SIMPLE IRA

What is a SIMPLE IRA?

Even with an acronym like SIMPLE, the Savings Incentive Match Plan for Employees IRA can be intimidating. However, this effective retirement plan is easy for employers and employees to use.

A SIMPLE IRA allows your employees to contribute to the plan through salary deferrals. You're also responsible for making contributions to the plan. Consider this plan if:

• You're looking for a primarily employee-funded plan with low required employer contributions.
• You have 100 or fewer employees who have earned at least $5,000 for the previous year.
• You don't maintain another retirement plan during any part of the calendar year.

SIMPLE IRA highlights

A SIMPLE IRA is only available to small businesses with 100 or fewer employees, including business owners and self-employed individuals.

Employers are required to make annual contributions to a SIMPLE IRA plan. At minimum, an employer must:

• Match employee contributions, up to 3% of compensation, or
• Contribute up to 2% of compensation for all eligible employees, regardless of whether the employee contributes

Benefits of a SIMPLE IRA include:

• Simple administration that can lead to cost savings
• Low contribution requirements from the employer

SIMPLE IRA contributions

When an employer establishes a SIMPLE IRA plan, they must decide on the eligibility requirements to participate in the plan. Everyone, including the business owner(s), is subject to these eligibility requirements.

An employer can establish the following maximum eligibility requirements for a SIMPLE IRA (but can choose to be more lenient):

• Earned at least $5,000 of compensation in any two previous years, and
• Is reasonably expected to receive $5,000 of compensation in the current year

Unlike other plan types, there are no age or minimum service hour requirements to be eligible to participate in a SIMPLE IRA plan.

Eligible employees can contribute up to the amounts below:

Employee contribution limits¹

1 Certain SIMPLE plans can contribute 110% of the contribution limits.

2 Participants between the ages of 60-63 are allowed additional catch-up contributions up to $5,250, beginning in 2025.

Employers are required to make annual contributions to a SIMPLE IRA plan. At minimum, an employer must:

Minimum employer contribution requirements

Beginning in 2024, employers are permitted to make additional contributions of up to 10% of compensation for all eligible employees (capped at $5,100). 

Employer contributions to SIMPLE plans are tax-deductible. Employees who receive contributions are immediately 100% vested.

SIMPLE IRA deadlines

SIMPLE IRAs have setup deadlines and contribution deadlines.

• Setup deadline:
  • A plan cannot have an effective date later than Oct. 1 for current-year contributions.
• Contribution deadline:
  • You must make contributions by your business's tax-filing deadline.
  • You must deposit salary deferral contributions no later than 30 business days after the end of the month they were deferred.

Taxation of distributions

Distributions taken before 59½ will be subject to a 25% penalty during the first two years (from the date of first deposit) unless a penalty exception applies. After the first two years, distributions from a SIMPLE IRA follow the same distribution rules as traditional IRAs.

Learn more about SIMPLE IRAs

If you're looking for a low-cost retirement plan for your employees, make sure to consider a SIMPLE IRA. Your local Edward Jones financial advisor can help you explore your options. Contact us for a complimentary, no-obligation consultation.