- A SIMPLE IRA is a type of individual retirement account offered by small businesses.
- In 2025, SIMPLE IRAs allow for employee contributions up to $16,500 annually.
- Employers are required to contribute to these retirement plans alongside employees.
Like many of the best IRA accounts, SIMPLE IRAs are powerful savings vehicles for growing retirement savings through regular contributions, investment opportunities, and the power of compound returns. But unlike a traditional or Roth IRA that's geared toward individuals, SIMPLE IRAs are generally used as small business retirement plans, with the added benefits of higher contribution limits and required employer contributions.
Here's how SIMPLE IRAs work, who's eligible, tax implications, and 2025 contribution limits.
What is a SIMPLE IRA? Understanding the basics
Definition and purpose of SIMPLE IRA retirement plans
Savings Incentive Match Plans for Employees (SIMPLE) IRAs are a type of employer-sponsored retirement plan. SIMPLE IRAs function similarly to 401(k)s, allowing both employer- and employee-side contributions, but they're often geared toward small businesses, as they're generally less complex than establishing a 401(k).
"They are fairly inexpensive to set up and maintain when compared to a conventional retirement plan," says Karina Valido, vice president and private client advisor at First American Bank. In contrast, 401(k) plans generally have higher fees, and employers are required to make complex federal reports.
Like other types of retirement accounts, a SIMPLE IRA is typically used as a tax-advantaged way to save and invest for retirement. Typically, accounts are funded on a pre-tax basis, like a traditional IRA, meaning you get an upfront tax deduction while deferring taxes until you later withdraw money. That said, it's possible for an employer to offer a Roth option for SIMPLE IRAs, thanks to the 2022 SECURE 2.0 Act. These Roth accounts are funded with post-tax dollars, meaning you don't get the upfront tax benefit, but you can make eligible withdrawals later on tax-free.
On the downside, the 2025 contribution limits for SIMPLE IRAs are lower than 401(k)s — the baseline limit (with some exceptions) is $16,500 for individual contributions to a SIMPLE IRA, while a 401(k) has a baseline individual contribution max of $23,500. Therefore, a smaller portion of your earnings can benefit from a SIMPLE IRA's retirement account's tax advantages and growth-earning capabilities vs. a 401(k).
Who can participate in a SIMPLE IRA?
With SIMPLE IRAs, there are requirements both for employers and employees.
- Employer requirements: Employers generally must be small businesses with 100 workers or fewer and cannot offer any additional retirement plans concurrently. They must agree to provide a matching contribution of up to 3% of the employee's salary (with some exceptions) or 2% in nonelective contributions annually, up to a compensation limit of $350,000.
- Employee requirements: To participate in a SIMPLE IRA, employees typically must have earned at least $5,000 in two previous years and expect to receive $5,000 in compensation in the current year, although employers can ease this restriction if they choose to do so.
While there's a compensation max in terms of employer contributions, John Hagensen, CFP, partner, and managing director at Creative Planning, notes that there are no income limits in terms of participating in the first place, "so even high-income earners qualify for SIMPLE IRAs." In contrast, traditional IRAs have income limits regarding what's deductible, and Roth IRAs have income limits regarding overall eligibility.
How SIMPLE IRAs work
SIMPLE IRAs are employer-sponsored retirement plans set up by small businesses — specifically, those with 100 or fewer workers. You can fund your SIMPLE IRA with either pre- or after-tax dollars, depending on what the employer offers.
SIMPLE IRAs have the benefit of enabling automatic deductions from employee's paychecks. This ensures that employees regularly contribute toward their retirement, rather than having to make contributions on their own in a traditional IRA.
So, in many respects, a SIMPLE IRA works like a 401(k), in terms of employees making elective contributions that get deducted from their paychecks. A key difference though is that employers have to make contributions too, either as a 3% match or 2% nonelective contribution, meaning that the employer contributes that regardless of whether the employee puts money in (although there are exceptions regarding these matches).
Within these accounts, employees make their own investment selections, similar to a traditional IRA, rather than having a fund menu like in a 401(k).
Another nuance is that employees typically face a 10% penalty for withdrawing funds before 59 ½, like with many other retirement plans, but in a SIMPLE IRA, this penalty goes up to 25% if withdrawals are made within the first two years of participation in the plan.
SIMPLE IRA contribution limits 2025
SIMPLE IRAs come with contribution limits, which vary by tax year and factors such as age. Here are the limits for 2025:
| Participant | Details | Annual contribution |
| Employee | Under age 50 | Up to $16,500, unless account meets provisions from SECURE 2.0 Act, which raises limit to $17,600 |
| Age 50 or older | Up to $20,000, unless account meets provisions from SECURE 2.0 Act, which raises limit to $22,850 | |
| Employer | Nonelective contributions (does not require employee contributions) | 2% of employee's salary, up to $350,000 compensation cap |
| Matching contributions (dollar-for-dollar match of employee contributions) | Up to 3% of employee's salary |
As the table shows, the exact contribution limits vary a bit, due to changes stemming from the SECURE 2.0 Act, such as allowing employees of businesses with 25 or fewer workers to contribute up to 110% of the 2024 contribution limit in 2025, thus totaling $17,600. Employers with 26 to 100 employees may also offer this higher contribution limit to their employees if the employer contribution is increased to a 4% match or a 3% nonelective contribution.
There are also age-based changes, such as having higher limits for those just between the ages of 60-63. Plus, since 2024, employers have been able to make an additional nonelective contribution of 10% of each employee's compensation or $5,000 (whichever is less).
Because the limits can get a bit tricky, it's best to check with a qualified professional such as a financial advisor or the SIMPLE IRA account provider for more clarity on what applies to your situation.
Benefits of a SIMPLE IRA
Tax-deferred growth
Like many retirement accounts, SIMPLE IRA tax benefits often make these accounts more valuable than the dollar amount contributed.
Traditional SIMPLE IRAs are funded with pre-tax dollars, so employees benefit from an initial income tax break and tax-deferred growth. The funds aren't taxed until the employee starts making withdrawals, ideally during retirement to avoid early withdrawal penalties.
"For employers, contributions are tax-deductible," Valido says. "For participants, contributions and earnings are not taxed until withdrawn." However, if you expect your tax bracket to be higher in retirement, it could result in higher costs.
The SECURE 2.0 Act introduced Roth SIMPLE IRAs so employees could contribute after-tax dollars, which can grow tax-free and be taken out tax-free in retirement. However, not all employers offer this option.
Employer contributions and matching
For employees, a big advantage of a SIMPLE IRA over some other retirement plans is that employers are required to contribute too. Generally, employers are required to match their employee's contributions (up to 3% of the employee's salary) or make a nonelective contribution (up to 2% of the employee's salary). Nonelective contributions can be made even if the employee doesn't contribute to their account. There are some exceptions, though, such as allowing employers to lower the 3% match to 1% for no more than two years out of a five-year period.
Immediate vesting
The IRS requires employer contributions to SIMPLE IRA to be 100% vested immediately. Different retirement savings plans have different vesting schedules, often at the employer's discretion. For example, a 401(k) plan often takes around three to six years to vest fully.
So, SIMPLE IRAs offer an advantage to employees over some other types of retirement plans, as they don't risk losing their employer contributions if they leave their current place of employment within the first few years.
Simple setup and administration
Setting up a SIMPLE IRA is straightforward. There are fewer SIMPLE IRA rules and requirements compared to establishing a 401(k). The financial institution or online brokerage where the SIMPLE IRA is opened handles most of the initial and ongoing legwork.
Startup costs and maintenance fees are also generally lower compared to other retirement plan options like 401(k)s. These lower costs are favorable for small businesses with tighter budgets. You can even find providers that will set up a SIMPLE IRA for your company for free, as they still benefit from those assets flowing to their institution.
SIMPLE IRA vs. traditional IRA
SIMPLE and traditional IRAs are both types of individual retirement accounts, but they're not the same thing.
"Traditional IRAs are set up by individuals and only that same individual can contribute to it, while SIMPLE IRAs are set up by small business owners," Hagensen says. "Both the employee and employer are able to contribute to that account."
There are also differences in contribution levels and income requirements, and traditional IRAs don't offer employer matching, as SIMPLE IRAs do. Here's a full look at the differences between these two types of accounts:
SIMPLE IRA vs. traditional IRA
| SIMPLE IRA | Traditional IRA | |
| Establishing Party | Plan opened by the employer, with employees then opening their accounts within the plan framework. | Opened by the participant. |
| Annual Contribution Limit (2025) | $16,500; $20,000 if 50 or older, with potential additional nuances for higher limits. | $7,000; $8,000 if 50 or older. |
| Match/Additional Contributions | Employers are generally required to make up to a 3% employer matching contribution or a 2% nonelective contribution, although there are exceptions. | Most traditional IRA providers do not offer matching contributions, aside from some promotions that might provide temporary boost. |
| Eligibility Requirements | Must have earned $5,000 in two previous years and be on track for $5,000 in earnings this year, although employer can waive this requirement | Must have earned some taxable compensation for the year to be eligible; Contributions might not be tax deductible if exceeding income limits and depending on if you or your spouse has access to a workplace retirement plan. |
| Early Withdrawal Penalty | Barring some exceptions, 25% penalty if withdrawn in the first 2 years. After 2 years, the standard 10% penalty for withdrawals before age 59 ½ applies. | Barring some exceptions, 10% penalty if you withdraw funds before 59 ½. |
Setting up and managing a SIMPLE IRA
How to set up a SIMPLE IRA
Setting up a SIMPLE IRA is fairly easy. Employers just have to create a written agreement about the plan and provide employees with relevant plan information, and then work with a financial institution to establish the plan so employees can open their accounts. There's also a bit of ongoing maintenance, such as providing an annual notice to employees about certain plan details, but in many cases, the financial institution that you set up the SIMPLE IRA with can help with all of the initial and ongoing paperwork.
SIMPLE IRAs can be set up with some online brokerages and financial institutions, many of which offer other types of retirement accounts, like traditional IRAs. Some examples of where you can open a SIMPLE IRA include the following providers:
Participating in a SIMPLE IRA
Remember that individuals can't set up SIMPLE IRAs unless their employers establish a company plan. If you believe you and other employees may benefit from access to a SIMPLE IRA, you can talk with your employer about potentially providing this retirement benefit.
If your employer offers a SIMPLE IRA, a 60-day "election period" begins, typically on November 2, and ends on December 31, barring some exceptions. During this period, new employees decide whether to participate in the SIMPLE IRA plan offered. Already participating employees use the 60 days to choose the amount they wish to contribute and review their employer's provided contribution.
Another important rule to note is that participants can only do a tax-free rollover out of one SIMPLE IRA into another SIMPLE IRA during the first two years of participation. After that, the money can potentially be transferred into a traditional IRA or another employer-sponsored account.
SIMPLE IRAs are also subject to required minimum distributions (RMDs) starting at age 73 — the same age as required for traditional IRAs.
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FAQs about SIMPLE IRAs
What is a SIMPLE IRA?
A SIMPLE IRA is a type of retirement plan designed for small businesses with 100 employees or fewer. It offers tax-deferred growth and mandatory employer contributions to help employees save for retirement. Employees also typically have more flexibility over how to invest within their SIMPLE IRA vs. a plan like a 401(k).
What are the SIMPLE IRA contribution limits for 2025?
SIMPLE IRA contribution limits for 2025 are typically $16,500 for employees younger than 50. Employees aged 50 and older can make an additional catch-up contribution of $3,500. However, some nuances stemming from the SECURE 2.0 Act can increase those contribution limits to as much as $22,850. Also, employers are required to make contributions, which don't count toward these limits, generally either as a 3% match, or a 2% contribution regardless of employee contributions.
How does a SIMPLE IRA compare to a Roth IRA?
A SIMPLE IRA is an employer-sponsored plan that allows for tax-deferred contributions and employer matching, while a Roth IRA is set up by an individual using post-tax money and offering tax-free withdrawals in retirement. Eligibility, contribution limits, and tax treatment differ between the two, making each suitable for different retirement goals and financial situations.
Can I have both a SIMPLE IRA and a Roth IRA?
Yes, you can have both a SIMPLE IRA and a Roth IRA, provided you meet the eligibility requirements and adhere to the contribution limits for each plan.
What are the benefits of a SIMPLE IRA?
The benefits of a SIMPLE IRA typically include tax-deferred growth, employer contributions, and a straightforward setup process, making it an attractive option for small businesses and their employees to save for retirement.
