SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a retirement savings plan designed for small businesses with 100 or fewer employees. It allows both employees and employers to contribute to individual retirement accounts, making it easier for smaller companies to offer retirement benefits without the complexity of a 401(k) plan.

SIMPLE IRAs work similarly to traditional IRAs, but with higher contribution limits. In 2026, employees can contribute up to $16,500 per year through payroll deductions. Workers aged 50 and older can make catch-up contributions of an additional $3,500, bringing their total potential contribution to $20,000. Employees aged 60 to 63 receive an even higher catch-up limit of $5,250 under updated SECURE 2.0 Act rules.

Employers are required to contribute in one of two ways:

• Matching contributions: The employer matches employee contributions dollar-for-dollar, up to 3% of the employee’s compensation.
• Non-elective contributions: The employer contributes 2% of each eligible employee’s compensation, regardless of whether the employee contributes.

One important rule to know is the two-year restriction. Money contributed to a SIMPLE IRA cannot be rolled over to a traditional IRA or another retirement plan for at least two years after the first contribution is made. Withdrawing funds early and before the two-year period ends triggers a 25% penalty, which is steeper than the standard 10% early withdrawal penalty that applies after the two-year period has passed.

Practical example: Maria works at a small dental office that offers a SIMPLE IRA. She earns $50,000 per year and contributes $10,000 annually. Her employer matches 3% of her salary, adding $1,500 to her account each year. That means $11,500 total goes into her retirement savings annually, with a portion coming directly from her employer at no extra cost to her.

A SIMPLE IRA is a straightforward and cost-effective option for small business owners who want to help their employees save for retirement. Contribution limits are reviewed annually by the IRS, so checking for updates each year is a good habit.

RetireGrader is not a financial advisor or fiduciary. This content is for educational purposes only.