SIMPLE IRA

A SIMPLE IRA is a type of tax-deferred retirement savings plan that most small businesses with 100 or fewer employees are eligible for. These plans require minimal paperwork for the employer and maintenance costs are low. Employee contribution limits are lower for SIMPLE IRAs than for 401(k) plans.

Christian Simmons, writer and researcher for RetireGuide
Fact Checked
Fact Checked

Our fact-checking process starts with vetting all sources to ensure they are authoritative and relevant. Then we verify the facts with original reports published by those sources, or we confirm the facts with qualified experts. For full transparency, we clearly identify our sources in a list at the bottom of each page.

Cite Us
How to Cite RetireGuide.com's Article

APA Simmons, C. (2022, June 8). SIMPLE IRA. RetireGuide.com. Retrieved June 27, 2022, from https://www.retireguide.com/retirement-planning/investing/accounts/ira/simple/

MLA Simmons, Christian. "SIMPLE IRA." RetireGuide.com, 8 Jun 2022, https://www.retireguide.com/retirement-planning/investing/accounts/ira/simple/.

Chicago Simmons, Christian. "SIMPLE IRA." RetireGuide.com. Last modified June 8, 2022. https://www.retireguide.com/retirement-planning/investing/accounts/ira/simple/.

Key Takeaways
  • SIMPLE IRAs are meant for small businesses and can only be used by employers with 100 or fewer employees.
  • As the name implies, SIMPLE IRAs are meant to be a less complex and straightforward way for smaller businesses to help their employees save for retirement.
  • SIMPLE IRAs include lower contribution limits than 401(k)s and require matching contributions from employers.

What Is a SIMPLE IRA?

A SIMPLE IRA stands for Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Account (IRA). An employer must have 100 or fewer employees to establish a SIMPLE IRA.

Self-employed people can also set up a SIMPLE IRA.

Unlike some other retirement accounts, SIMPLE IRAs require mandatory contributions from employers.

Yearly employee contribution limits for SIMPLE IRAs are lower than 401(k) plans but higher than traditional IRA contribution limits.

There are a few employee eligibility requirements for SIMPLE IRAs.

SIMPLE IRA Eligibility Rules for Employees
  • Earn at least $5,000 from the employer in any two previous calendar years.
  • Be expected to earn at least $5,000 in the current year.
  • Work for a company that offers a SIMPLE IRA.

How Does a SIMPLE IRA Work?

SIMPLE IRA rules share several similarities with traditional IRAs.

Contributions are tax deductible, which means the money you add to your account helps reduce your taxable income for the year.

Investment growth is also tax-deferred, which means you won’t owe taxes until you’re ready to make withdrawals during retirement.

Employers must contribute to each worker’s SIMPLE IRA.

Two Ways Employers Can Contribute to a SIMPLE IRA
  1. Provide a matching contribution of up to 3% of the employee’s pay.
  2. Make nonelective contributions equivalent to 2% of the employee’s compensation if the employee earns $285,000 or less in 2022.

If your employer chooses the 3% matching option, then the employee must put money into their SIMPLE IRA in order to receive the match.

For the 2% option, your company will add 2% of your salary to your SIMPLE IRA. As an employee, you don’t need to make any contributions to receive this money.

SIMPLE IRA Rules

As with any form of retirement account, there are rules that must be followed. One of the advantages of SIMPLE IRAs is that they typically have fairly straightforward rules, regulations and requirements.

Contribution Limits

Employees can contribute up to $14,000 a year to a SIMPLE IRA in 2022, which is a $500 increase from 2021. Employees who are 50 and older can make contributions of up to $17,000 a year.

For comparison, employees can contribute up to $20,500 to a 401(k) plan in 2022. SIMPLE IRA contribution limits have risen by $500 each year since 2019.

Required Minimum Distributions (RMDs)

Your required minimum distribution (RMD) is the smallest amount of money you can take out of your account each year once you begin making withdrawals. You can choose to withdraw more than this amount each year but can’t take out any less.

To calculate your minimum distribution, you take the balance of the account at the end of the previous year and divide it by the distribution period.

For SIMPLE IRAs, you must begin withdrawing your required minimum distribution when you are 70 ½ years old if you were born before July 1, 1949, and when you are 72 if you were born on or after that date.

Basic Withdrawal Rules

You will have to pay income tax once you begin making withdrawals from your SIMPLE IRA. There are also additional tax rates if you make withdrawals early.

You will owe an additional 10% tax rate if you make withdrawals from your SIMPLE IRA before you are 59 ½ years old. If you opt to make withdrawals within two years of when you first participated in the SIMPLE IRA, then you will owe a 25% tax rate.

There are some exceptions to the additional tax rates under certain circumstances.

Examples of Exceptions to Additional SIMPLE IRA Taxes
  • Your withdrawal is an annuity
  • You are disabled
  • You are the beneficiary of someone else’s SIMPLE IRA

Filing and Notice Requirements

There is generally no filing requirement for the employer when it comes to SIMPLE IRAs. When reporting on a W-2 as an employee, a SIMPLE IRA can be reported by checking the retirement plan box.

How to Set Up a SIMPLE IRA

As the name implies, a SIMPLE IRA is often easier for a small employer to set up and administer than a 401(k) plan.

These plans require minimal paperwork for the employer and maintenance costs are low.

A SIMPLE IRA is established through a financial institution, such as a bank, which then administers the plan.

The plan provider will offer various investment options to choose from, such as stocks, bonds and mutual funds.

Each employee can choose which investments to include in their own SIMPLE IRA.

Three Steps an Employer Must Follow to Establish a SIMPLE IRA
  1. Select the type of SIMPLE IRA you want to provide. You must fill out IRS Form 5305-SIMPLE if you want to select the financial institution where employees will hold their IRAs, or fill out IRS Form 5304-SIMPLE if you want workers to pick the financial institution that will hold their account.
  2. Provide eligible employees with information about the SIMPLE IRA plan.
  3. Create separate SIMPLE IRAs for each eligible employee using Form 5305-S or Form 5305-SA.

If you’re an employee and want to sign up for a SIMPLE IRA at your job, your employer will have you fill out one of the forms above.

SIMPLE IRA Alternatives

A SIMPLE IRA isn’t your only option. While it may make the most sense for smaller companies, there are also other types of IRAs, as well as 401(k)s.

TypeEligibilityContribution Limit
SIMPLE IRAEmployee received at least $5,000 from the employer any two previous years and is expecting to receive $5,000 in the coming year. Company cannot have more than 100 employees.$14,000
401(k)Employee is 21 or older and has at least one year of service.$20,500
SEP IRAEmployee is 21 or older, has worked for the company for at least three of the last five years and received at least $650 in 2021 and 2022.$61,000
Roth IRAMust make under $144,000 in 2022.$6,000 or $7,000 depending on age
Traditional IRAGenerally, anyone.$6,000 or $7,000 depending on age

SIMPLE IRA vs 401(k)

One of the main differences between a SIMPLE IRA and a 401(k) is the fact that SIMPLE IRAs are designed specifically for smaller companies while a 401(k) can typically be used by an employer of any size.

SIMPLE IRAs are also simpler, more straightforward plans that are generally less of a burden on employers. SIMPLE IRAs also come with a lower contribution limit than a 401(k).

SIMPLE IRA vs SEP IRA

The key difference between a SIMPLE IRA and SEP IRA is who can contribute to it. With a SIMPLE IRA, both the employer and employee contribute to the plan. But with a SEP IRA, only the employer contributes.

Both plans may make sense for smaller businesses given their simplicity. A SEP IRA also has a much higher contribution limit.

SIMPLE IRA vs Roth IRA

While a SIMPLE IRA is meant for businesses with 100 or fewer employees, ROTH IRAs are plans for individuals. This means that a SIMPLE IRA will receive contributions both from the employer and employee while a ROTH IRA would only be contributed to by the account holder.

A ROTH IRA also has a lower contribution limit.

SIMPLE IRA vs Traditional IRA

Traditional IRAs virtually have no limit on who can set up one. Essentially anyone can use it as a retirement-saving strategy. This differs greatly from SIMPLE IRAs, since they are meant exclusively for small businesses.

Both an employer and employee contribute to a SIMPLE IRA whereas a Traditional IRA would only receive contributions from the individual it belongs to.

Advantages and Disadvantages of SIMPLE IRAs

SIMPLE IRAs come with different advantages and disadvantages for both employers and employees.

Advantages & Disadvantages of SIMPLE IRAs for Employees
Advantages
  • You receive account contributions from your employer.
  • Few eligibility requirements.
  • You can contribute to other nonworkplace retirement savings plans at the same time.
  • More diverse investment options compared to 401(k) plans.
  • You can decide how much of each paycheck you want to contribute to your account.
Disadvantages
  • Employee contribution limits are lower than other workplace retirement plans.
  • There is no Roth version of a SIMPLE IRA.
  • Early withdrawals made within two years after opening a SIMPLE IRA result in a 25% tax penalty. In comparison, early withdrawals from traditional IRAs are taxed at 10%.
  • The 25% tax penalty also applies if you rollover your account into a different retirement plan less than two years after opening your SIMPLE IRA.

For business owners, SIMPLE IRAs offer lower start-up and operating costs than 401(k) plans. Additionally, there are tax advantages.

Advantages & Disadvantages of SIMPLE IRAs for Employers
Advantages
  • Lower administrative costs to establish a SIMPLE IRA plan than a 401(k) plan.
  • Fewer regulations than other retirement plans.
  • Employers receive a tax deduction for any contributions made to employees’ accounts.
Disadvantages
  • Employer account contributions are required for each employee.
  • SIMPLE IRAs are typically only available to companies with less than 100 employees.
  • If you’re self-employed, other retirement accounts may better suit your needs, such as a SEP IRA or solo 401(k).

Frequently Asked Questions About SIMPLE IRAs

When can you withdraw money from a SIMPLE IRA?
You typically must be at least 59 ½ years old to withdraw from your SIMPLE IRA. There are tax penalties for withdrawing early, including a 10% tax rate if you withdraw before you reach 59 ½, and a 25% tax rate if you withdraw within two years of when you first participated in the plan.
Can you convert a SIMPLE IRA to another retirement plan?
You can transfer money from a SIMPLE IRA to another retirement plan like a 401(k). You can only do this after you have participated in the SIMPLE IRA plan for two years. Before then, you can only transfer it to another SIMPLE IRA without penalty.
How are SIMPLE IRAs taxed?
SIMPLE IRA contributions are tax deductible, and growth is tax deferred. This means that you won’t pay taxes on your SIMPLE IRA until you make withdrawals.
When is the SIMPLE IRA contribution deadline?
SIMPLE IRA contributions must be made within 30 days of when they were taken out of an employee’s earnings.
Last Modified: June 8, 2022

11 Cited Research Articles

  1. Internal Revenue Service. (2022, January 3). SIMPLE IRA Plan FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans
  2. Internal Revenue Service. (2022, January 3). SIMPLE IRA Plan. Retrieved from https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
  3. Internal Revenue Service. (2021, May 3). Retirement Topics – Required Minimum Distributions (RMDs). Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
  4. Internal Revenue Service. (2020, November 23). Choosing a Retirement Plan: SIMPLE IRA Plan. Retrieved from https://www.irs.gov/newsroom/choosing-a-simple-ira-plan
  5. Hogan, C. (2020, October 23). What Is a SIMPLE IRA? And How Does It Work? Retrieved from https://www.daveramsey.com/blog/what-is-a-simple-ira
  6. Podell, D. (2019, January 29). Retirement Plans For Businesses Aren't Always Simple: SIMPLE IRAs Vs. 401(k)s. Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2019/01/29/retirement-plans-for-businesses-arent-always-simple-simple-iras-vs-401ks/?sh=f22d5b16eb52
  7. Internal Revenue Service. (2020, November 23). Choosing a Retirement Plan: SIMPLE IRA Plan. Retrieved from https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-ira-plan
  8. Hogan, C. (2020, October 23). What Is a SIMPLE IRA? And How Does It Work? Retrieved from https://www.daveramsey.com/blog/what-is-a-simple-ira
  9. Internal Revenue Service. (2020, September 4). SIMPLE IRA Plan FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans
  10. Internal Revenue Service. (2020, January 18). SIMPLE IRA Plan. Retrieved from https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
  11. Podell, D. (2019, January 29). Retirement Plans For Businesses Aren't Always Simple: SIMPLE IRAs Vs. 401(k)s. Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2019/01/29/retirement-plans-for-businesses-arent-always-simple-simple-iras-vs-401ks/?sh=f22d5b16eb52