The Small Business Guide to SIMPLE IRAs

What is a SIMPLE IRA?

A SIMPLE IRA is a retirement plan that allows both employees and employers to contribute to employees’ retirement accounts. It is an excellent option for small businesses looking to offer a retirement plan as part of their employee benefits package. The best business retirement plan providers make SIMPLE IRAs easy to set up, and they can be nearly as comprehensive as more complex retirement plans.

Lisa Sakai, founder and financial consultant at One Vision Retirement, emphasized how straightforward SIMPLE IRAs are for businesses to start and manage affordably. “There is no annual tax filing, and a wider range of investments [is] available,” Sakai explained. 

How does a SIMPLE IRA work?

Aileen Danley, a certified financial planner at Oak Street Advisory Group, explained that SIMPLE IRAs are one of the easiest types of tax-deferred employee retirement plans to establish. “It is [set up] by completing an IRS form and can provide employees with tax-deferred retirement savings benefits,” Danley noted. “Funding is held directly in an IRA for each employee, and employees own and control their accounts, even after they leave the original employer.”

However, you’ll need to understand some essential factors and considerations when starting and administering a SIMPLE IRA for your business:

• SIMPLE IRAs have employee limits. Any business with up to 100 employees can establish a SIMPLE IRA. Businesses with more than 100 employees are not eligible. However, for very small businesses — those with just a few employees — a Simplified Employee Pension (SEP) IRA may be easier to start and potentially more beneficial for tax purposes. SEP IRAs also work far better as self-employed retirement plans than SIMPLE IRAs.
• A SIMPLE IRA must be your only plan. Another key difference between SIMPLE and SEP IRAs is that only the latter can be combined with other retirement plans. If you start a SIMPLE IRA for your business, it must be your only employer-sponsored retirement plan.
• Your SIMPLE IRA plan provider will handle most of the paperwork. Although your provider may require you to complete certain IRS forms, you won’t need to file paperwork to establish or administer your plan. Your plan provider will manage all necessary documentation, though you’ll need to share annual notices and ensure timely contributions.
• A SIMPLE IRA has eligibility requirements. Any employee you paid at least $5,000 in any two previous years and to whom you expect to pay at least $5,000 in the current year qualifies for inclusion in your SIMPLE IRA. You can modify these criteria to be less restrictive, e.g., allowing all employees to participate regardless of income or tenure. But you cannot impose stricter requirements than the IRS’s base-level standards.

SIMPLE IRA contribution rules

The above considerations are straightforward. However, SIMPLE IRA account contribution rules can be complex. Keep the following contribution rules in mind:

• Employee-matching contributions: Employers are generally required to match employee contributions to a SIMPLE IRA up to 3 percent of each employee’s income. For example, if an employee earns $50,000 per year and contributes $2,000 (4 percent) to their account, you need to match only up to $1,500 (3 percent) of their salary. You can opt to contribute less than 3 percent, but you must match at least 1 percent of employee contributions in at least two years out of any five-year period. These rules don’t apply if you make nonelective contributions instead (see below).
• Nonelective contributions: Alternatively, you can make nonelective contributions of 2 percent to all eligible employees’ IRAs. This means that even if an employee chooses not to contribute, you must still contribute 2 percent of their income. (As with SEP IRAs, but unlike many other retirement plans, employees are not required to make annual contributions.)
• Income limitations: For both contribution methods, employer matching and nonelective contributions are limited to the first $350,000 of an employee’s income in 2025 (up from $345,000 in 2024). This means that if an employee earns $360,000, a 2 percent nonelective contribution would be based on $350,000, not $360,000.
• Employee contribution limits: In 2025, employees can contribute up to $16,500 of their salary to a SIMPLE IRA. Employees aged 50 and older can contribute an additional $3,500 as a catch-up contribution. Additionally, under the SECURE 2.0 Act, employers with 25 or fewer employees can offer an increased contribution limit of $17,600. Employers with 26 to 100 employees can also adopt this higher limit if they agree to either a 4 percent employer match or a 3 percent nonelective contribution.
• Employees are fully vested: No matter how much employees contribute (or don’t contribute), they are always fully vested in the money in their accounts. This means employees take ownership of employer contributions immediately.
• Deposit timing for employee contributions: According to Department of Labor spokesperson Grant Vaught, employers must deposit employee contributions into the financial institution serving as the SIMPLE IRA trustee as soon as reasonably possible. Deposits must first be segregated from company assets. They also can’t be made later than 30 days after the end of the month in which the amounts would have been payable to the employee. For businesses with fewer than 100 employees, Vaught noted that employers can deposit salary reduction contributions as late as the seventh business day after withholding them and still be compliant with the law.
• Aggregate limits across plans: If an employee contributes to a SIMPLE IRA through your business and also participates in another employer-sponsored retirement plan through a second job, their total contributions across all plans cannot exceed:
  • $23,500 for individuals under 50
  • $31,000 for individuals ages 50-59 and 63-plus
  • $34,750 for individuals ages 60-63

Note: The higher catch-up contribution limit for ages 60-63 applies to 401(k)s and similar plans.

SIMPLE IRA rollover rules

• First two years: During the first two years, tax-free rollovers are available only to other SIMPLE IRAs. 
• After two years: Once an employee has participated in your company’s SIMPLE IRA for two years, they can transfer funds to employer-sponsored retirement plans and traditional (non-Roth) IRAs without paying taxes.
• Roth contributions: As of 2025, the SECURE 2.0 Act allows employers to offer Roth options within SIMPLE IRAs. Employees can choose to designate all or part of their contributions as Roth contributions, which are made with after-tax dollars. Unlike rollovers to other plans, there is no two-year waiting period for converting existing SIMPLE IRA funds to Roth contributions within the SIMPLE IRA itself. However, rollovers from a SIMPLE IRA to a Roth IRA (outside the SIMPLE IRA plan) are subject to the two-year holding requirement before they can be transferred tax-free. Regardless of the conversion type, employees must pay income taxes on the converted amount in the year of the conversion, as it transitions from pretax to after-tax status.

SIMPLE IRA tax considerations for businesses

Administering a SIMPLE IRA can help lower your business taxes. “The nice part of an employer match is it is a company business deduction,” Sakai noted. That’s because all contributions your company makes to employees’ SIMPLE IRA accounts are fully tax-deductible. 

If you’re a sole proprietor or a partner in a business, these tax deductions pass through to your personal income. However, employees cannot deduct their own SIMPLE IRA contributions from their taxable income, as these contributions are made on a pretax basis.

All money in SIMPLE IRAs grows tax-deferred, meaning employees won’t pay taxes on their contributions or investment earnings until they begin making withdrawals. However, once employees start taking required minimum distributions (RMDs) — at either age 73 or 75, depending on their birth year — these withdrawals are taxed as ordinary income.

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If an employee withdraws money from their SIMPLE IRA before reaching RMD age, their withdrawals will be taxed as income. Additionally, if an employee under age 59 1/2 withdraws money, they’ll incur a 10 percent early withdrawal penalty. That amount increases to 25 percent if the withdrawal occurs within the first two years of their participation in the SIMPLE IRA.

Pros and cons of SIMPLE IRAs

Like all retirement plans, SIMPLE IRAs’ features and complexities give them specific advantages and disadvantages over other plans. We’ve broken down the pros and cons of SIMPLE IRAs below to help you make a more informed decision about your company’s retirement benefits.

Pros of SIMPLE IRAs

• SIMPLE IRAs are straightforward and cost-effective. Starting a 401(k) retirement plan for your team is often expensive and complex. In contrast, a SIMPLE IRA requires minimal paperwork and is generally less costly to establish and administer than many other retirement plans.
• SIMPLE IRAs do not require discrimination testing. Unlike 401(k) plans, SIMPLE IRAs do not require nondiscrimination testing to ensure equitable benefits for employees. This simplifies plan administration and reduces compliance burdens.
• SIMPLE IRAs have no filing requirements. Employers are not required to file annual forms — such as Form 5500 — to set up or manage a SIMPLE IRA. This eliminates paperwork-related administrative tasks, allowing you to focus on running your business. Your SIMPLE IRA provider will handle these compliance responsibilities on your behalf.

Cons of SIMPLE IRAs

• SIMPLE IRAs have relatively low contribution limits. In 2025, the limit is $16,500, with a catch-up contribution of $3,500 for people aged 50 and over. While this exceeds the limits for traditional and Roth IRAs, it falls short compared to 401(k) plans, which have higher contribution limits. Additionally, SEP IRAs can allow contributions of up to $70,000 for certain participants.
• SIMPLE IRAs require employer contributions. Unlike 401(k) plans, which don’t require employer matching, SIMPLE IRAs require employers to contribute. Employers must either match employee contributions (up to 3 percent) or provide a nonelective contribution (2 percent), which can make the plan more expensive in the long run.
• SIMPLE IRAs penalize withdrawals. Although the vast majority of retirement plans penalize early withdrawals, not all do, so it’s fair to classify this standard retirement plan drawback as a key disadvantage of SIMPLE IRAs. Sakai also noted that no loans are available with SIMPLE IRAs.

How to set up a SIMPLE IRA

If you’re ready to start a SIMPLE IRA for your business, here’s how to get started:

1. Establish a SIMPLE plan. The IRS provides two forms for setting up a SIMPLE IRA plan. Your SIMPLE IRA provider can help determine which form applies to your business, depending on how employee contributions will be managed:
   
   • IRS Form 5304-SIMPLE: Use this form if employees are allowed to choose the financial institution that will hold their SIMPLE IRA contributions.
   • IRS Form 5305-SIMPLE: Use this form if your company requires all contributions be deposited into a designated financial institution.
2. Educate your employees on your SIMPLE IRA. During setup, inform employees about the SIMPLE IRA and how their accounts work. Vaught emphasized that employers must provide a summary description of the plan. “The employer (or the trustee) must give workers information about the plan, including a copy of the summary description,” Vaught noted. “The required notice also informs eligible workers of the plan’s election period, which is when they can decide to contribute to the plan.” 
3. Have employees fund their accounts. Employees who choose to participate will set up paycheck withholdings to fund their accounts and select their investment options.
4. Create individual SIMPLE IRAs for your employees. Each participating employee must have an individual SIMPLE IRA account established through your provider’s dashboard. This process typically takes just a few minutes.
5. Follow IRS time restrictions. Employers must adhere to strict deadlines when setting up a SIMPLE IRA plan. “SIMPLE IRA plans operate on a calendar-year basis,” Vaught explained. “An employer may initially set up a SIMPLE IRA plan as late as October 1 [of the current year], and they must establish a SIMPLE IRA account for each employee receiving contributions under the plan.”

Danielle Bauter contributed to this article.