What Is a SIMPLE IRA?
SIMPLE IRAs Are Less Simple Than the Name Implies
A SIMPLE IRA is an employer-sponsored retirement plan offered within small businesses that have 100 or fewer employees. SIMPLE is an acronym for savings incentive match for employees. Small businesses may favor SIMPLE IRAs because they are a less expensive and less complicated alternative to a 401(k) plan. But there are some distinct rules.
With a SIMPLE IRA, the employer matching incentive is built into the plan. The employer must either match the contributions employees make to their plan, up to 3% of salary. Or the employer can make contributions for employees of a flat 2% of salary, whether or not the employee chooses to participate in the plan. This differs from 401(k) plans. An employer offering a 401(k) plan can choose whether to match employee contributions. Many do, but in difficult economic times, matching programs can be among the first benefits cut.
Employers who choose to offer SIMPLE IRAs are generally required to match, dollar for dollar, from 1% to 3% of the employee's salary.
A SIMPLE IRA works a lot like a 401(k) plan. Contributions to the plan are made pre-tax, and the money in the plan accumulates tax-deferred until the money is withdrawn at retirement. If the money is withdrawn before age 59 1/2, you will pay a 10% penalty fee. Within a SIMPLE IRA, your employer will likely offer a wide variety of stock and bond mutual fund investment options. A SIMPLE IRA cannot be a Roth IRA.
If you are a small business employer, the decision to offer a SIMPLE IRA vs a 401(k) is often not so much about the size of your company or the number of employees, as it is about how much you as the owner want to put into the plan. The contribution limits for a SIMPLE IRA are different than 401(k) contribution limits.
SIMPLE IRA Contribution Limits
In 2017, employees can generally contribute $12,500 to a SIMPLE IRA. The catch-up contribution limit for 2017 is $3,000 making the SIMPLE IRA contribution limit $15,500 for participants age 50 or older. That means if you are age 50 or older and your employer allows catch-up contributions, you can put an additional $3,000 into the SIMPLE IRA this year (contact your employer to confirm). If you have a SIMPLE IRA and you participate in any other type of employer retirement plan during the year (such as a 401(k), for example), the limit on how much you can contribute to all of the plans is $18,000.
With a 401(k), individuals can save $18,000 in 2017, or up to $24,000 with a catch-up contribution. So, you can see, there is a big difference in the amount you can sock away in a 401(k) plan. Small-business owners who are highly paid professionals, such as doctors, dentists or attorneys, tend to favor small-business 401(k) plans over SIMPLE IRAs because of the higher contribution limits offered with a 401(k).
See this article on Self-Employed Retirement Plans for more information on the pros and cons of various retirement plan options.
Rollovers With SIMPLE IRAs
SIMPLE IRA rollovers are anything but simple if you have been invested in the plan for less than two years. If two years have passed since you've begun participating in the plan, you can move the money into a rollover IRA or new employer 401(k). If you've participated for less than two years, you can only roll it into another SIMPLE IRA or leave the money in the former employer's plan.
DISCLAIMER: The information included here is not professional financial advice. It is intended for guidance only. Any private (non-governmental) websites linked to from this piece are included for informational purposes and cannot be verified. While we every effort is made to ensure that this information is correct, it may vary depending on your own personal circumstances.