SIMPLE IRA

In short

A friend of mine runs a small plumbing shop with six employees, and she once told me she wanted a retirement plan without a pile of paperwork. A SIMPLE IRA is built for people just like her. It is a retirement account that a small business sets up for its workers and its owner. The business must have 100 or fewer employees who earned at least $5,000 in pay, and the IRS describes the exact test on its SIMPLE IRA page. Each worker can set aside up to the current figure, which the official source publishes each year of pay, with a larger limit for those age 50 and over. The employer must either match what a worker puts in or give every eligible worker a set amount. Money is not taxed going in, and it grows without yearly tax, but taking it out early can cost extra.

The whole of it

What it is

I once sat on a porch with a retired mail carrier who said he never understood the alphabet soup of retirement accounts. I told him I felt the same way for years. So let me say it plain. SIMPLE stands for Savings Incentive Match Plan for Employees. An IRA is an individual retirement arrangement, which is just a special account held in a person's own name. Put them together and you get a SIMPLE IRA, a plan a small employer offers so that workers can save for retirement straight from their paychecks.

You have probably heard of the 401(k). The SIMPLE IRA is its smaller cousin. The plan was made for businesses that do not want the costly testing and filing that bigger plans bring. A business owner and a self employed person can use it too. There is one catch worth knowing early. The employer cannot run another retirement plan at the same time for the same workers, with a few narrow exceptions the IRS explains.

Every account belongs to the worker. That matters. Even the money the employer puts in is the worker's from the first day. There is no waiting period before it becomes theirs, which is called vesting. Other plans often make workers wait. This one does not.

How it works

A friend of mine once said the best plans are the ones you barely notice. This one works that way. The worker tells the employer how much of each paycheck to send to the account. The employer takes that money out before income tax and deposits it. That lowers the worker's taxable pay for the year, though Social Security and Medicare taxes still apply to it.

Then comes the employer's part. The employer has two choices. The first is to match what the worker saves, dollar for dollar, up to 3 percent of pay. In some years the employer may lower that match to as little as 1 percent, but the plan allows this only a limited number of times. The second choice is to give every eligible worker 2 percent of pay, whether or not that worker saves a dime. The employer must tell workers which choice it made before the sign up period opens.

The money sits in an account at a bank or a brokerage firm that the employer picks. The worker usually chooses how to invest it among the options offered. Nothing is taxed while it grows. Tax comes later, when the worker takes money out in retirement, and it is then treated as ordinary income.

Taking money out early is where the plan bites. A worker who pulls money before age 59 and a half generally owes regular income tax plus an extra 10 percent. If the withdrawal happens within the first two years of joining the plan, that extra tax jumps to 25 percent. Two years. Mark that.

The numbers, and where to find yours

If you are holding a pay stub and wondering what your limit is, here is where the figures live. The yearly limit on what a worker may put in is the current figure, which the official source publishes each year. Workers age 50 and over may add a catch up amount of the current figure, which the official source publishes each year. These limits change from year to year, so the site fills in the verified figure with its source and date.

The match is a percent of pay set by law, and the 3 percent match and 2 percent flat contribution described above come from the plan rules. The age when penalty free withdrawals begin is the current figure, which the official source publishes each year. The extra tax for early withdrawal is 10 for 2025 (source, checked 9/27/2026), and the higher rate in the first two years is the current figure, which the official source publishes each year.

To find your own numbers, look at the plan summary your employer gave you. It names the match choice, the sign up dates, and the firm holding the money. For the official rules, the Internal Revenue Service publishes a page on SIMPLE IRA plans and a publication called Publication 560, which covers retirement plans for small business. The IRS also posts the yearly limits on its retirement plan pages. Those are primary sources, and they beat any summary, including this one.

A worked example

Let me tell you about a woman I will call Maria. She is 38 and works at a small print shop with 12 employees. Her salary is $52,000 a year. Her employer picked the match choice, so it matches her savings up to 3 percent of pay.

Maria decides to save 6 percent of her pay. Six percent of $52,000 is $3,120 a year. That is the number she puts in. Her employer matches dollar for dollar up to 3 percent. Three percent of $52,000 is $1,560. So the employer adds $1,560.

Add the two together. $3,120 plus $1,560 is $4,680 going into her account in the first year. Maria only felt the $3,120, and even that came out before income tax. If her federal tax bracket is 12 percent, her tax drops by about $374 that year, because 12 percent of $3,120 is $374.40. So the real cost to her take home pay is closer to $2,746.

Now picture it growing. Suppose the account earns an average of 6 percent a year, and Maria adds $4,680 at the end of each year for 20 years. The balance after 20 years comes to about $172,000. That figure rests on the made up 6 percent and on deposits made once a year, so it is an illustration, not a promise. Real returns go up and down, and some years lose money.

Now watch what happens if Maria skips the match. If she saved only 1 percent, which is $520, her employer would match just $520. The yearly total would be $1,040. She would be leaving $1,040 of free money on the table, because she would not be reaching the full $1,560 match. Small choices add up.

Where it goes wrong

A friend of mine once pulled money from her account at age 45 to fix a leaking roof. I understood why. A roof is a roof. But she paid income tax on it and a 10 percent penalty on top, and the money stopped growing. If she had joined the plan less than two years before, the penalty would have been 25 percent. That is a steep price for a quick fix.

Another trap is the other plan problem. An employer who sets up a SIMPLE IRA generally cannot offer a 401(k) to the same workers in the same year. A business that grows past 100 employees faces rules about when it must leave the plan. The employer must follow the IRS grace period for that change, and a mistake can disqualify the plan.

Rollovers can trip people up too. In the first two years, money from a SIMPLE IRA can move only to another SIMPLE IRA without tax trouble. After two years, it may move to other types of retirement accounts. A worker who moves it too soon can be hit with that 25 percent tax. A worker who plans to move the money does well to check the timing first.

Then there is the quiet mistake of never signing up. The plan does nothing for a worker who does not choose an amount. The employer cannot do it for them. So the match goes unused, and nobody sends a warning.

Questions to answer before you leave this page

Have you looked at your plan summary to see whether your employer chose the 3 percent match or the 2 percent flat contribution? Do you know the date your sign up window opens, and how much you could set aside this year given the limit of the current figure, which the official source publishes each year? Are you close enough to age 50 that the catch up amount of the current figure, which the official source publishes each year might apply to you? Have you worked out how many years you have been in the plan, so you know whether the 25 percent early withdrawal tax would apply if you needed cash? Do you know which bank or brokerage holds your account, and which investment choices it offers? And have you checked the IRS page on SIMPLE IRA plans to confirm the rules for your own situation?