For many small business owners, setting up an employee retirement plan is expensive, complex, and requires federal filing they’d rather not deal with. A SIMPLE IRA is a retirement savings designed for small businesses with 100 or fewer employees. The lower costs and ease of setup make it appealing for small business owners who don’t want to break the bank to provide their employees with a retirement plan.
How does a SIMPLE IRA work?
A SIMPLE IRA offers a tax-deferred savings plan for employees at small businesses and self-employed individuals to save for retirement. SIMPLE is an abbreviation for Savings Incentive Match Plan for Employees.
This type of Individual Retirement Account (IRA) makes it optional for employees to contribute to their retirement savings while requiring employers to match their contributions or contribute a mandatory percentage to employee accounts.
How does it work?
Under a SIMPLE IRA, employees and employers contribute funds to the employee’s retirement account. Employee participation is optional. Whether your workers participate or not, employers still contribute to their retirement accounts.
Employers choose between matching employee contributions by up to 3% (and no less than 1%) or making a mandatory contribution of 2%. From the start, employees are 100% vested in the SIMPLE IRA, meaning all of the contributions made to the account belong to them.
If you’re interested in providing a SIMPLE plan for your small business, self-employment, or sole proprietorship, you’ll need to fill out one of two forms with the IRS– Form 5304-SIMPLE or Form 5305-SIMPLE. This depends on whether you want to choose a financial institution for all employee plans (Form 5305) or if you want employees to choose their own bank or financial institution (Form 5304).
2024 and 2025 contribution limits
The contribution limits on a SIMPLE IRA are lower than other retirement savings plans. That means your employees won’t be able to save as aggressively as they would with other retirement plans, which could be a disadvantage. In 2024, SIMPLE IRA contributions are limited to $16,000. If you have employees aged 50 and older, they’re eligible to make an added catch-up contribution of $3,500 to a SIMPLE IRA plan for a total of $19,500.
For 2025, the contribution limit will go up by $500 to $16,500. The catch-up limit for those age 50 and over is unchanged in 2025, making the total contribution limit, including catch-up contributions, $20,000.
For perspective, a 401(k) retirement plan has contribution limits of $23,000 in 2024, plus a $7,500 catch-up contribution limit. The contribution limit will rise by $500 to $23,500 in 2025, but the catch-up contribution limit is unchanged. In 2024, under a 401(k) plan, employees under 50 years old could save a maximum of up to $7,000 more through their contributions than with a SIMPLE IRA. Employees 50 and older could save up to $11,000 more under a 401(k) plan.
New super catch-up contribution for those aged 60, 61, 62 and 63
Both 401(k) and SIMPLE IRAs have new rules for catch-up contributions in 2025, due to SECURE 2.0. A higher catch-up contribution limit applies for those aged 60-63 beginning next year. 401(k) plan participants in that age range may contribute an additional $11,250 instead of $7,500, raising the total limit to $34,750 in 2025.
The new catch-up contribution limit in 2025 for SIMPLE IRAs will increase to the greater of $5,000 or 150% of the regular age 50 catch-up contribution limit for SIMPLE IRA plans. This supersized catch-up contribution is $5,250 for 2025, for a contribution total limit of $21,750, which is still less than 401(k) limits. Cost of living adjustments to the catch-up limit will begin in 2026.
The barriers to entry for a SIMPLE IRA are lower than other retirement plans, making it ideal for a budding small business that’s cautious of added costs. Is a SIMPLE IRA the right choice for your business? Let’s break down the pros and cons of this retirement plan.
SIMPLE IRA pros
- 100% Vested: Employees are 100% vested from the start. All contributions to the retirement account belong to them and can be taken with them if they change jobs.
- Tax Credit: Employers with 51 to 100 employees receive a tax credit under the SECURE Act, which is 50% of the administrative costs of setting up a retirement plan for employees. Employers with 50 or fewer employees could receive a tax credit of 100% of the administrative costs under the SECURE 2.0 Act.
- No filing requirement: There’s no filing requirement under this savings plan which makes maintenance easier.
- Contribute to other plans: Employees can still contribute to retirement plans with other employees or on their own.
- Lower set-up costs: Compared to other retirement plans, the SIMPLE IRA costs less to set up and maintain. Under financial institutions like Merrill Edge and Fidelity, there are no setup or maintenance fees.
SIMPLE IRA cons
- Lower contribution limits: SIMPLE IRAs restrict your employees’ tax-deferred contributions by up to $12,000 vs a 401(k) plan.
- No loans: If an employee needs money from their SIMPLE plan, there’s no option for a loan, unlike other retirement plans. Instead, they might have to do an early withdrawal, which carries heavy tax penalties and could put them significantly behind on retirement.
- Strict Rollover Rules: If an employee leaves the company and tries to roll over their balance, they have limited options. Rolling over to a Roth IRA, Traditional IRA, or 403(b) account carries a 25% penalty if they don’t meet the two-year waiting period. Otherwise, their only choice is another SIMPLE IRA.
- No other retirement plan: Employers who adopt the SIMPLE plan can’t have another retirement plan option for their employees.
Should I choose a SIMPLE IRA?
Choosing a SIMPLE IRA could allow your employees to save for retirement with tax-deferred earnings while you support their savings goals through a matching contribution. It's easier to set up and maintain compared to other employer-offered retirement accounts and even costs less. However, employees who want to save aggressively for retirement might be disappointed by the lower contribution limits. Still, it’s a great option for employers who don’t want the heavy maintenance, filing requirements, and costs associated with other retirement plans.
