SIMPLE IRA: Contribution limits and how it works

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2024-07-19T16:43:17Z JUMP TO Section Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
  • What is a SIMPLE IRA? 
  • How does a SIMPLE IRA work?
  • Contribution limits for 2023
  • Contribution limits for 2024
  • Pros and cons
  • SIMPLE IRA vs. Traditional IRA 
  • FAQs
  • The bottom line

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    • A SIMPLE IRA is a type of individual retirement account offered by small businesses.
    • In 2023, SIMPLE IRAs allow for employee contributions up to $15,500 annually ($19,000 for those 50 or older); those numbers increase to $16,000 and $19,500 in 2024.
    • Employers can make matching contributions of up to 3% of the participant's salary.

    SIMPLE IRAs are a great option for small business owners who want to help their employees save.

    "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.

    What is a SIMPLE IRA? 

    Savings Incentive Match Plans for Employees (SIMPLE) IRAs are a type of individual retirement plan offered by small businesses with fewer than 100 employees. SIMPLE IRAs function similarly to 401(k)s, allowing both employer- and employee-side contributions.

    How does a SIMPLE IRA work?

    SIMPLE IRAs are set up by employers — specifically, those with 100 or fewer workers. Employees can then contribute a portion of their earnings to the account, and their employer can then match those contributions up to 3% of their salary. 

    Employers can also choose "nonelective contributions," which essentially means they'll contribute up to 2% of the employer's salary — even if the employee never contributes to the account themselves.

    "For employers, contributions are tax-deductible," Valido says. "For participants, contributions and earnings are not taxed until withdrawn."

    Quick tip: As with other types of IRAs, these accounts are intended as retirement-saving tools. Employees face a 10% penalty for withdrawing funds before the age of 59 ½. This penalty goes up to 25% if made within the first two years of participation in the plan.

    Eligibility requirements

    With SIMPLE IRAs, there are requirements both for employers and employees.

    • Employer requirements: Employers must be small businesses with 100 workers or fewer, and they cannot offer any additional retirement plans. They must agree to provide a matching contribution up to 3% of employees' salary or 2% in nonelective contributions annually.
    • Employee requirements: To participate in a SIMPLE IRA, employees need to have earned at least $5,000 in the prior two years and expect to receive $5,000 in compensation in the current year.

    "There are no income limits for these accounts, so even high-income earners qualify for SIMPLE IRAs," says John Hagensen, founder and previous managing director of Keystone Wealth Partners.

    SIMPLE IRA contribution limits for 2023

    SIMPLE IRAs do come with contribution limits, though, and these vary by tax year. Here are the limits for for 2023:

    ParticipantDetailsAnnual contribution
    EmployeeUnder age 50Up to $15,500
    Age 50 or olderUp to $19,000
    EmployerNonelective contributions (does not require employee contributions)2% of employees' salary
    Matching contributions (dollar-for-dollar match of employee contributions)Up to 3% of employees' salary

    Quick tip: If you're 50 or older, you can take advantage of what the IRS calls "catch-up contributions." On SIMPLE IRAs, this means you can contribute an additional $3,500 per year compared to other age brackets.

    SIMPLE IRA contribution limits for 2024

    Here are the limits for SIMPLE IRAs in 2024:

    ParticipantDetailsAnnual contribution
    EmployeeUnder age 50Up to $16,000
    Age 50 or olderUp to $19,500
    EmployerNonelective contributions (does not require employee contributions)2% of employees' salary
    Matching contributions (dollar-for-dollar match of employee contributions)Up to 3% of employees' salary

    Pros and cons of a SIMPLE IRA

    As with anything, there are both pros and cons to using a SIMPLE IRA. One major advantage is that employees have full control over what their SIMPLE IRA is invested in. For employers, these accounts are easy to set up, are tax-deductible, and come with few administrative costs.

    On the downside, the contribution limits are lower on SIMPLE IRAs than they are on 401(k)s, and there's no Roth version of these IRAs either. As a result, participants may pay higher taxes on their withdrawals down the line (if they're in a higher tax bracket at that point).

    Here's a breakdown of all the pros and cons a SIMPLE IRA comes with:

    ProsCons

    • Easy to set up and manage

    • Employees have full control over investments

    • Employees are immediately fully vested

    • Employer contributions are tax-deductible

    • Limited administrative costs

    • Employers can't offer additional retirement plans

    • No Roth IRA versions

    • Contribution limits are lower than 401(k) and SEP IRA retirement plans

    • Taxes are paid on withdrawal, which could make them more expensive if you're in a higher tax bracket by then

    SIMPLE IRA vs. Traditional IRA 

    SIMPLE and traditional IRAs are both types of individual retirement accounts, but they're not one and the same. 

    "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 IRATraditional IRA

    • Opened by the employer

    • $15,500 limit in 2023 ($19,000 if you're 50 or older); $16,000 limit in 2024 ($19,500 if you're 50 or older)

    • Up to 3% employer matching

    • Must have earned $5,000 in two previous years and be on track for $5,000 in earnings this year

    • Come with a 25% penalty if funds are withdrawn in the first two years

    • Opened by the participant

    • $6,500 limit in 2023 ($7,500 if 50 or older); $7,000 limit in 2024 ($8,000 if 50 or older)

    • No matching contributions

    • Must have earned some taxable compensation for the year

    SIMPLE IRA FAQs

    What is a SIMPLE IRA, and how does it work? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.

    A SIMPLE IRA is a retirement plan offered by small businesses with 100 or fewer employees. The worker can contribute up to $15,000 in 2023 and $16,000 in 2024. If you're age 50 or older, you can contribute up to $3,500 more per year.

    Is a SIMPLE IRA better than a 401(k)? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.

    A 401(k) is better overall than a SIMPLE IRA because the contribution limits are higher, and the employer may be able to match more of your contributions. But keep in mind that certain small businesses aren't eligible to offer 401(k)s.

    Is there a difference between an IRA and a SIMPLE IRA? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.

    Yes, a SIMPLE IRA is an employer-sponsored retirement plan. A traditional or Roth IRA is an individual retirement account you open on your own, and it has lower contribution limits than a SIMPLE IRA.

    Should you open a SIMPLE IRA?

    If you work for or own a small business, a SIMPLE IRA may be an option for you. These retirement accounts are easy to set up and manage, and they offer low administrative costs, flexible investments, and immediate vesting, too.

    Keep in mind, though, they are pre-tax accounts, so if you expect your tax bracket to be higher in retirement, they could result in higher costs. They also come with smaller contribution limits than 401(k)s and SEP IRAs.

    spanAly J. Yale is a writer and editor with more than 10 years of experience covering personal finance topics including mortgages and real estate. She contributes to Personal Finance Insider’s mortgages and loans coverage./spanspanExperience/spanspanAly began her journalism career as reporter, and later an editor, for several neighborhood sections of the Dallas Morning News./spanspanHer work has been published in several national publications, including Bankrate, CBS, Forbes, Fortune, Money, Newsweek, US News and World Report,  the Wall Street Journal, and Yahoo Finance. She’s also contributed to a variety of mortgage and real-estate publications, such as The Balance, Builder Magazine, Housingwire, MReport, and The Mortgage Reports. /spanspanHer favorite personal finance tip is to schedule regular check-ins to make sure your credit cards, savings accounts, and other financial vehicles still align with your budget and financial goals. She is a member of the National Association of Real Estate Editors (NAREE)./spanspanExpertise/spanspanAly’s areas of personal finance expertise include:/spanullispanMortgages/span/lilispanLoans/span/lilispanReal estate/span/lilispanInsurance/span/lilispan/span/li/ulspanEducation/spanspanAly is a graduate of Texas Christian University, where she received a bachelor’s degree in radio/TV/film and news-editorial journalism./span Aly J. Yale Aly J. Yale is a writer and editor with more than 10 years of experience covering personal finance topics including mortgages and real estate. She contributes to Personal Finance Insider’s mortgages and loans coverage.ExperienceAly began her journalism career as reporter, and later an editor, for several neighborhood sections of the Dallas Morning News.Her work has been published in several national publications, including Bankrate, CBS, Forbes, Fortune, Money, Newsweek, US News and World Report,  the Wall Street Journal, and Yahoo Finance. She’s also contributed to a variety of mortgage and real-estate publications, such as The Balance, Builder Magazine, Housingwire, MReport, and The Mortgage Reports. Her favorite personal finance tip is to schedule regular check-ins to make sure your credit cards, savings accounts, and other financial vehicles still align with your budget and financial goals. She is a member of the National Association of Real Estate Editors (NAREE).ExpertiseAly’s areas of personal finance expertise include:
    • Mortgages
    • Loans
    • Real estate
    • Insurance
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