Most people have never heard of a SIMPLE IRA and are curious to know the rules, limits, and how it differs from a 401(k).
A SIMPLE IRA sounds “simple” to set up, but is it really that easy? And how does it compare to the 401k and other retirement plans that exist? We’ll answer that and more as we take a deep dive into the SIMPLE IRA rules and limits.
What Is a Simple IRA?
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A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of employer-sponsored retirement savings plan that is designed to be easy to set up and maintain for small business owners.
It offers a way for employees to save for retirement on a tax-deferred basis while also requiring employers to make contributions on behalf of their employees.
Benefits of the SIMPLE IRA vs 401k
One of the main benefits of a SIMPLE IRA is that it is easy for small business owners to set up and maintain.
| Unlike a 401(k) plan, which can be complex and costly to administer, a SIMPLE IRA can be established by any employer with 100 or fewer employees. |
Additionally, the plan requires minimal paperwork and has relatively low administrative costs.
Benefits of the SIMPLE IRA
Another key benefit of a SIMPLE IRA is that it allows employees to make contributions to the plan on a pre-tax basis. This means that the money employees contribute to the plan is not subject to income taxes until it is withdrawn in retirement.
This can help employees save money on their taxes in the short term while also allowing them to save for retirement in the long term.
Employers are also required to make contributions to a SIMPLE IRA on behalf of their employees.
The employer must either match employee contributions dollar for dollar up to 3% of compensation or make a non-elective contribution of 2% of compensation for all eligible employees.
This can be a great incentive for employees to save for retirement and a way for small business owners to attract and retain talented employees.
| SIMPLE IRA RULES | DETAILS |
|---|---|
| Employer Eligibility | Any employer with 100 or fewer employees who earned at least $5,000 in the previous year can establish a SIMPLE IRA. |
| Employee Eligibility | Employees who received at least $5,000 in compensation from the employer during any two preceding calendar years and who are expected to earn at least $5,000 in the current year are eligible to participate in a SIMPLE IRA plan. |
| Contribution Limits | For 2024, employees can contribute up to $16,000 to a SIMPLE IRA plan. If the employee is 50 or older, they can make an additional catch-up contribution of up to $3,500. Employers must make either a matching contribution of up to 3% of the employee’s compensation or a non-elective contribution of 2% of the employee’s compensation. |
| Vesting | Employee contributions are always 100% vested. However, employer contributions may be subject to a vesting schedule, which means that employees may have to work for a certain period before they are entitled to the full amount of the employer’s contribution. |
| Withdrawals | Withdrawals from a SIMPLE IRA are generally subject to income tax and a 10% penalty if taken before age 59 ½. However, there are exceptions to this penalty, such as for first-time home purchases or certain medical expenses. |
| Rollovers | SIMPLE IRA funds can be rolled over into another SIMPLE IRA, a Traditional IRA, or a Qualified Employer Plan (QEP). However, there are certain restrictions and tax implications to consider when rolling over funds. |
7 Things You Should Know About the SIMPLE IRA
1. Your Employer’s Contributions Are 100% Vested
With most 401(k)s, you must work for the employer for a certain number of years to be vested. This means if you were to leave that employer, you could take that employer’s matching contribution with you.
But with the 401(k), you have anywhere from three to five years before you’ve satisfied the 401(k) vesting schedule, which is different with SIMPLE IRA.
With the SIMPLE IRA, you are 100% vested whenever the employer deposits that into your account.
This is definitely a huge difference from the 401(k). Both you and any employees you have enjoy immediate vesting, not only of your own contributions to the plan but also of matching contributions on the employer side.
2. Employers Have to Match in a SIMPLE IRA
Each year, the employer is required to make a contribution to your SIMPLE IRA account, whether it be in the form of a match or what’s called a non-elected contribution. Matching contribution states that the employer has to match at least what you match.
So, if you’re matching 3%, the employer has to match 3% as well. Note that 3% is the most that the employer has to match, which could be considerably different than compared to a 401(k).
The employer does have the option to reduce the matching amount to 1% for two of a five-year period. What that means is that if the employer does do this, they have to match the full 3% for the remaining three of those five years.
The calculation can be a little tricky, but know that your employer is matching no matter what.
If the employer chooses not to match, they may make a “non-elect contribution”. That means they will contribute 2% of your salary. Even if you are contributing 3% of your salary, they will only contribute 2%.
3. Employees Control the Investments
With most 401(k)s, you are limited to the investment options that your employer provides you. This is considerably different when compared to the SIMPLE IRA. Being a self-employed retirement plan, the SIMPLE IRA gives you the discretion of what exactly you want your money invested into.
If you want to buy individual stocks, mutual funds, ETFs, or CDs, you are allowed. This is the same feature that a SEP IRA offers.
The investment control factor plays out in two ways:
- Employee Choice of Investment Trustee. You can designate the plan so that the employee chooses his or her own financial institution to hold the plan. That not only gives a greater choice to the employees, but it also relieves you, as the employer, of the burden of managing the entire plan for everyone.
- Self-Directed Investing. Participants not only choose the financial institution, but they are also free to engage in do-it-yourself investing. That means they can choose how the money is invested, where it’s invested, as well as the level of risk that they are willing to assume.
4. Employees Can Contribute 100% Of Their Income to a SIMPLE IRA
You are allowed to contribute up to $16,000 in 2024, up from $15,000 in 2023, per year in a SIMPLE IRA. If you’re over the age of 50, you’re allowed a catch-up contribution, which increased to $3,500.
Please note that the $16,000 (or $19,500) is far less than the amount that you are eligible to contribute to a 401(k).
Nor is it as high as the (up to) $69,000 that you could contribute to either a SEP IRA or a Solo 401(k).
But the SIMPLE IRA contribution limit is more than two times as high as the contribution limit for a traditional or Roth IRA. And the contribution limit for people 50 or older is almost 2 ½ times higher than the $8,000 limit for traditional and Roth IRAs.
The 100% feature of the SIMPLE IRA means that the employee can contribute virtually all of their income to the plan, up to the maximum contribution.
That means that if an employee earns $30,000, they can contribute the first $16,000 of their income into the plan (or $19,500 if they’re 50 or older). There is no percentage limitation on the contribution, only the dollar amount.
Yes, it’s true that you can contribute more to other plans, like the SEP-IRA or the Solo 401(k). However, your business will have to have a relatively high income to reach those levels since both are percentage-based.
But if your self-employment income is less than $100,000 per year, you might find the simplicity of the SIMPLE IRA to be the better choice for your business.
For example, SIMPLE IRAs don’t require filing special reports with the IRS. They also aren’t subject to discrimination and top-heavy testing. It’s more of a group IRA than anything else. And for a small business, simplicity is a definite advantage.
5. SIMPLE IRAs Do Not Allow Loans
A lot of 401(k)s have loan provisions that allow the employee to borrow against their money if need be. With SIMPLE IRAs, this is not the case. Keep that in mind if you’re thinking that this might be a last resort place to draw money out.
The reason this is true is that a SIMPLE IRA is, first and foremost, an IRA. And just as you cannot borrow money from a traditional or a Roth IRA, you also can’t borrow from a SIMPLE IRA.
That’s probably not a bad thing, either. The most important function of any retirement plan is to give you the ability to create a tax-sheltered investment portfolio for your retirement.
Since you won’t be able to borrow against a SIMPLE IRA, you’ll be forced to keep the plan for its primary intended purpose.
6. The SIMPLE IRA Two-Year Rule
This is something that should definitely be noted within the SIMPLE IRA. Most retirement plans — 401(k)s, regular IRAs, Roth IRAs, etc. — have a 10% early withdrawal penalty if under the age of 59.5. But with the SIMPLE IRA, it takes it one step further.
If the SIMPLE IRA that you’ve started is less than two years and you cash it out, instead of the normal 10% penalty, you will be subject to a 25% penalty in addition to ordinary income tax.
Do not overlook this. Keep in mind that doesn’t apply to just cashing it out. If you were attempting to rollover your SIMPLE IRA into a rollover IRA, the 25% penalty would apply as well. Remember to just wait the two years before converting into either a regular IRA or cashing it out.
7. The 2024 Contributions Have Increase
The contribution limit for 2024 increased to $16,000. The catch-up contribution limit also increased to $3,500. That means that somebody who turns 50 in the year 2023 or 2024 and has access to a SIMPLE IRA can contribute a total of $19,500.
7 Things You Should Know About the SIMPLE IRA
| ASPECT | DESCRIPTION |
|---|---|
| 1. Vesting | Employer Contributions Are 100% Vested Immediately Contrast With 401(k)s With 3-5 Year Vesting |
| 2. Employer Matching | Mandatory Yearly Contribution Matches Up to 3% or Opts for 2% Non-Elect Contribution |
| 3. Investment Control | Employees Decide Investment Choices (Stocks, Mutual Funds, ETFs, CDs) Enables Self-Directed Investing |
| 4. Contribution Limits | $16,000 for 2024 Extra $3,500 for Those Over 50 Up to 100% of Income, With Caps |
| 5. Loan Provisions | No Loans Allowed Ensures Primary Use Is Retirement Savings |
| 6. Two-Year Rule | 25% Penalty for Early Withdrawal Within First Two Years, Higher Than Standard 10% Applies to Both Cash-Outs and Rollovers |
| 7. 2024 Contribution | Limit: $16,000 Catch-Up for Those 50 or Older: $3,500 |
Setting Up a SIMPLE IRA and Maintaining Filing Requirements
Setting up a SIMPLE IRA is only a little bit more complicated than setting up a traditional or Roth IRA. You start by selecting a financial institution (which we’ll cover below) and then following three steps:
- Execute a written agreement to provide benefits to all eligible employees
- Give employees certain information about the agreement
- Set up an IRA account for each employee
The written agreement can be completed using IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. (5304 is used if each participant will choose their own financial institution. A 5305 is used if you will designate the financial institution for the entire plan).
Neither form is required to be filed with the IRS, but you should keep a completed copy of the form on file, including all relevant signatures. You could also use a pro forma provided by the financial institution that you will be using to hold the plan. It will accomplish the same purpose.
You’ll need to provide an annual notice to eligible employees at the beginning of the election period (or provide each with a copy of either the completed 5304 or 5305 form). That will notify each employee of the following:
- The employee’s opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
- The employees’ ability to select a financial institution that will serve as trustee of employees’ SIMPLE IRA, if applicable;
- Your decision to make either matching contributions or nonelective contributions;
- A summary description (the financial institution should provide this information); and
- Written notice that the employee can transfer his or her balance without cost or penalty if you are using a designated financial institution.
The plan must be set up by or for each eligible employee, and all contributions to the plan must go into it. The plan must be established between January 1 through October 1 of the year. Unfortunately, a SIMPLE IRA cannot have a Roth provision, as would be possible with a 401(k) plan.
Pros and Cons of a Simple IRA
If you’re considering a SIMPLE IRA for your business, here’s a breakdown of the pros and cons of setting it up versus another retirement plan:
| PROS | CONS |
|---|---|
| Easy to Set Up and Maintain for Small Business Owners | Limited Investment Options, Compared to Other Types of Retirement Plans Like 401(k)s |
| Allows Employees to Make Contributions to the Plan on a Pre-tax Basis | Employer Contributions Are Mandatory, Which Can Be Costly for Small Business Owners |
| Employers Are Required to Make Contributions to the Plan on Behalf of Their Employees | Lower Contribution Limits Compared to Other Types of Retirement Plans Like 401(k)s and Traditional IRAs |
| Lower Administrative Costs Compared to Other Types of Retirement Plans Like 401(k)s | Eligibility Is Limited to Employers With 100 or Fewer Employees |
| No Income Limits on Contributions or on Tax Deductions for Contributions | Employer Matching Contributions Are Not as Flexible as Other Plans Like 401(k)s |
Where Can I Open a SIMPLE IRA?
A SIMPLE IRA can be opened through a wide number of potential trustees. These can include banks, investment brokerage firms, mutual fund families, and managed investment account brokers. The process is easy and comparable to opening up either a traditional or a Roth IRA.
For whatever reason, there are fewer investment brokerage firms that accept SIMPLE IRA plans than other types of IRAs, like traditional, Roth, rollover, and even SEP plans. Below are two investment brokers that we have reviewed (or used) and recommend as a trustee for your plan.
TD Ameritrade
We’ve done a full review of TD Ameritrade and recommend it as a good trustee for a SIMPLE IRA plan. Like many other large brokers, they’ve eliminated trading fees on stocks, exchange-traded funds (ETFs), and options.
And they have a strong IRA capability in general. They’re a diversified broker, offering stocks, options, mutual funds, ETFs, futures, Forex, bonds, and even certificates of deposit.
Not only do they have excellent customer service, but they also have more than 100 branches located nationwide, in case you prefer face-to-face contact.
They also have a Retirement Calculator tool that analyzes your personal information, goals, income, assets, and risk tolerance and then shows you how to reach your goals, as well as track your progress.
They also offer more than 100 ETFs that you can trade for free. All around, TD Ameritrade is an excellent platform to host a SIMPLE IRA plan or any other type of IRA account.
E*TRADE
We’ve also reviewed E*TRADE, and in doing so, we’ve rated it as the best investment platform for active traders. The platform offers free independent research, streaming real-time quotes, customizable planning tools everything that you need for do-it-yourself investing.
At $0 per trade, they’re one of the best in the industry on pricing. But they also offer more than 2,700 no-load, no transaction fee mutual funds. And since they offer virtually every other type of investment or retirement plan, you can use E*TRADE to hold all of your accounts with one brokerage.
E*TRADE is well recognized in regard to customer service, which can be reached by phone 24 hours a day. They also offer as much or as little account assistance as you need.
And if you want a fully managed account, E*TRADE offers that through their E*TRADE Capital Management arm. That will even enable you to have your SIMPLE IRA plan split between a self-directed portion and a professionally managed portion.
The Bottom Line on the SIMPLE IRA
The SIMPLE IRA can be a great option for small business owners and their employees. It offers an easy and low-cost way for employees to save for retirement on a tax-deferred basis while also requiring employers to make contributions on behalf of their employees.
If you are a small business owner or an employee, it’s worth considering a Simple IRA as part of your retirement savings strategy.
I have contributed 3% of gross compensation to my simple IRA for years which my employer matched. This year, with change of management, they are only contributing 3% of gross less section 125 deductions. This reduces the employee match significantly as I have Family medical deductions and Family HSA deductions. They claim that is how compensation is defined for a simple IRA. My question is can they contribute more than the 3% of gross less section 125? Can they define the match to be 3% of gross. If they cant it seems that employees with the same gross pay will receive different matching contributions depending on whether they have single or family or no medical coverage or HSA contributions.
I have a SIMPLE IRA from a ex employer, i was wondering if i can still deposit money to it. (After tax money)? Ive had it for about 7 years.. or do i have to roll it into a IRA? txs
Hi Josh – You can keep the SIMPLE but you can’t continue contributing to it. But you can make contributions to a traditional or Roth IRA. And yes you can roll the SIMPLE into an IRA.
I have an employee that was here on a H-1B Visa. His Visa ran out and was not renewed. This year we started including him on our SImple IRA. Since the year is not over can we just give him the money back and have our IRA company return what we sent them? He has only had 8 deductions over 4 months of this year.
Hi Will – I believe so. Since it’s early in the year, and no tax deductions have been claimed, the funds should be able to be reclassified. Talk with the plan administrator to see how to proceed.
What if the employer received incorrect account information and the deductions & company match went to a savings account vs Simple IRA account? How can this be corrected?
Hi Suzanne – Contact the plan administrator and let them know what happened. They may be able to correct the situation, then issue corrected tax information.
I’m a new hire at a small (8 employees) non profit. The organization has offered a 401(k) for several years to rather low participation. The costs are egregious for such a small outfit with small participation. How would we “transfer” the benefit from a 401(k) to a SIMPLE IRA?
Hi George – I presume that you have some influence over this transition, even as a new employee. But talk to a trustee about creating a SIMPLE IRA for the company, then ask about the implications of making a transfer from the existing 401k plans. It’s not possible to give a general answer to all the implications, so you need to get very specific advice from an interested party.
Hi Jeff, thanks for the post. Question for you: Is the employer match limited on a per month or per paycheck basis, or annually? My employer is matching per paycheck right now but only up to the 3% per paycheck. I wanted to front load my contributions at the beginning of the year for the first 2 months and so I was contributing what equated to 18% per paycheck. When they did the employer match it was only for 3% of the gross paycheck. They also said that in order to receive the employer match that I had to contribute per paycheck. I’ve already essentially maxed out my contributions for the year in the first 2 months and can’t contribute any more to the Simple IRA but they’re saying that they won’t contribute any more for the rest of the year since I’m not contributing any per paycheck. This seems crazy to me. Is this correct? I thought that the match was based on a yearly earnings and not per paycheck. Can you please clarify?
Hi Steven – My understanding is that it’s annual, so you should be able to frontload. That’s true of employee contributions to a SIMPLE IRA. But the employer may have administrative rules that limit the contributions on a per paycheck basis. Discuss it with your employer or the plan sponsor if you want to accelerate contributions.
Your part 7 has a number of errors in it you should correct immediately before someone relies on your advice and sends off excessive contributions to a SIMPLE IRA account. It says “contributions limits have increased for 2018. The increase in 2017 and 2018 will be from $18,000 to $18,500. The catch up contribution has increase from $2,500 to $3,000.” None of that is correct. Instead, the contribution limit for SIMPLE plans is $12,500 for both 2017 and 2018 (see IRS Notices 2016-62 and 2017-64, for example) , and the catch up contribution limit for both years is also $3,000, which means your statement indicating increases between 2017 and 2018 occurred is also incorrect. Providing such information constitutes providing tax advice, whether you “disclaim” you are doing so or not, so this should be corrected immediately before someone relies upon it.
Relax Bert, those were typos, not an intent to mislead, and they’ve been corrected. If you look at the first numbers presented in Item #4 they are correct. Sometimes when we update these pieces information is transferred incorrectly. There’s a lot involved in running a blog, particularly one with content at technical as the kind we provide. Merry Christmas!
I am interested in the SIMPLE IRA for myself. I work as a contract engineer in the nuclear industry and have multiple employers each year; 3 this year so far. They each send me a W-2, but the usual duration of employment is too short for most to offer even a 401K. Is there a way for me to take advantage of the SIMPLE IRA or something similar? I am trying to significantly increase my annual retirement contributions beyond the standard IRA I now have. My age is 65 and I plan to continue working for three more years.
Hi Chuck – A traditional or Roth IRA are your best choices. The only way to do that will be to set yourself up as self-employed. And to do that, you’ll need to get paid by W2. That may not apply in all cases due to IRS regulations. But if you can, you can use it for a SIMPLE IRA or for other retirement plans. But be careful about your taxes on that arrangement. Your FICA tax will go from 7.65% to 15.3%. You have to weigh out if that will be to your advantage.
In order to be classified as “self-employed” Chuck will need to get paid by 1099-MISC, not a W2, unless there is someway for him to be classified as a “statutory employee”, which based on his description, I don’t believe he would.
Agreed Ron.
If I’m the employer and file a Schedule C and I contribute 3% to my employees Simple IRA, and I’m over 50 and contribute 15,500 to my Simple IRA for 2015, can I add a 3% for my own Simple IRA and how should I calculate that?
Hi Tom – Based on SIMPLE IRA Plan FAQs – Contributions it looks like you can. It looks like you can make a matching contribution of up to 3% of your income up to $265,000. But please discuss this with your tax preparer. I’m not a tax preparer, and giving this advice based only on the general guidelines available, as I interpret them.
I have a client that would like everyone to be eligible for the Simple IRA, but wants to wait 90 days before offering it to new employees. This will allow my client to ensure the employee will work out at the firm before allowing the employee to participate. Is this okay? In the paperwork I see that “employees must have two years of service during which they have earned $5k per year…” Does this allow my client to wait the 90 days? Generally all of her employees will earn at least $5k within the first two months. Thank you.
What should i do if my employer is not contributing to my simple ira
@ Leo What’s their excuse for not contributing?
The simple answer (pun intended) is that they are potentially violating the law. As per Internal Revenue Code, a SIMPLE provider must match employee contributions up to 3% of compensation. That match can be reduced, but can never be less than a 1% match, and cannot be reduced for more than two out of any five year period. The rules were intended to give an employer some reprieve during economic hardship, but not a permanent hiatus from employee benefits.
In short, you can only legally get “nothing” in two circumstances – either you are not contributing yourself, or the plan has been terminated. Termination requires that you be given written notice.
In my experience, many employers are sold SIMPLE plans without being fully informed of the rules I referenced above. The employer is probably breaking the law and has no idea. I would suggest you inform him/her, politely. If that doesn’t work, report them to the department of labor. Note that doing so may cost you your job. Most employers don’t tend to retain employees that get them in trouble with the federal gov’t.
Thanks for this reply!
After reviewing our retirement plans, my Husband, who works at a small business informed me his employer has not been contributing for years to his SIMPLE IRA (yikes!)
Would be interested to hear from any other “Simple” investors who may have experienced this. What might be the most respectful way of informing your leadership they are violating the law and ripping you off? Should we consider terminating this policy altogether?
I have been contributing to my simple IRA for 8 years. In that time, my income has almost tripled. My employer started contributing 1%, which amounted to about $30/month in 2009 when I was earning approx. 36,000/yr. Since that time, I have earned between $75,000-$80,000 for the last 4 years and my employer is still only contributing 1% of the old $36K salary.
2 years ago, I asked him if he could recalculate the contribution and he got mad at me and told me I should be grateful for what I was getting and the fact that I have a company phone and gas card. (The company phone and gas card are not going to help me retire – I turn 50 this year). I really do love my job and it will be hard to find another job making what I am making here, but I feel like I am being cheated. Is there anything I can do without him finding out it is me complaining?
Unfortunately Diana, the answer is no. Employers are not required to offer a company match on contributions and many offer none at all. You may have a case (discrimination – matches must be uniform) if other employees are being given a higher match, but I’m not sure how you can find that out. Matching contributions are in the discretion of the employer.
I thought that as long as an employee was making a contribution the emplorer was
required by law to match that amount up to 3%. IE: employee earns $50,000 and contributes. 5%,=$2500, the employer must contribute 3%,=$1500. Or the employer must make a 2% nonelect contribution.
Is this not right?
You are correct Don, they must offer the match on a SIMPLE IRA. My earlier answer was incorrect. I get so many questions on so many retirement plans I sometimes forget which plan I’m talking about. Like this time š
I have about 26k balance on a 401k from my old employer and I would like to rollover the 401k to either an IRA or a Roth IRA. right now my income is low, (I’d say about 18k a year). I have been reading about the differences on the two types of accounts and I am leaning towards the Roth IRA, however, I saw your web video which mentioned that a rollover to an Roth IRA is a taxable income, my question is if I do that now how can I calculate how much tax I have to pay next year, I am on a tight budget right now therefore should I consider opening a simple IRA. Thx
@ Mari Your tax bracket is based on how much income you make. If you’re making $18k per year and you decide to convert the entire 401k balance of $26k, you would add that to your income total and that’s what tax bracket you would be in.
Personally I would roll it over to an IRA and let it grow. Of course you can start your own Roth for about $50 per month (Prudential to name one company) and then hedge your bets against taxes being higher or lower by time you retire.
Very informative post. This definitely points out a positive to working for a bigger company that offers benefits like a Simple IRA. Working for an entrepreneur can offer flexibility but you miss out on benefits like this. Planning for retirement is hard enough when you have programs like Simple IRAs. Trying to accomplish this on your own can be nearly impossible.
Perfect timing. I just did a budget today for someone with a SIMPLE IRA. So, if you had a couple who had a 401k, SIMPLE IRA, traditional IRA and Roth, which order would you have them fund the options?
If I am a partner in an LLC, can I contribute to a SIMPLE IRA if I do not take any W-2 income?
@ Melissa You have to show some sort of income to be able to contribute to any retirement plan; including SIMPLE IRA’s.
Old post, I know, and I apologize. Maybe this will help someone else that comes along….
The correct answer to your question is “maybe”. Jeff is correct that you do have to show some sort of income, but it doesn’t have to be w-2 income. Sole proprietors and LLC members may contribute to a SIMPLE. The calculation is based on net income.
My work offers a simple Ira that has a $75 dollar annual fee and a $95 rollover fee but matches 3 percent. I’m 25 and this is my first Ira I’m looking to start. Is it wise to open this account with my job or should I look around for a different simple IRa with a smaller, if any, annual fee? Thankyou.
@ Dan
I would stick with the Simple IRA plan you have. The $75 fee is annoying, but hopefully the free money will make up for it. Most brokerage firms will have some sort of IRA fee although $75 is on the higher side.