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A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a small-company version of a 401(k) plan and is subject to many of the same rules as individual retirement accounts (IRAs). This workplace retirement savings account allows eligible employees to invest a portion of their pretax salary into an individual account and receive mandatory employer contributions.
Small businesses — generally those with 100 or fewer employees — sometimes offer workers a SIMPLE IRA plan in lieu of a 401(k) because (as the acronym implies) it’s easier to set up and administer. If you work for yourself, you’re also allowed to contribute to a SIMPLE IRA, although there may be better .
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a retirement plan for small businesses with fewer than 100 employees. SIMPLE IRAs are similar to other individual retirement accounts (IRAs) and are easier to set up than 401(k)s, but the employee contribution limits are lower than for 401(k)s.
SIMPLE IRAs have many of the same investment, distribution and rollover rules as other types of retirement plans. The main drawback for some businesses might be the fact that SIMPLE IRAs require mandatory employer contributions. Employees might like that employer match, but they may be less happy about the lower contribution limits, compared with 401(k)s, and the lack of a Roth version.
The mandatory employer contribution is what makes SIMPLE IRAs different from some other employer-sponsored retirement plans.
Simple IRAs bear some similarities to a . Contributions are tax-deferred, meaning the amount you save up to your contribution limit reduces your taxable income for the year, and investment growth is tax-deferred until you start taking distributions in retirement.
In some ways, SIMPLE IRAs are like 401(k) plans: Eligible employees indicate how much (if anything) of each paycheck they want to contribute to the account, and the money is automatically diverted into the worker’s individual investment account.
Employee contribution limits for a SIMPLE IRA in 2020 and 2021 are $13,500 per year for those under age 50. People age 50 and older can make an additional $3,000 catch-up contribution.
Employer contributions are mandatory and can be made using one of two methods:
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Opening a SIMPLE IRA is similar to opening a traditional IRA. However, if you're a business owner, there are additional reporting requirements and documents you must fill out to establish the plan. Most IRA providers offer SIMPLE IRAs that you can open online.
There are three steps to setting up a SIMPLE IRA plan:
If you work at a company that offers a SIMPLE IRA, your employer will have you fill out one of the forms above to establish an individual account.
For employers, SIMPLE IRAs have start-up and operating costs that are generally lower than setting up a 401(k) plan. Employers get a tax deduction for their contributions to employees’ accounts.
The contribution limits for SIMPLE IRA plans are lower than other workplace retirement plans. In 2020 and 2021, employees and solo business owners under age 50 are allowed to contribute $13,500 in a SIMPLE IRA per year versus $19,500 in a 401(k), and $16,500 versus $26,000 for those age 50 and up.
Also, there is no Roth version of the SIMPLE IRA. This is a big drawback given the benefits of Roth IRAs and Roth 401(k)s. (See “” for more on why we like these accounts.)
» Looking to open an IRA? Here are our top picks for the
The answer depends on whether you're an employee or the employer.
For business owners: If you're a solo business owner or self-employed and your goal is to maximize your own retirement savings, there are other retirement savings plans that have higher contribution limits:
If you own a small business with employees, a SIMPLE IRA might be attractive if you want to offer your employees a retirement plan but would like to avoid the extra administrative costs that can come with a 401(k). Just keep in mind that some employees may still wish for a 401(k) because of its higher contribution limits.
For employees: Anyone who has access to the plan at work and wants to maximize their savings should contribute to the account. Otherwise, you’re leaving free money on the table.
If your plan provides the automatic 2% employer contribution, you’ll get that money even if you elect not to divert any of your salary. If the employer contribution is offered by matching funds, you must sign up to contribute a portion of your own salary to earn the match. (Remember: You can still save in other types of retirement savings accounts in addition to a SIMPLE IRA.)
» Read more about how to choose between a