SIMPLE IRA

A SIMPLE IRA plan is built for a small business that wants employees to save through payroll without running a full 401(k). The employer can adopt it on an IRS model form such as Form 5304-SIMPLE, each eligible worker gets a SIMPLE IRA, and there is generally no annual IRS filing and no nondiscrimination testing.

To offer one, the business must have had no more than 100 employees who earned $5,000 or more in the prior year, and it generally can’t maintain any other retirement plan. Employees must be let in if they earned at least $5,000 in any 2 earlier years and expect to earn $5,000 this year; the employer may loosen those tests but not tighten them.

Each year there is an election period, which must include November 2 to December 31, when employees choose or change how much to defer. The employer must deposit deferrals within 30 days after the end of the month they were withheld, and its own contribution by its tax-return due date, including extensions. Every dollar is 100% vested at once, unlike the vesting schedule a 401(k) can put on employer money, and loans aren’t allowed.

Once in the account, the money follows traditional IRA rules for investing, taxes and required minimum distributions, with two extra restrictions during the first two years.

Employees choose a deferral as a percentage of pay, or as a dollar amount if the plan allows it. Deferrals to a traditional SIMPLE IRA escape income tax now but still count as wages for Social Security and Medicare tax; the employer’s contributions escape both. SIMPLE deferrals also share the $24,500 overall limit on elective deferrals, so someone who also defers into a 401(k) or 403(b) at another job must add the two together.

SECURE 2.0 created a higher tier. Employers with 25 or fewer employees generally get it automatically, and those with 26 to 100 can opt in by raising their contribution to a 4% match or 3% of pay. The 2026 figures:

Every year the employer picks one formula and announces it before the election period. With the match, only employees who defer receive employer money, up to 3% of their pay: someone earning $60,000 who defers 4% puts in $2,400 and receives $1,800. With the 2% nonelective contribution, every eligible employee gets 2% of pay whether or not they save anything, so the same employee would receive $1,200 even with no deferral. The match costs less when few employees join; the 2% formula reaches everyone.

These employer contributions are required every year, unlike in a SEP IRA, and the plan is a commitment in time: after its first year the plan runs for whole calendar years, and to end it the employer must tell employees before November 2 that contributions stop the following January 1.

For two years from the first day your employer deposits money into your SIMPLE IRA, the account is fenced in. A withdrawal before 59½ in that window owes a 25% additional tax instead of the usual 10% early withdrawal penalty, on top of income tax. The standard exceptions, such as disability, death or 72(t) payments, still remove it.

The same window limits moves. During the two years you can generally transfer the money tax-free only to another SIMPLE IRA, unless your employer replaces the plan with a 401(k) or 403(b). Sending it to a traditional IRA, a 401(k) or any other plan is treated as a taxable distribution, with the 25% rate if you are under 59½, followed by a contribution to the new account that doesn’t count as a rollover. After two years, a SIMPLE IRA can be rolled into a traditional IRA or a workplace plan that accepts it, or converted to a Roth IRA as taxable income.

The clock starts with the employer’s first deposit, not your hire date. Starting an IRA rollover a few weeks too soon after leaving a job is an easy way to trigger the 25% rate.

A SIMPLE IRA sits between a SEP and a 401(k). Against a 401(k), it is cheaper and easier to run but caps employee saving lower, $17,000 against $24,500 for 2026, with a smaller catch-up, and it can’t sit beside another plan. Against a SEP, it lets employees save their own money, and the required employer cost is 2% or 3% of pay rather than whatever uniform share the owner wants for themselves.

For a self-employed owner, a SIMPLE can beat a SEP at low profits, because the owner can defer up to $18,100 of earnings (the usual limit with 25 or fewer employees) and then add the 3% match on net earnings. At $60,000 of profit that is about $19,762 against a SEP’s $11,152. By $120,000 the SEP’s $22,304 pulls ahead of the SIMPLE’s $21,425, and a solo 401(k), for an owner with no employees, beats both.