What Is a SIMPLE IRA?

A SIMPLE IRA is one of the more common retirement accounts that employers offer. Here is everything that you need to know to decide if taking part in yours is beneficial.

Written by Micah Murray / July 8, 2022

Quick Bites

  • SIMPLE IRA plans are start-up retirement savings plans for small employers who aren’t sponsoring retirement plans. Self-employed individuals may also open one.
  • With a SIMPLE IRA, the employer must make contributions, even if you choose not to.
  • Making contributions to a SIMPLE IRA will lower your taxable income and you will be able to put off tax payments until you withdraw from your account during retirement.

Starting a new job can be overwhelming. You have to remember things like the password to your new company email, how many pumps of caramel your boss likes in their coffee, or that Jan in accounting is very particular about expense reports.

One thing to never neglect is your retirement account options. In your compensation package, you may be presented with a retirement account called a SIMPLE IRA. Before you disregard it, give it a chance. If you play your cards right, it could be the key to you living your best life in retirement.

Inside this article

  1. What is a SIMPLE IRA?
  2. SIMPLE IRA contribution rules
  3. SIMPLE IRA vs. Roth IRA
  4. SIMPLE IRA vs 401(k)
  5. Rollovers with SIMPLE IRAs
  6. The bad about SIMPLE IRAs

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees, commonly known as a SIMPLE IRA, is a type of retirement plan that employers can set up for their employees. With this plan, employees have the incentive to save money for their retirement since employers match their contributions up to a certain percentage. In fact, employers are required to make contributions even if you choose not to.

Typically, SIMPLE IRAs are preferred by smaller businesses that do not have the capital to cover the start-up, maintenance and operation costs of other retirement plans. These smaller businesses only qualify to set up SIMPLE IRAs if they employ 100 people or less.[1]

What Is an IRA?

What Is an IRA?

An IRA is one of the simplest ways to save for retirement. Unlike a 401(k), your employer doesn’t need to offer one—you can open one on your own.

Find out more

If you’re self-employed, you can also get the benefits of a SIMPLE IRA. Self-employed individuals can set up a SIMPLE IRA on their own behalf and even match their own contributions, just like an employer would.[2]

Who is eligible for a SIMPLE IRA?

Being eligible for a SIMPLE IRA is mostly dependent on your employer and how much you are paid. To be eligible you must:[3]

  • Work for an employer that offers a SIMPLE IRA or be self-employed

  • Make at least $5,000 in the current calendar year and have made at least $5,000 from your employer in the previous year

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SIMPLE IRA contribution rules

With a SIMPLE IRA, your employer is required to make a contribution even if you do not. Each year, they must do one of the following:[1]

  • Match an employee’s contributions: (dollar-for-dollar) up to 3% of their annual compensation

  • Make a non-elective contribution: for every eligible employee of 2% of their annual compensation (yup, even if that employee doesn’t contribute a dime!)

For 2022, the contribution limit for SIMPLE IRAs is $14,000, up $500 from the $13,500 limit set for 2021. If you are 50 or older, you can make extra contributions amounting up to $3,000.[4]

For the self-employed among us, the rules for contributing to your SIMPLE IRA are slightly different. You can either match your contributions at up to 3% of your compensation or contribute 2% of your net self-employment earnings, up to $305,000 in 2022.[2]

SIMPLE IRA vs. Roth IRA

By now, you might be asking yourself what the difference is between a SIMPLE IRA and a Roth IRA. The truth is, not that much.

The biggest difference between a SIMPLE IRA and a Roth IRA is when you pay taxes on contributions. With a SIMPLE IRA, you make contributions pre-tax, which reduces your taxable income. It isn’t until you withdraw from your account that you pay income tax on those funds.

With a Roth IRA, you pay the taxes on your contributions upfront and are able to withdraw from your account tax-free during retirement. The good news is that you can contribute to both a SIMPLE IRA and a Roth IRA at the same time. The bad news is that you might not be able to deduct your full contributions if you do so.[5]

SIMPLE IRA vs 401(k)

So, how about 401(k)s?

One of the major differences between 401(k)s and SIMPLE IRAs is that a 401(k) can be opened on behalf of an employee by businesses of any size, no matter if they have five employees or 305.[6]

Additionally, with a 401(k) you can contribute more than with a SIMPLE IRA. For 2022, 401(k) contributions have a $20,500 limit. If you’re 50 or older, you can make an additional $6,500 in catch-up contributions.[7]

What Is a 401(k)?

What Is a 401(k)?

A 401(k) is the most popular employer-sponsored retirement plan. Find out how to use this tool to reach your retirement goals.

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The last notable difference between these two accounts is their eligibility requirements. To be eligible for a SIMPLE IRA as an employee, you must meet both a compensation requirement and a minimum employment length requirement.

With a 401(k), eligibility requirements are less strict. That is, a company can use their discretion as to when they offer one to you, whether that be on day one of your employment or after a vesting period. That said, if they offer them at all, they are required to offer them to all employees who are 21 years of age or older and who have been employed by the company for at least one year.[1]

Rollovers with SIMPLE IRAs

If you change jobs, you might want to roll over your retirement account into a new one. Rolling over your retirement accounts can help you defer tax obligations. Luckily, SIMPLE IRAs can be rolled over from one account to another tax-free.

What Is a Rollover IRA?

What Is a Rollover IRA?

Most people roll over their IRAs into new accounts upon changing jobs or retirement.

Find out more

There are some rules. For example, if you wish to roll over your SIMPLE IRA into a traditional IRA you may do so, but you will need to wait until you have participated in the SIMPLE IRA for at least two years before doing so.[1]

The IRS offers a handy chart to help you figure out whether or not you can roll over your SIMPLE IRA.

What’s not good about SIMPLE IRAs?

SIMPLE IRAs might sound like a great idea, but they aren’t for everyone.

For you

SIMPLE IRAs do not offer a Roth option

Roth plans aren’t taxed on distribution and SIMPLE IRAs don’t offer that option and are taxed upon distribution, says Alan Kirby, a Certified Tax Specialist, among other titles, at RidgeBrooke Retirement Planning.

Employer matches are limited to a max of 3%

When an employer matches your retirement contributions, it is like they are giving you free money. Unfortunately, SIMPLE IRAs limit employer matches more so than other retirement accounts.

“This can be significantly less than some of the employer matching contributions found in many 401(k) plans,” says Kirby.

They have lower contribution limits than 401(k)s

When it comes to retirement accounts, there may be better options than a SIMPLE IRA. Most notably, 401(k)s, which have higher contribution limits.

“The SIMPLE IRA allows the employee to contribute up to $14,000 per year ($17,000 per year if age 50 or older) whereas a traditional 401(k) plan allows the employee to contribute $20,500 per year ($27,000 per year if age 50 or older),” Kirby says.

However, Kirby says that SIMPLE IRAs still have their advantages over other accounts, mainly the traditional IRA.

“It should be noted that the lower contribution limits of the SIMPLE IRA are still far more generous than the ordinary traditional IRA, with a contribution limit of $6,000 per year ($7,000 per year for age 50 and older.),” says Kirby. “The other missing component of a traditional (personal) IRA is the convenience of payroll deduction that is so helpful with employer plans like the SIMPLE IRA or traditional 401k.”

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For the employer

They must contribute either a non-elective 2% or a 3% match

“When choosing a SIMPLE IRA plan, the employer must choose whether to contribute 2% or 3%,” Kirby says. “There is no option to offer the retirement plan without the additional cost of employer contributions.”

This means that employers will need to plan on paying this additional expense for every eligible employee. Depending on how many employees your company has, this added cost could add up quickly.

There is no room for a vesting period

Vesting periods give employers time to tell if a new hire is going to work out before they have to pay for all of their perks, including retirement accounts.

“The inability to enforce a vesting period in a SIMPLE IRA is another downside for employers,” says Kirby. “Vesting periods built into other types of employer-sponsored retirement plans provide an incentive for the employee to continue employment for a longer period.”

Article Sources
  1. “SIMPLE IRA Plan.” Internal Revenue Service. Jan. 03, 2022. https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
  2. “SIMPLE IRA Tips for the Sole Proprietor.” Internal Revenue Service. Nov. 10, 2021. https://www.irs.gov/retirement-plans/simple-ira-tips-for-the-sole-proprietor
  3. “SIMPLE IRA Plan FAQs.” Internal Revenue Service. Jan. 03, 2022. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans
  4. “Retirement Topics - SIMPLE IRA Contribution Limits.” Internal Revenue Service. Nov. 08, 2021. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits
  5. “Retirement Topics - IRA Contribution Limits.” Internal Revenue Service. Nov. 27, 2021. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  6. “401(k) Plan Overview.” Internal Revenue Service. Nov. 15, 2021. https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview
  7. “IRS announces changes to retirement plans for 2022.” Internal Revenue Service. Nov. 17, 2021. https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022

About the Author

Micah Murray

Micah Murray

Micah is a personal finance writer and editor from Augusta, Maine. His work has been featured on sites like Money Under 30 and RateGenius. He is passionate about helping others build their financial literacy and, in turn, improve their lives.

Full bio

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