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What is a SIMPLE IRA and how does it work?

If you run a small business and want to provide a retirement plan for your workers, a SIMPLE IRA may be a good option.

For small-business owners, it can be expensive and time-consuming to establish a 401(k) plan for their employees. But a Savings Incentive Match Plan for Employees (SIMPLE) individual retirement account (IRA) may be a less costly option. SIMPLE IRAs work similarly to traditional IRAs and can help your employees maximize their retirement savings.

What is a SIMPLE IRA?

A SIMPLE IRA is a workplace retirement plan generally designed for small businesses with 100 or fewer employees. As with a traditional IRA, the money in a SIMPLE IRA grows tax-deferred until account holders make qualified withdrawals at age 59.5 or later. Within a SIMPLE IRA, employees can choose from various investing options, including stocks, bonds, exchange-traded funds (ETFs) and more.

Employer contributions are mandatory, and employees can elect to contribute as well. Contributions are always 100% owned by the employee.

Our top picks for brokerages that offer SIMPLE IRA accounts

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SIMPLE IRAs at a glance

Type of employerTypically small businesses with 100 or fewer employees
Who can contributeEmployers and employees
Contribution limitsIn 2024, employees can contribute up to $16,000 and an extra $3,500 if they are age 50 or older.(1)
If the employee participates in another employer-sponsored retirement plan, such as a 401(k) in which they make elective deferral contributions, the total they can save across all those plans in 2024 is $23,000.
Employers must match up to 3% of the employee’s pay or a nonelective contribution for each eligible employee equal to 2% of the employee’s salary up to the annual limit of $345,000.
Employee eligibilityEmployees who received at least $5,000 in compensation during any two prior years and who are expected to make at least $5,000 in compensation during the current calendar year.(3)
Tax statusPre-tax
Deductible contributionsEmployers can deduct all contributions on their tax returns.
Employees can’t deduct contributions, but their contributions reduce their taxable income.
Access to funds before age 59.5Withdrawals before age 59.5 are taxable and subject to a 10% early withdrawal penalty; withdrawals within the first two years of participation in the plan incur a 25% penalty instead of 10%.

How does a SIMPLE IRA work?

A SIMPLE IRA functions like a traditional IRA in terms of investment options and distribution and rollover rules. Here are the highlights of a SIMPLE IRA:

  • Employee contributions are not tax-deductible but do reduce their taxable income.
  • Take distributions at any time, but distributions before the age of 59.5 are taxable and incur a 10% early withdrawal penalty.
  • If you take a distribution within the first two years you participate in the SIMPLE IRA, the early withdrawal penalty jumps from 10% to 25%.
  • Required minimum distributions (RMDs) begin at age 73.
  • Roll over money tax-free to another IRA or an employer-sponsored retirement plan such as a 401(k) after the first two years of plan participation — a rollover within the first two years of plan participation can only be to another SIMPLE IRA.

SIMPLE IRA contribution limits

Employers are required to contribute each year to their employees’ SIMPLE IRAs. Employers can choose either a matching contribution of up to 3% of compensation or a nonelective contribution for each eligible employee equal to 2% of their compensation up to the annual limit of $345,000. In other words, if an employee makes $350,000 a year, the 2% contribution would be $6,900 (2% x $345,000 = $6,900) instead of $7,000 (2% x $350,000).

Employees can choose to contribute to their accounts as well. Employee contributions are made through elective deferrals, and they can contribute up to $16,000 in 2024 and another $3,500 if they’re age 50 or older. If the employee participates in another employer-sponsored retirement plan in which they make elective deferrals, the most they can contribute across all these accounts is $23,000.

SIMPLE IRA taxes

Money in a SIMPLE IRA grows tax-deferred. This means you won’t need to pay taxes on your savings until you withdrawn them. But if you make a withdrawal before age 59.5, you’ll likely face an early withdrawal penalty. The usual penalty is 10%, but it’s bumped to 25% if you withdraw money within the first two years of participation in the plan.

The employer can deduct its contributions each year. Employees can’t deduct contributions, but their contributions reduce their taxable income.

Are SIMPLE IRAs insured?

SIMPLE IRA funds in bank deposit products like a certificate of deposit (CD) are insured up to the $250,000 limit set by the Federal Deposit Insurance Corporation (FDIC). If your IRA investments are in stocks and exchange-traded funds (ETFs), FDIC insurance will not apply.(4)

However, an IRA held at a brokerage firm that’s a member of the Securities Investor Protection Corporation (SIPC) is protected up to $500,000 for securities and cash.

How to set up a SIMPLE IRA as a small business

If you want to start a SIMPLE IRA for your small business, you have two options:

  1. Choose a financial institution to serve as the SIMPLE IRA trustee for all your employees. Explore and compare IRA providers like brokerages and banks while considering points like investment options, fees, customer support and platform functionality. Execute a written agreement using Form 5305-SIMPLE if you will deposit all contributions at a financial institution that you, the employer, designate.
  2. Let your employees choose their own IRA custodian. Use Form 5304-SIMPLE if you want to let your employees choose their own SIMPLE IRA custodian.

Benefits and drawbacks of SIMPLE IRAs – are they worth it?

Weigh the pros and cons of a SIMPLE IRA to decide if it’s right for you.

Pros

  • Easy to set up. Minimal paperwork to establish an account. Complete with Form 5304-SIMPLE or Form 5305-SIMPLE and create an account with an IRA custodian.
  • Deductible contributions. Employers can deduct their contributions to employee plans, while employee contributions reduce their taxable income.
  • Money grows tax-deferred. Don’t pay taxes on your money until you begin taking withdrawals.

Cons

  • Lower contribution limit than other employer-sponsored plans. Employees can contribute up to $16,000 in 2024, compared to $23,000 with a 401(k).
  • SIMPLE IRAs don’t allow participant loans. Unlike a 401(k), SIMPLE IRA participants can’t borrow from their account.
  • Steep early withdrawal penalties within the first two years. If you withdraw money from your SIMPLE IRA within two years of establishing the account, the early withdrawal penalty jumps from 10% to 25%.
  • RMDs. Plan participants must begin withdrawing money from their SIMPLE IRA starting at age 73.

Compare brokerages that offer SIMPLE IRA accounts

Narrow down top brokers by annual fee, stock trade fee and more to find the best for your financial goals.

1 - 6 of 6
Name Product Minimum deposit Annual fee Retirement account types
SoFi IRA
Finder Score: 4.2 / 5: ★★★★★
SoFi IRA
$0
$0 per month
Roth, Traditional, SEP, Rollover
Trade stocks, options, ETFs, mutual funds and alternative asset funds, with no-cost financial advice and a no-cost robo-advisor.
JP Morgan Personal Advisors
Finder Score: 3.3 / 5: ★★★★★
JP Morgan Personal Advisors
$25,000
0.6% on balances of $25,000 to $249,999

0.5% on balances of $250,000 to $1,000,000

0.4% on balances of $1,000,000+
Roth, Traditional
Ongoing access to an advisory team with personalized, expert-built portfolios. Provider terms & conditions apply
Robinhood Retirement
Finder Score: 4.4 / 5: ★★★★★
Robinhood Retirement
$0
0%
Roth, Traditional, Rollover
Boost your retirement savings with 1% in matching funds on every dollar contributed, transferred or rolled over to a Robinhood IRA.
Vanguard IRA
Finder Score: 4 / 5: ★★★★★
Vanguard IRA
$0
0.3%
Roth, Traditional, SEP, Spousal, Rollover
Save for retirement with Vanguard's commission-free stocks, ETFs and 160+ no-transaction-fee mutual funds.
Interactive Brokers IRA
Finder Score: 4.5 / 5: ★★★★★
Interactive Brokers IRA
$0
N/A
Roth, Traditional, SEP, Rollover
Choose from 6 IRA account options, with access to stocks, ETFs , futures, currencies and more.
Acorns Later
Finder Score: 4.2 / 5: ★★★★★
Acorns Later
$0
$3 per month
Roth, Traditional, SEP
Automatic ETF investing with as little as $5. Annual fee of $3, $5 or $9 per month depending on subscription.
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SIMPLE IRA vs. SEP IRA vs. Solo 401(k)

SIMPLE IRAs, SEP IRAs and Solo 401(k)s are all retirement plans available to business owners, but these plans differ in how they operate.

SIMPLE IRASEP IRASolo 401(k)
Who it’s forSmall businesses with 100 or fewer employeesAny size businessBusiness owner with no employees
Who can contributeEmployers and employeesEmployersBusiness owner contributes as employer and solo employee
Employee contribution limits$16,000None$23,000
Employer contribution limitsEmployers must match up to 3% of the employee’s pay or a nonelective contribution for each eligible employee equal to 2% of the employee’s salary up to the annual limit of $345,000Up to 25% of employee’s compensationUp to 25% of employee’s compensation
Tax statusPre-taxPre-taxPre-tax or after-tax

Bottom line

If you’re a small business with 100 or fewer employees looking for a simple, cost-friendly retirement plan for your employees, a SIMPLE IRA may be worth considering. Employers are required to make contributions on behalf of each eligible employee, but their contributions are tax-deductible. Employees also get tax benefits for contributing — contributions reduce their taxable income, and their money grows tax-deferred until they begin taking withdrawals.

Frequently asked questions

What are the disadvantages of a SIMPLE IRA?
SIMPLE IRAs have stricter early-withdrawal penalties than other retirement plans. With many retirement plans, you’ll incur a 10% early withdrawal penalty if you pull your money out before reaching age 59.5. If you make an early withdrawal from a SIMPLE IRA within the first two years of participation in the plan, you’ll pay a 25% penalty. SIMPLE IRAs also don’t have a Roth option, which would allow you to make tax-free withdrawals at retirement.

What is the 2-year rule for a SIMPLE IRA?
If you withdraw money from a SIMPLE IRA before turning age 59.5 within the first two years of participation in the plan, you owe a 25% early withdrawal penalty.

Is a SIMPLE IRA better than 401(k)?
The better option depends on your needs and plans. A 401(k) has a higher contribution limit of $23,000, but 401(k)s are typically more difficult and costly to set up.

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