The landscape · Self employed and owners
The SIMPLE IRA
A SIMPLE IRA lets employees defer part of pay into their own IRAs, and requires the employer to either match up to 3 percent of pay or contribute 2 percent for everyone, with less paperwork than a 401(k).
Who this exists for. This exists for a small business with 100 or fewer employees that wants a plan where workers defer from pay and the employer makes a required match or contribution. Ticks that show it: I own a business with revenue; I earn money on my own (freelance, gig, side work); I work for an employer.
How it works
An employer with 100 or fewer workers adopts the plan on an IRS form, and each eligible worker can defer up to this year's official simple ira deferral limit (not yet verified here; see the official source below) a year, with a catch up of this year's official simple ira catch up 50 (not yet verified here; see the official source below) from age 50. The employer picks one of two required contributions each year: a dollar for dollar match on deferrals up to 3 percent of pay, or a flat 2 percent of pay for every eligible worker whether they defer or not. Deferrals go into a SIMPLE IRA owned by the worker and count against the shared deferral cap with any 401(k). Withdrawals in the first two years of participation carry a 25 percent addition instead of 10 for a person under 59 and a half, and during those two years the money can be rolled only into another SIMPLE IRA.
What it gives
No yearly government filing and no discrimination testing.
Workers get a deferral and a required employer contribution, which is more than a SEP offers employees.
Setup and running costs are low, and most custodians handle it.
What it costs, or where the catch is
The deferral cap is lower than a 401(k), which limits an owner who wants to save more.
The 25 percent addition in the first two years is steep for a worker who leaves early and withdraws.
The employer contribution is required every year the plan exists, in good years and bad.
A worked example
Ada owns a bakery with four employees and adopts a SIMPLE IRA with the 3 percent match. Her baker Malik earns $42,000 and defers 5 percent, which is $2,100. The match covers deferrals up to 3 percent of his pay, so Ada contributes $42,000 times 0.03, which is $1,260. Malik's account receives $2,100 plus $1,260, which is $3,360 this year, and all of it is his the day it arrives.
Where it goes wrong
The common miss is a worker who leaves in the first two years, rolls the SIMPLE balance into a regular IRA, and triggers the 25 percent addition on the whole amount.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS Publication 560, Retirement Plans for Small Business. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about The SIMPLE IRA
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- The employer match
This exists for anyone whose job offers a retirement plan with matching contributions.
- Traditional 401(k) contributions from pay
This exists for anyone whose employer offers a 401(k) plan and who wants to know what happens when part of a paycheck goes into it.
- The Roth 401(k) option inside the plan
This exists for a worker whose 401(k), 403(b), or 457(b) plan offers a designated Roth account alongside the traditional one.
- The 403(b) for schools and nonprofits
This exists for people who work at public schools, colleges, hospitals, churches, and other nonprofit employers that offer a 403(b) plan.
- The 457(b) and its separate limit
This exists for state and local government workers and some nonprofit employees whose employer offers a 457(b) deferred compensation plan.
- Vesting schedules
This applies when an employer puts money into a worker's retirement plan and the plan document says that money becomes the worker's over time.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.