Simple IRA

What is a Simple IRA?

Simple IRAs, or also referred to as simplified incentive match plan, are designed to make it easier for small businesses of less than 100 people to offer retirement plan benefits.  Similar to a 401(k), the SIMPLE IRA allows pre-tax deductions to be made from employee accounts. 

Employers who sponsor a SIMPLE IRA will open a new account in the employees' name to receive the employee and employer contributions.

Many employers go the route of a SIMPLE IRA plan versus a 401(k) as administrative expenses are much lower.

A great benefit of the SIMPLE IRA to the employee is that they are 100% vested at all times.  Therefore, if you decide to leave, you will retain all employer contributions.  This is an advantage against the 401(k) which usually has vesting over 5 years.

If your employer offers a SIMPLE IRA, no other plans will be offered.  This includes qualified plans such as 401(k), defined benefit plans, profit sharing plans, SEP IRAs, 403(b) plans, employee-funded pension trusts, or qualified annuity plans.

Simple IRA Contribution Limits

While the 401k and SIMPLE IRA seem to be structurally the same, the key difference comes into play with the maximum allowable contribution per year.  SIMPLE IRA's only allow up to $10,500 employee contribution per year, $5,000 less than the 401(k).  However, persons over the age of 50 are allowed to contribute an extra $2,000. 

The employer that maintains a SIMPLE IRA is mandated to make contributions to each employee's account.  They can match up to 3% of the employee's contribution or some employers will elect to deposit a flat 2% of each employee's salary into their accounts, whether the employee makes a contribution or not.  This has a lifetime cap of $225,000.