A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement. Show Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions. What makes a SIMPLE IRA unique is that the employer is required to make a contribution on the employee's behalf - either a dollar-for-dollar match of up to 3% of salary or a flat 2% of pay - regardless of whether the employee contributes to the account. SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs, and it's cheaper to set up and run a SIMPLE IRA plan than it is to administer many other workplace retirement plans. With so many different small business retirement plans to choose from, it can be hard to decide which one is best for you. That’s why it’s important to know what each one offers. If you’re wondering, “What is a SIMPLE IRA?” it turns out it’s what it sounds like. It’s an easy-to-manage savings plan that lets you put tax-deferred money aside for retirement. Money in this account gets invested in a similar way to traditional IRAs.
Many small employers use SIMPLE IRAs because they’re easy to set up and the costs to manage them are low. But these types of plans also have to follow specific rules set by the IRS. Whether SIMPLE IRAs are the best choice for you and your employees depends on your business.
How Does a SIMPLE IRA Work?
As with other retirement savings plans, there is a limit to how much you can put into your SIMPLE IRA. In 2020, you or your employees can’t put more than $13,500 into this type of account.1
If you’re age 50 or older, your SIMPLE IRA plan may let you make catch-up contributions. This means you’re allowed to put more money into your retirement savings account. In 2020, the IRS limited catch-up contributions for SIMPLE IRAs to $3,000.2
SIMPLE IRAs require employers to match employee contributions:
Your business can also make a 2% non-elective contribution to your employees’ SIMPLE IRA accounts. This means your business makes a contribution to all employees, even if they don’t contribute themselves.
Pros and Cons of a SIMPLE Retirement Plan
Pros of SIMPLE IRAs:
Cons of SIMPLE IRAs:
Setting Up a SIMPLE IRA Plan
Otherwise, you may have to complete:
After your SIMPLE IRAs are set up, you and your employees can choose to make regular pre-tax contributions through payroll deductions. You can also pick how your money gets invested. For example, you can set up your account to invest in mutual funds. Your SEP IRA grows tax-deferred until you make withdrawals.
1, 2 IRS, “Retirement Topics – SIMPLE IRA Contribution Limits”
3 IRS, “401(k) contribution limit increases to $19,500 for 2020; catch-up limit rises to $6,500”
The Hartford shall not be liable for any damages in connection with the use of any information provided on this page. Please consult with your insurance agent/broker or insurance company to determine specific coverage needs as this information is intended to be educational in nature.
The information contained on this page should not be construed as specific legal, HR, financial, or insurance advice and is not a guarantee of coverage. In the event of a loss or claim, coverage determinations will be subject to the policy language, and any potential claim payment will be determined following a claim investigation. What is the difference between a simple and a traditional IRA?Traditional IRAs are set up by individuals, while SIMPLE IRAs are set up by small business owners for employees and for themselves. Traditional IRA contributions are made by the individual only, but SIMPLE IRA contributions can be from both an employee and an employer.
Can I have both a SIMPLE IRA and a traditional IRA?Yes, you can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan).
Is my SIMPLE IRA a traditional or Roth?A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.
Can you convert SIMPLE IRA to traditional?After the 2-year period, you can make tax-free rollovers from SIMPLE IRAs to other types of non- Roth IRAs, or to an employer-sponsored retirement plan. You can also roll over money into a Roth IRA after the 2-year period, but must include any untaxed money rolled over in your income.
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