Your Guide to Simple Iras: How They Work, the Rules and Key Benefits

If you’re a small business owner looking for an easy way to offer retirement benefits, a SIMPLE IRA might be the solution.

These plans are straightforward to set up and are generally cost-effective, allowing employees to save for retirement through payroll deductions while employers contribute as well. (If you own a business but don’t have other employees, you can still have a SIMPLE IRA and make both employer and employee contributions for yourself.)

WHAT IS A SIMPLE IRA?

SIMPLE stands for Savings Incentive Match Plan for Employees, and it’s designed for businesses with 100 or fewer employees. A SIMPLE IRA is a type of employer-sponsored retirement plan that blends simplicity with tax advantages.

Unlike a 401k, which often requires complex administration and higher costs, SIMPLE IRAs are easier to manage. Compared with SEP-IRAs, which only allow employer contributions, SIMPLE IRAs let employees contribute too, making them more appealing and potentially helping attract quality employees.

WHY SMALL BUSINESSES USE SIMPLE IRAS

Small businesses often choose SIMPLE IRAs because they’re affordable and easy to administer. There’s no need for annual IRS filings and the employer contribution requirement can be a great company benefit. For companies that can’t handle the complexity or cost of a 401k, a SIMPLE IRA offers a practical alternative.

HOW DOES A SIMPLE IRA WORK?

EMPLOYEE CONTRIBUTIONS

Employees contribute pretax dollars through payroll deductions, and those contributions go into individual SIMPLE IRA accounts at a financial institution.

EMPLOYER CONTRIBUTIONS

Employers must also contribute, either by matching employee contributions up to 3% of compensation or by making a 2% nonelective contribution for all eligible employees, regardless of whether they contribute themselves.

As a result of the SECURE 2.0 Act, employers can also choose to make additional nonelective contributions up to certain limits, on top of these amounts.

VESTING AND OWNERSHIP

Ownership is immediate; employees own both their contributions and the employer’s contributions right away. There are no vesting schedules or waiting periods, which can make SIMPLE IRAs attractive for potential employees.

SIMPLE IRA CONTRIBUTION LIMITS

ANNUAL EMPLOYEE CONTRIBUTION LIMITS

For 2025, employees can generally contribute up to $16,500 to a SIMPLE IRA – lower than the 401k limit, but more than a traditional IRA.

Under the SECURE 2.0 Act, the contribution limit may be increased depending on plan size and under certain circumstances.

CATCH-UP CONTRIBUTIONS

Employees age 50 or older can make an additional catch-up contribution of $3,500 in most plans.

And thanks again to the SECURE 2.0 Act, individuals aged 60 to 63 can make an even larger catch-up contribution of $5,250.

EMPLOYER MATCH AND NONELECTIVE CONTRIBUTIONS

Employer contributions follow one of two formulas:

• A dollar-for-dollar match up to 3% of compensation (with the option to reduce to as little as 1% in two out of five years), or
• A 2% nonelective contribution for every eligible employee

With the match formula, there is no limit on employer contributions. With nonelective contributions, the limit is 2% of compensation up to $350,000 in 2025 (which is $7,000).

The SECURE 2.0 Act also allows for additional nonelective contributions up to certain limits.

SIMPLE IRA MATCHING RULES

Each year, an employer can decide which contribution model they’ll follow for the following year.

THE 3% EMPLOYER MATCH OPTION

The standard employer match is 3% of an employee’s compensation. However, employers can reduce this match to as low as 1%, but only in two out of five years, which can give your business extra flexibility in years you might have less available to contribute.

THE 2% NONELECTIVE OPTION

Alternatively, employers can choose the nonelective option, where they contribute 2% of compensation up to $350,000 for all eligible employees, even those who don’t contribute themselves.

SIMPLE IRA ELIGIBILITY RULES

EMPLOYEE ELIGIBILITY

Employees typically qualify to contribute to a SIMPLE IRA if they earned at least $5,000 in any two preceding years and are expected to earn that amount in the current year. Employers can also choose to reduce or remove the participation threshold and let additional employees contribute. Either way, employers must allow all eligible employees to participate.

EMPLOYER ELIGIBILITY

Employers must have 100 or fewer employees who earned $5,000 or more in the previous year to offer a SIMPLE IRA. And in most cases, they can’t offer another type of retirement plan.

SIMPLE IRA WITHDRAWAL AND EARLY DISTRIBUTION RULES

TAXES ON WITHDRAWALS

Withdrawals from a SIMPLE IRA are taxed like other IRAs – traditional contributions are taxable as regular income and Roth contributions are tax-free if requirements are met.

EARLY WITHDRAWAL PENALTIES

Employees who take money out of a SIMPLE IRA before age 59½ will generally pay a 10% penalty. However, if they withdraw funds within the first two years of participation, the penalty jumps to 25%.

SIMPLE IRA VS OTHER RETIREMENT ACCOUNTS

SIMPLE IRA VS SEP-IRA

Compared with SEP-IRAs, SIMPLE IRAs allow employee contributions, while SEP-IRAs do not.

SIMPLE IRA VS TRADITIONAL IRA

Traditional IRAs are individual accounts, not employer-sponsored. If an employee wishes to, they can contribute to both a traditional IRA on their own as well as their employer’s SIMPLE IRA.

SIMPLE IRA VS 401K

While 401k plans offer higher contribution limits, they also come with more administrative complexity and cost. For small businesses, SIMPLE IRAs can strike a balance between affordability and a meaningful employee benefit.

PROS AND CONS OF A SIMPLE IRA

PROS

• Easy to set up
• Low-cost
• Flexibility to decide how to make employer contributions each year
• Employer contributions and immediate vesting can attract high-quality talent to your business

CONS

• Lower contribution limits than a 401k plan
• No flexibility to stop employer contributions without dissolving the plan
• Might not be right for you if you expect to grow your business to more than 100 employees

WHO A SIMPLE IRA IS BEST FOR

SIMPLE IRAs are most ideal for small-business owners with fewer than 100 employees who want a low-cost, easy-to-administer retirement plan, and/or who lack the resources to manage a 401k.