SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan for small businesses and self-employed people. Employees contribute pre-tax salary, and the employer makes mandatory or matching contributions, all with minimal administrative overhead.

How it works

A SIMPLE IRA is a straightforward retirement plan for small businesses. Employees contribute pre-tax salary (up to $16,000 per year for 2024). The employer is required to make contributions in one of two ways:

1. Matching contributions. The employer matches 100% of employee contributions up to 3% of salary. For example, an employee earning $50,000 who contributes 3% ($1,500) receives a $1,500 match.
2. Non-elective contributions. The employer contributes 2% of all eligible employees’ salaries, regardless of whether they contribute.

This is less complex than a 401(k) and less generous (to employers) than a SEP IRA, making it the middle ground for small firms with employees.

Who should use SIMPLE

• Small businesses with 5–100 employees. A SIMPLE is much simpler than a 401(k) while still providing meaningful employer contributions.
• Self-employed with employees. Unlike a SEP IRA, a SIMPLE allows you to employ others without having to contribute equal percentages for everyone.
• Businesses wanting to match employee contributions. Unlike a 401(k), the matching rules are simpler and mandatory.

Setup and administration

A SIMPLE IRA is easy to set up. You complete a short form with your chosen financial institution (bank or brokerage), notify employees, and begin operations. There is no Form 5500 annual filing (unlike a 401(k)), making compliance minimal.

Employers must file Form 5498-SIMPLE annually with the IRS and provide a copy to each employee, but this is routine.

Contribution limits

Employee contributions (2024): Up to $16,000 per year ($19,500 with catch-up at 50+).

Employer contributions: Matching (100% of the first 3% of salary) or 2% non-elective. In practice, most employers choose the matching formula, as it ties contributions to employee participation.

Withdrawal and tax rules

SIMPLE IRAs follow standard IRA withdrawal rules:

• Penalty-free withdrawals at 59½.
• 10% penalty (plus income tax) for withdrawals before 59½ (with exceptions).
• Required minimum distributions begin at age 73.
• All withdrawals are taxed as ordinary income.

One exception: there is a 25% early-withdrawal penalty (instead of 10%) if you withdraw within the first two years of opening the SIMPLE.

SIMPLE vs. SEP vs. 401(k)

Changing or terminating

If an employer wants to switch to a 401(k) or SEP, or terminate a SIMPLE, there are rules about timing and notification. Generally, the employer must give employees 30 days’ notice.

See also