What Is a SIMPLE IRA? And How Does It Work?

Do you own and operate a small business with 100 or fewer employees? Or are you one of those employees?

Whatever your individual situation, you may think getting set up with a workplace retirement plan is going to be a huge task. But it’s SIMPLE. Literally.

Let’s take a closer look at SIMPLE IRAs, how they work, and some of their advantages (as well as their limitations).

What Is a SIMPLE IRA?

A SIMPLE IRA (Savings Incentive Match PLan for Employees) is a retirement savings plan for small businesses with no more than 100 employees.

If you’re the business owner, this plan makes it easy for you to not only save for your own retirement but also contribute to your employees’ retirement savings. And if you’re an employee working for a small business, the SIMPLE IRA is easy for you too. Everybody wins!

How Does a SIMPLE IRA Work?

The SIMPLE IRA isn’t much different from a traditional 401(k) plan you might see at a larger company. There are just a few things you need to know:

• The plan allows both employees and employers to invest in a traditional IRA that’s set up by the business.
• Your plan’s provider will offer a wide variety of investment options to choose from, and each employee is free to pick which ones to include in their own SIMPLE IRA. We recommend spreading out your investments between four different types of mutual funds: growth and income, growth, aggressive growth, and international.
• You get to decide how much to contribute (or match, if you’re the employer). Since it’s a tax-deferred account, taxes are due in retirement.
• Business owners get to make a few more decisions: how much to match for their employees, as well as how and where the money is invested. And they can even save for their own retirement through the plan.

What Are the Contribution Limits for a SIMPLE IRA?

For 2025, employees can contribute up to $16,500 per year to a SIMPLE IRA. Anyone age 50 and older can put in an extra $3,500 as a catch-up contribution. Also, thanks to the SECURE 2.0 Act, a higher catch-up limit of $3,850 may apply (check with a pro to find out if this applies to your particular plan).²

Employer contributions are mandatory for SIMPLE IRAs, and they can be made one of two ways:

• The match option: Most employers choose to match employee contributions—up to 3% of their salary.

• The automatic option: Other employers choose to make an automatic 2% contribution.

If you’re an employee in a plan under the match option, you have to put money into your SIMPLE IRA before your employer does. But the good news is, they match your contributions dollar for dollar. If you’re ready to invest, take advantage of that because it’s free money.

How much will you need for retirement? Find out with this free tool!

If you’re an employee in a plan under the automatic option, that means your employer will contribute 2% of your salary into your SIMPLE IRA—even if you don’t put in a dime.³

What Are the Pros and Cons of a SIMPLE IRA?

Before you decide whether a SIMPLE IRA is right for you, you may want to take a peek at some of the advantages and limitations of these plans.

 

SIMPLE IRA: Pros and Cons

Pros	Cons
Your money is immediately vested on deposit.	It has no Roth option.
It’s easy and relatively cheap to set up and run, plus you have more flexibility and investing options.	Contribution limits are relatively low.
Business owners get a tax deduction.	Withdrawal penalties are steep.

 

The Pros of Starting a SIMPLE IRA

The SIMPLE IRA has a lot of benefits to offer—whether you work for or own a small business.

Immediate Vesting

Whatever money the employer contributes to a SIMPLE IRA is immediately vested. That means every dollar put into the account, whether by the employer or the employee, belongs to the employee immediately—even if the employee leaves the company.⁴

Flexibility

While many 401(k) plans come with a preselected group of mutual funds, a SIMPLE IRA often gives you more flexibility and a wider range of investments to choose from—especially if it’s set up through a large brokerage firm.

Easy Setup and Low Cost

One of the biggest benefits to opening a SIMPLE IRA is that they’re much easier to set up and less expensive to run than other qualified plans—such as a typical 401(k). This is because SIMPLE IRAs have fewer regulations (and lower administrative costs).

Tax Advantages

If you’re a small-business owner, any contributions made to your employees’ accounts can be treated as a tax-deductible business expense. That’ll help take some of the pressure out of tax season!

The Cons of Starting a SIMPLE IRA

Like a lot of things in life, we have to take the bad with the good (you knew this was coming).

No Roth Option

Unfortunately, there isn’t a Roth IRA option available for SIMPLE IRA plans (which would allow employers and employees to enjoy tax-free growth and tax-free withdrawals in retirement). Still, contributions made to your SIMPLE IRA are tax-deductible, which lowers your taxable income—and your tax bill—for the year.

If you’re the business owner, as your company grows beyond the limits of a SIMPLE IRA plan, you may want to consider introducing a Roth 401(k) option.

Lower Contribution Limits

As we mentioned above, SIMPLE IRA contributions max out at $16,500 for most employees. Even though that’s thousands less than the contribution limit for a regular 401(k) plan, it’s still a good place to start.

The good news is that as an employee, you’re allowed to contribute to other retirement savings plans at the same time. So if you have another job that offers a workplace retirement plan or want to put money in a personal Roth IRA outside of work, go ahead and invest there too!

Steep Withdrawal Penalties

Taking money out of any retirement account—including a SIMPLE IRA—should always be a last resort. For example, you would only go there to avoid either bankruptcy or foreclosure. Why? Because penalties are steep: If you withdraw from a SIMPLE IRA within two years of opening it, you’ll pay a whopping 25% penalty.⁵

You’ll also get hit with that 25% penalty if you roll those funds over into anything other than another SIMPLE IRA during the first two years, so be careful.⁶

How to Set Up a SIMPLE IRA for Your Business

Okay, this part’s for the small-business owner. Setting up a SIMPLE IRA for your employees isn’t very complicated. With the help of an investment professional, you can get your SIMPLE IRA program up and running in no time by following these steps:

1. Pick a financial institution.

To set up a SIMPLE IRA, first you need to pick a financial institution—like a brokerage firm or a bank—to serve as a provider for your plan. They’ll invest any contributions from you and your employees, and they’ll also give you annual updates on any new features and benefits available.

But don’t rush the process. You can decide to let your employees choose the financial institutions that will receive their contributions, but you want to make sure you’re working with one that will provide the best mutual fund options for your employees—and the administrative support your business needs.

2. Choose the type of SIMPLE IRA you want.

If you choose to go with a plan that allows your employees to pick the financial institutions that will receive their SIMPLE IRA plan contributions, you’ll fill out Form 5304-SIMPLE. But if you want to designate a specificfinancial institution for the plan, you’ll fill out Form 5305-SIMPLE instead. 

Either of those forms will also let you specify which of your employees are covered. You can choose to cover everyone without restriction, or you can limit coverage based on salary or length of employment, for example. After filling out and signing the form, keep it for your records (don’t send it to the IRS).

And don’t forget: It’s your responsibility to make sure the plan is up-to-date each year.

3. Set up individual SIMPLE IRAs for each employee.

An individual SIMPLE IRA must be set up for each employee. That’s where all the contributions to each employee’s retirement plan—from both employee and employer—will go.

The IRS wants you to set up your SIMPLE IRA plan between Jan. 1 and Oct. 1. (In most cases, you must give 60 days’ notice to your employees whenever there are changes to the plan, including getting it started in the first place.) ⁷ And this feels weird to say, but the IRS actually allows a little flexibility on this deadline. Talk to a pro about the options you may have in your situation.

Are There Any Alternatives to a SIMPLE IRA?

In a word, yep! There are two main alternatives to a SIMPLE IRA for small-business owners: the SEP IRA and the solo 401(k). Here’s a quick run-through of both of these retirement plans and who they’re for.

SEP IRA

A simplified employee pension (SEP IRA) offers many of the same tax advantages of a traditional IRA, much like the SIMPLE IRA. But there are some key differences.

Unlike the SIMPLE IRA, only employers contribute to the SEP IRA (it’s like an old-school pension plan). For 2025, employers can contribute an amount up to 25% of an employee’s salary each year, with a total contributioncap of $70,000. ^8,9

Solo 401(k)

Don’t have any employees? A solo 401(k)—also known as a one-participant 401(k)—might be perfect for you. In 2025, you can contribute up to $23,500 (and even more if you’re 50 or older). Even better, all those contributions are tax-deductible.

Plus, you can add on an employer match (even though you’re the employer) up to 25% of your income—as long as your total contributions are less than $70,000 per year. ^10,11

Work With an Investment Pro

Whether you’re a small-business owner trying to give your employees a chance to save for their retirement future or you work for a company that offers a SIMPLE IRA, it’ll help a lot if you have an investment professional walk you through all the little details.

Pros in our SmartVestor program can answer your questions about SIMPLE IRAs—and help you create a plan to save for your retirement.

 

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.