A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a U.S. retirement plan designed specifically for small businesses and self-employed individuals. It’s intended to offer a straightforward, lower-cost alternative to more complex options like 401(k)s, while still providing tax advantages and regular retirement saving for both employers and employees.
For businesses with 100 or fewer employees, the SIMPLE IRA is often the easiest way to set up a workplace retirement plan without the administrative burden or cost of traditional pension plans. For employees, it works much like a 401(k) — pre-tax contributions, tax-deferred growth, and eventual taxable distributions. But there are important structural and practical differences.
Structure and eligibility
To qualify, the employer must have no more than 100 employees who earned $5,000 or more in the preceding year. The employer cannot offer any other retirement plan during the same period. All employees who have earned at least $5,000 in any two prior years and are expected to earn at least that in the current year must be allowed to participate.
Unlike 401(k) plans, there is no complex discrimination testing or annual filing requirement. The plan is easy to administer, with minimal paperwork, and is supported by most financial institutions.
Contributions and employer match
In 2025, employees can contribute up to $16,000 annually, with a catch-up contribution of $3,500 for those aged 50 or older. Contributions are made through salary deferrals and reduce taxable income in the year they are made.
Employers must either match employee contributions up to 3% of compensation or make a fixed contribution of 2% of compensation for all eligible employees, whether they contribute or not. This choice is made annually and must be applied consistently to all eligible participants.
For business owners, this structure provides flexibility. Those who want to reward active savers can offer a match. Those who prefer predictable outlay can choose the fixed contribution route.
Investment and account management
Each participant owns their own SIMPLE IRA account and controls how the funds are invested. The investment options are determined by the provider, but typically include mutual funds, ETFs, and other standard retirement assets. The account operates like a traditional IRA — contributions grow tax-deferred, and withdrawals are taxed as income.
Employees can move SIMPLE IRA funds to another IRA after a two-year holding period. Before that, transfers to anything other than another SIMPLE IRA may trigger an early distribution penalty — not just the standard 10%, but 25% if taken out within the first two years.
Withdrawals and taxation
SIMPLE IRAs follow the same withdrawal rules as traditional IRAs. Withdrawals taken before age 59½ are subject to a 10% penalty plus income tax, unless an exception applies. As mentioned, if the account is less than two years old, the early withdrawal penalty increases to 25%. After that, the standard rules apply.
Required Minimum Distributions (RMDs) must begin at age 73. There’s no Roth version of a SIMPLE IRA, which means all distributions are taxable.
Practical uses and limitations
SIMPLE IRAs make sense for small business owners who want to offer a benefit without the cost and oversight of a 401(k). They’re also useful for sole proprietors or partners in small firms looking for a tax-advantaged way to build retirement savings without committing to SEP IRAs or more structured pension options.
That said, the lower contribution limits can be restrictive for high earners. The lack of Roth features and the two-year penalty period limit flexibility. Some business owners outgrow the SIMPLE IRA once profits and payroll rise, often switching to a 401(k) or Solo 401(k) for more control and higher contribution ceilings.
Seen from Pension Gruber
We’ve hosted retirees who started with SIMPLE IRAs in their early careers and rolled them into traditional IRAs once their businesses grew or employment changed. Some did well by contributing consistently and taking advantage of the employer match. Others barely used the account, treating it like a minor side fund rather than a core retirement vehicle.
A few remembered the 25% early withdrawal penalty the hard way — moving money too early or cashing out without understanding the rules. The pattern is predictable: those who saw the SIMPLE IRA as part of a larger retirement strategy got more out of it. Those who ignored it or left it idle usually forgot it existed until much later.
For what it’s designed to do — offer small businesses a no-frills retirement plan — the SIMPLE IRA works. But it isn’t built for complexity, high contributions, or advanced planning. It works best when kept simple.
