What is a SIMPLE IRA

Whether you’re a seasoned investor or just beginning to grow your future wealth, it’s important to understand the ins and outs of different financial tools and what they have to offer.

One of the best ways to invest in your retirement is with an individual retirement account (IRA). IRAs are generally easy to handle, especially for those who are either too busy to plan out their investments or not interested in regulating them closely.

There are many different types of IRAs at your disposal, all with their own benefits and downsides, but in this article, we will explore SIMPLE IRAs, how they work, and who should take advantage of them.

How Do SIMPLE IRAs Work?

Similar to a 401k, an IRA is a tool designed to help individuals save for retirement by investing in various assets.

Most financial assets are up for grabs with IRA investments, including mutual funds, stocks, bonds, and exchange-traded funds.

IRAs can be opened via a bank, brokerage, or other investment company and are available to any individual who earns a fixed income.

It’s also worth noting that an IRA, like a 401k, allows the owner to enjoy various tax benefits depending on the type of IRA you choose. The options include traditional IRA, Roth IRA, SEP IRA, and, of course, SIMPLE IRA.

Since there are so many types of IRAs, what makes a SIMPLE IRA different from the rest?

As its name implies, a SIMPLE IRA is an easy way for employees to contribute to their retirement savings with a considerable matching contribution from their employer.

The acronym SIMPLE stands for “Savings Incentive Match Plan for Employees.”

Employers who utilize SIMPLE IRAs have two options for matching their employees’ contributions: a dollar-for-dollar match of each contribution up to 3% of the employees’ salary or a 2% salary contribution across all employees, regardless of their own contributions.

In order for a business to set up a SIMPLE IRA, the owners first need to confirm their eligibility.

According to the IRS, any small business can open up a SIMPLE IRA as long as it employs 100 or fewer people and the employer does not currently offer any other type of retirement plan.

All it takes for any small business owner to get their own SIMPLE IRA started is to fill out a few documents and open up the accounts with a financial institution.

Most working individuals, including those who are self-employed, will be eligible to contribute to a SIMPLE IRA.

The only requirements are that you earned at least $5,000 income during any 2 years before the current calendar year, and you expect to earn at least $5,000 again during the current calendar year.

Employers have the ability to lower the amount of income required to be eligible, but they cannot raise it above $5,000.

Just like other types of IRAs, SIMPLE IRAs have limitations on how much you can contribute each year.

In 2023, the annual contribution limit for employees is $15,500, with an additional $3,500 catch-up contribution available to those who are 50 and over, for a grand total of $19,000.

A SIMPLE IRA plan will generally be best suited to small business owners, individuals who work for a small business, or those who are self-employed.

If your financial situation sets you up to be in a lower tax bracket when you retire, then you may want to consider a SIMPLE IRA as well because your contributions will only be taxed once you make your withdrawals.

Since SIMPLE IRAs are generally low maintenance, they also make a great fit for anyone who is looking for a more hands-off investment experience.


As we mentioned, SIMPLE IRAs are an excellent option for small businesses and self-employed individuals due to their accessibility.

The costs for maintaining a SIMPLE IRA plan are quite low, and the plan itself is administered via the financial institution with which it was established, reducing the hands-on workload of the employer.

There is also only a small amount of paperwork necessary to initiate a SIMPLE IRA as compared to other retirement plans, requiring just a planning document at the start and annual disclosure statements for employees. 

Employers utilizing a SIMPLE IRA can even count on a tax deduction for their employee contributions.

And, in terms of tax benefits, SIMPLE IRAs help out employees as well by reducing their amount of taxable income for the year and potentially dropping them into a lower tax bracket.

This is the same system as the traditional IRA, which counts on employees having lower income taxes in retirement (when the withdrawals will be taxed) than they do currently, thus saving money in the long-term.


Unfortunately, one of the biggest cons of investing in a SIMPLE IRA is that there is no Roth version of it.

Roth IRAs work opposite to a traditional IRA by taxing contributions at your current tax rate instead of upon withdrawal.

Here at My Money My Freedom, we utilize Roth IRA’s for our retirement investing because it means that the distributions will be tax-free in retirement.

If you want to invest like we do, then you may want to consider investing in a Roth IRA instead of a SIMPLE IRA in order to avoid losing some of your contributions to income taxes. 

Another reason to consider plans outside of SIMPLE IRAs is that they have a much lower contribution limit than some other retirement plans.

A 401k, for example, has a contribution limit of $22,500 in 2023 with optional catch-up contributions of $7,500 for those aged 50 and over.

That puts the total annual contributions for a 401k at $30,000, which is $11,000 higher than the annual limit for a SIMPLE IRA in 2022. 

Additionally, SIMPLE IRAs are subject to increased taxes when withdrawals are made from the account before retirement.

If you wish to withdraw money prior to turning 59½ years old, keep in mind that the amount will have both your current income tax and an additional 10% tax deducted.

In the event of withdrawing during the first two years of the plan, the additional tax rate will increase to 25%. 

Feeling like an expert yet?

Backed by your knowledge of SIMPLE IRAs, you’re ready to take control of your financial strategy and find the best retirement investment plan for you.

If your employer doesn’t offer SIMPLE IRAs or you think another option would best fit your unique situation, you can also check out our article, “5 Steps to Follow When You Need to Catch Up on Your 401k,” which explores all the basics about how to make the most of your retirement plan. Happy investing!

What is a Simple IRA FAQs

What is the 2 year rule for SIMPLE IRA?

When you first start participating in a SIMPLE IRA, there’s a 2-year period where some specific rules apply to moving your money. This 2-year countdown begins on the day your employer deposits your first contribution. During this 2-year period, you can’t roll over your SIMPLE IRA funds to a non-SIMPLE retirement account (like a traditional IRA or a 401k). If you do, it’ll be treated as a taxable distribution, and you’ll get hit with a hefty 25% early withdrawal penalty if you’re under 59½. Ouch! Once the 2-year period is up, you’re free to roll over your SIMPLE IRA funds to other retirement accounts without any penalties or restrictions, just like a regular ol’ rollover. So, the moral of the story is: Keep an eye on that 2-year rule if you’re thinking about rolling over your SIMPLE IRA funds. It’s better to wait it out than to face a painful penalty!

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