The 401(k) isn’t the only employer-sponsored retirement account around. SIMPLE IRAs may be an option for employees of smaller companies and the self-employed who want tax-advantaged savings for their futures.
SIMPLE IRA contribution limits
The annual SIMPLE IRA contribution limits are:
- Under age 50: $13,000
- Age 50 and older: $16,000
These contribution limits are lower than those for a 401(k), which in 2019 allows employees to contribute up to $19,000 of income, or $25,000 for those 50 and older. But people with a SIMPLE IRA may take part in another employer-sponsored plan (say, if a person had more than one job) and make contributions up to a total of $19,000.
What’s more, while employers are not required to match employee contributions to a 401(k), generally they must kick in on a SIMPLE IRA, either matching contributions of up to 3% of employee compensation, or fixed contributions of 2% to every eligible employee. (The “SIMPLE” stands for “Savings Incentive Match Plan for Employees.”)
Aside from the different contribution limits — and the fact that SIMPLE IRAs are available only at companies with fewer than 100 employees — the two work similarly. Just as a 401(k) does, a SIMPLE IRA allows investors to defer taxes on contributions and investment growth until the cash is used in retirement.
2019 contribution limits
|Under 50||50 and older|
|Traditional or Roth IRA||$6,000||$7,000|
Other important notes for a SIMPLE IRA:
- Rollover period: Participants in a SIMPLE IRA can roll their cash into a traditional IRA two years after first contributions to the account
- Big penalty for early withdrawal: As with many tax-advantaged accounts, you face a 10% penalty on top of regular income taxes for withdrawing before age 59½. But for SIMPLE IRA withdrawals within the first two years, that tax penalty is increased to 25%. Other withdrawal rules are similar to those for traditional IRAs.