A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan designed for small businesses with 100 or fewer employees. It offers both employers and employees an easy way to save for retirement with lower administrative costs than a traditional 401k. In this guide, we will explain how SIMPLE IRAs work and whether they are right for your business.
What is a SIMPLE IRA?
A SIMPLE IRA is an employer-sponsored retirement plan that allows employees to make salary deferral contributions while requiring employers to make either matching or non-elective contributions. It combines the simplicity of an IRA with some benefits of employer-sponsored plans.
The simple version: A SIMPLE IRA is like a mini-401k for small businesses. Employees can contribute from their paychecks, and employers must contribute either a match or a flat percentage for all employees. It has less paperwork than a 401k.
How a SIMPLE IRA Works
- Employer sets up the plan: Complete IRS Form 5304-SIMPLE or 5305-SIMPLE
- Employees enroll: Eligible employees elect how much to contribute
- Salary deferrals: Employee contributions come from their paychecks pre-tax
- Employer contributes: Employer makes required matching or non-elective contributions
- Invest the funds: Employees choose investments from the plan's options
- Tax-deferred growth: All contributions and earnings grow tax-deferred
SIMPLE IRA Contribution Limits 2026
Employee Contribution Limits
- Under age 50: $16,500 per year
- Age 50 and older: $20,000 per year ($3,500 catch-up contribution)
- Age 60-63: $21,750 per year ($5,250 super catch-up contribution)
Employer Contribution Requirements
Employers must make one of two types of contributions:
Option 1: Matching Contribution
- Match employee contributions dollar-for-dollar up to 3% of compensation
- Can reduce to 1% match in 2 out of 5 years
Option 2: Non-Elective Contribution
- Contribute 2% of each eligible employee's compensation
- Must contribute for all eligible employees, regardless of whether they contribute
- Maximum compensation considered: $350,000 (2026)
Example: SIMPLE IRA Contributions
Lisa earns $60,000 and contributes 5% ($3,000) to her SIMPLE IRA. Her employer uses the 3% matching option.
- Lisa's contribution: $3,000 (5% of salary)
- Employer match: $1,800 (3% of salary - matches up to 3%)
- Total annual contribution: $4,800
If Lisa contributed the maximum $16,500, employer would still only match $1,800 (3% of $60,000).
Who Can Establish a SIMPLE IRA?
SIMPLE IRAs are available to:
- Businesses with 100 or fewer employees who earned at least $5,000 in the prior year
- Self-employed individuals (sole proprietors)
- Businesses that do not currently maintain another employer-sponsored retirement plan
Employee Eligibility
Employees must be allowed to participate if they:
- Earned at least $5,000 in any two prior years
- Are expected to earn at least $5,000 in the current year
SIMPLE IRA Benefits
For Employers
- Easy to set up: Minimal paperwork compared to 401k plans
- Low administrative costs: No annual filing requirements with the IRS
- Tax deductions: Employer contributions are tax-deductible
- Flexible contributions: Can choose matching or non-elective formula
- Attract employees: Retirement benefits help recruit and retain workers
For Employees
- Pre-tax contributions: Reduce taxable income
- Employer contributions: Free money added to retirement savings
- Immediate vesting: All contributions are 100% vested immediately
- Investment control: Employees choose their own investments
- Portability: Take your account when you leave the company
SIMPLE IRA Withdrawal Rules
SIMPLE IRA withdrawal rules are similar to Traditional IRAs with one important exception:
Standard Rules
- Age 59 1/2 or older: Withdraw without penalty, pay income tax
- Required Minimum Distributions: Begin at age 73
Early Withdrawal Penalties
- First 2 years: 25% penalty (not the usual 10%)
- After 2 years: Standard 10% early withdrawal penalty
Important: The 2-year period begins on the date of your first SIMPLE IRA contribution. Withdrawing within this period triggers a steep 25% penalty, so plan carefully.
SIMPLE IRA vs Other Retirement Plans
SIMPLE IRA vs 401k
- Contribution limits: 401k allows higher contributions ($23,500 vs $16,500)
- Setup cost: SIMPLE IRA is cheaper and easier to establish
- Administration: SIMPLE IRA has minimal ongoing requirements
- Loan option: 401k may offer loans, SIMPLE IRA does not
- Roth option: Many 401k plans offer Roth, SIMPLE IRA does not
SIMPLE IRA vs SEP IRA
- Employee contributions: SIMPLE allows employee deferrals, SEP does not
- Employer contribution: SEP has higher limits ($70,000 vs ~$24,000)
- Flexibility: SEP contributions are discretionary, SIMPLE requires contributions
- Best for: SIMPLE is better for businesses with employees; SEP is often better for solo businesses
Example: Choosing the Right Plan
ABC Company has 15 employees and wants to offer a retirement plan.
- SIMPLE IRA: Easy to administer, employees can contribute, employer must match 3% or contribute 2%
- 401k: More complex and costly, but higher limits and more features
- SEP IRA: Simple administration, but only employer contributes and must be same percentage for all
For ABC Company, SIMPLE IRA offers the best balance of simplicity and employee engagement.
How to Set Up a SIMPLE IRA
- Choose a financial institution: Select a brokerage or bank to hold the accounts
- Complete plan documents: Use IRS Form 5304-SIMPLE (employees choose institution) or 5305-SIMPLE (employer designates institution)
- Notify employees: Provide written notice at least 60 days before the plan year
- Set up payroll deductions: Configure your payroll system for employee contributions
- Establish election period: Allow employees to enroll during the 60-day election period
- Begin contributions: Start deducting and depositing contributions
SIMPLE IRA Deadlines
- Plan setup: October 1 of the year you want to start (for calendar year plans)
- Employee deferrals: Must be deposited within 30 days of payroll
- Employer contributions: Due by tax filing deadline (including extensions)
SIMPLE IRA Strategies
For Employers
Consider the 3% matching option in profitable years and the 1% match (when allowed) in lean years. If all employees contribute significantly, the non-elective 2% might be cheaper than matching.
For Employees
Always contribute enough to get the full employer match. If possible, maximize contributions to take full advantage of tax-deferred growth.
Track Your SIMPLE IRA
Pro Trader Dashboard helps you monitor your SIMPLE IRA investments and track your retirement savings progress over time.
Summary
A SIMPLE IRA is an excellent retirement plan option for small businesses that want to offer retirement benefits without the complexity and cost of a 401k. With immediate vesting, reasonable contribution limits, and simple administration, it provides real value for both employers and employees. Just remember the 25% early withdrawal penalty during the first two years and ensure employees understand this important rule.
Explore more retirement options in our guides on SEP IRAs and 401k plans.