SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan for businesses with 100 or fewer employees that allows both employee salary deferrals and mandatory employer contributions, with easier administration than a 401(k).
The SIMPLE IRA was created by Congress in 1996 as a cost-effective middle ground between the SEP IRA (employer-only contributions) and the full 401(k) (complex administration). It targets small businesses with 100 or fewer employees who earned at least $5,000 in the prior year. Both employees and employers contribute, making it a genuine matching-based plan without the testing and compliance burden of a traditional 401(k).
For 2025, the employee contribution limit is $16,500, up from $16,000 in 2024. Workers aged 50 and older may add a $3,500 catch-up contribution, for a total of $20,000. SECURE Act 2.0 introduced an enhanced catch-up for ages 60-63: $5,250 in 2025. Notably, SECURE Act 2.0 also allows businesses with 26-100 employees (rather than the prior cutoff of 100) to use SIMPLE IRAs provided they make slightly more generous employer contributions.
Employers must make one of two contribution types. The most common is a dollar-for-dollar match on employee deferrals up to 3% of compensation (which can be temporarily reduced to 1% in two out of five years). Alternatively, employers may make a flat 2% non-elective contribution for all eligible employees, regardless of whether the employee contributes. Both options are immediately 100% vested, a key advantage over many 401(k) plans with multi-year vesting schedules.
One significant drawback of the SIMPLE IRA is its punitive early withdrawal provision. In the first two years of plan participation, early withdrawals are subject to a 25% penalty (versus 10% for other plans). After two years, the penalty reverts to the standard 10%. This two-year seasoning period also restricts rollovers: during the first two years, SIMPLE IRA funds can only be rolled over to another SIMPLE IRA; afterward, rollovers to Traditional IRAs or 401(k) plans are permitted. SIMPLE IRA accounts are held at IRAs at a custodian, with the same broad investment universe as Traditional IRAs.