contributions) or non-elective. Non-elective means that the employer makes a unilateral decision to contribute to an employee’s savings plan, regardless of whether the employee contributes in a given year. Non-elective matches have a lower limit of 2%.

IRS rules prohibit employees from opting out of a SIMPLE IRA. They can choose not to make elective deferrals (in which case they wouldn’t receive an employer match), but they cannot opt out of receiving non-elective contributions from their employers. This shouldn’t ever be an issue, however, because it would be against the employee’s interest to turn down more money from their employer.

Employers can deduct as business expenses all contributions made to employees’ SIMPLE IRAs. For employees, the money contributed to a SIMPLE IRA is pre-tax. This means it can lower your tax liability now.

SIMPLE IRA Contribution Limits

In 2023, the SIMPLE IRA contribution limit was $15,500 ($16,000 in 2024), with a catch-up contribution limit of $3,500. This is lower than 401(k) contribution limits but higher than IRA contribution limits. Plus, the owner of a business can give herself an employer match of up to 3% of net self-employment income. If two spouses work together, they can both make maximum contributions (and deduct them at tax time), making the SIMPLE IRA a great option for married people who work together and file jointly.

SIMPLE IRA Rollover

SIMPLE IRA rollovers are slightly trickier than rollovers for more conventional IRAs. That’s because the rules are different for the two years beginning when an employee enrolls in a SIMPLE IRA plan. During these two years, a tax penalty-free rollover is only possible as a trustee-to-trustee transfer from one SIMPLE IRA to another. After two years, an employee can make a penalty-free trustee-to-trustee rollover from a SIMPLE IRA to a traditional IRA.

What is this trustee-to-trustee business, you ask? It comes up any time retirement account rollovers are in the mix. If you move money from the trustee of one retirement account (Fidelity, for example) to another trustee (say, Vanguard), you can avoid a tax penalty. But if you ask Fidelity to write you a check for the amount you have in your retirement account and then you wait a while before sending that money over to a new account at Vanguard, you’ll pay tax penalties as if you took an early withdrawal. If you’re considering a rollover, ask your new retirement account provider to help you enact a tax-free rollover.

SIMPLE IRA vs. 401(k)

Business owners and sole proprietors don’t have to opt for the SIMPLE IRA. They can also open an Individual 401(k). But with an Individual (also known as a Solo) 401(k), you can’t contribute for your employees, unless those employees are your spouse, your business partner, your business partner’s spouse, a shareholder or a shareholder’s spouse. So, no contributions for regular old employees.

If you’re concerned about attracting and retaining talent, a SIMPLE IRA can be a good option. Plus, SIMPLE IRAs are easier to administer than Individual 401(k)s. On the other hand, the contribution limits are higher on an Individual 401(k) than they are for a SIMPLE IRA ($23,000 vs. $16,000 in 2024).

SIMPLE IRA vs. SEP-IRA

SEP-IRA stands for simplified employee pension individual retirement account. With a SEP-IRA, a business owner can contribute money for her own retirement plan and make contributions on behalf of employees. Employee contributions are not an option with SEP-IRAs, however. If you want to encourage your employees to be active participants in their own retirement planning while they’re in your employ, a SIMPLE IRA will likely be a better bet.

The SIMPLE IRA also lets you save more for yourself and less for your employees. You can save more of your income in a SIMPLE IRA than in a SEP-IRA, so if you’ve put off saving for retirement and you want to make up for lost time, you may want to go with a SIMPLE IRA. Plus, with a SEP-IRA, you must pay the same percentage of salary into an account for each employee. Meanwhile with a SIMPLE IRA, if an employee doesn’t sign up for matching contributions, you’re not obligated to give them.

Bottom Line

If you want to boost your retirement savings, do right by your employees and get a tax break all at the same time, a SIMPLE IRA may be the way to go. The contribution limits are lower than with a 401(k), but overall, they’re simpler and cheaper to implement. Consulting with a tax expert or a financial advisor could help you decide what the best option for your business is.

Tips for Getting Retirement Ready

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