A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.
Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions. What makes a SIMPLE IRA unique is that the employer is required to make a contribution on the employee's behalf - either a dollar-for-dollar match of up to 3% of salary or a flat 2% of pay - regardless of whether the employee contributes to the account.
SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs, and it's cheaper to set up and run a SIMPLE IRA plan than it is to administer many other workplace retirement plans.
FAQs
A SIMPLE IRA plan provides small employers with a simplified method to contribute toward their employees' and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or nonelective contributions.
What are the disadvantages of a SIMPLE IRA? ›
Are There Downsides to SIMPLE IRAs and SEPs?
- Employee limitations. SIMPLE IRAs can only be implemented at companies with 100 or fewer employees. ...
- Total annual contribution limits. ...
- Lower contribution limits than a 401(k). ...
- Mandatory employer contributions. ...
- No loans or Roth contributions.
Key Takeaways. Traditional IRAs are set up by individuals, while SIMPLE IRAs are set up by small business owners for employees and themselves. Traditional IRA contributions are made by the individual only, but SIMPLE IRA contributions can be from both an employee and an employer.
Is a SIMPLE IRA the same as a 401k? ›
A 401(k) plan is one of the most flexible workplace retirement plan options available, while a SIMPLE IRA plan is less flexible but also less complex to use and administer. Each of these has its own distinct pros and cons, but which is best suited for you is dependent on your personal needs.
Can I pull my money out of a SIMPLE IRA? ›
Withdrawals from SIMPLE IRAs
Generally, you have to pay income tax on any amount you withdraw from your SIMPLE IRA. You may also have to pay an additional tax of 10% or 25% on the amount you withdraw unless you are at least age 59½ or you qualify for another exception.
At what age can you withdraw from a SIMPLE IRA without penalty? ›
Withdrawals from SIMPLE IRAs
Generally, you have to pay income tax on any amount you withdraw from your SIMPLE IRA. You may also have to pay an additional tax of 10 percent or 25 percent on the amount you withdraw unless you are at least age 59 1/2 or you qualify for another exception.
What is the 2 year rule for SIMPLE IRA? ›
During the first 2 years of participation in a SIMPLE IRA plan, you may roll over amounts from another SIMPLE retirement account. After 2 years of participation, you also may roll over amounts from a qualified retirement plan or an IRA.
Does money grow in a SIMPLE IRA? ›
The money will grow tax-deferred until it's withdrawn at retirement.
Which is better, Roth IRA or SIMPLE IRA? ›
An IRA offers investors a tax-advantaged way to build the value of their investments during their working years. A traditional IRA offers investors tax-deferred growth, while a Roth IRA offers investors tax-free growth and withdrawals, after paying taxes on the money contributed.
Do I have to report my SIMPLE IRA on my taxes? ›
SIMPLE IRA contributions are not subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Matching and nonelective contributions are not subject to these taxes. Reporting employer deductions of contributions.
A SIMPLE IRA could be a good option for small business owners who want to save for their retirement while helping their employees do the same. It has advantages that include simple administration and low costs. However, the SIMPLE IRA isn't right for everyone.
What is the limit for a SIMPLE IRA? ›
The amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $16,000 in 2024 ($15,500 in 2023; $14,000 in 2022; $13,500 in 2020 and 2021; $13,000 in 2019 and $12,500 in 2015 – 2018).
What happens to SIMPLE IRA after leaving job? ›
You can leave it where it is, at its current financial institution. You can roll it over to another SIMPLE IRA before two years have elapsed with no penalty. Or you can wait two years after the account was opened, and then move the funds to another account via a rollover or Roth conversion.
Can I have a SIMPLE IRA and a cash balance plan? ›
You cannot combine SIMPLE IRAs with defined benefit plans or cash balance plans. The IRS specifically prohibits you from funding both plans at the same time.
Does the employer have to match 3% for a SIMPLE IRA? ›
Employee contributions to a SIMPLE IRA are discretionary – they can decide to contribute each year or not. Employers, however, are required to make annual contributions. Employers must provide a 100% match up to 3% of employee's contributions or provide 2% of their annual salary.
How much tax do you pay on a SIMPLE IRA? ›
How Does a SIMPLE IRA Work? With a SIMPLE IRA, you and your employees can put a percentage of pay aside for retirement. The money will grow tax-deferred until it's withdrawn at retirement. So, you won't have to pay taxes on your investment growth, but you will have to pay income taxes when you take out money.
Is a SIMPLE IRA worth it? ›
A SIMPLE IRA could be a good option for small business owners who want to save for their retirement while helping their employees do the same. It has advantages that include simple administration and low costs. However, the SIMPLE IRA isn't right for everyone.
