What is a SIMPLE IRA?

A SIMPLE IRA is an employer sponsored retirement plan that shares some similarities to both the Traditional IRA and the 401K.

The name SIMPLE IRA comes from the government backronym Savings Incentive Match PLan for Employees. While the name is a bit of a stretch, the plan itself provides an easy way for small businesses to offer retirement plans for their employees.

Employers match the individual’s contributions to the plan at a dollar for dollar rate for a total match up to 3% of the employee’s compensation.*

The SIMPLE IRA is funded through employee payroll deductions. Contributions to the SIMPLE IRA are tax-deductible, and all taxes are deferred until withdrawals are made during retirement. The IRS mandates that minimum withdrawals be made at age 70½.

The maximum an employee can contribute to a plan in 2023 is $15,500, but total annual contributions can not exceed total annual income. ¹ This contribution limit only applies to the SIMPLE IRA plan and only to the employee’s contributions. The employer’s match is a dollar for dollar match (up to 3% of the employee’s salary) on top of the employee contributions. After reaching the SIMPLE IRA contribution limit, the employee may still make the maximum allowed contributions to a Traditional or Roth IRA as those limits are calculated separately.

Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money. However, there is a two year waiting period on all newly created SIMPLE IRA before the account holder may not withdraw money or roll-over the account into a different type of IRA. During this period the penalty for withdrawing funds before retirement is increased from 10% to 25%. That is in addition to the tax that is already do on withdrawn funds.

* Employers can opt to lower the amount of the match for 2 out 5 years in voluntary plans, or set the match rate permanently at 2% in non-elective plans. Rules can change. See the IRS website for the most up-to-date information.

[1] irs.gov - Updated: 26-Oct-2022 - SIMPLE IRA Contribution Limits

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