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SIMPLE IRA

A Savings Investment Match Plan for Employees (SIMPLE IRA) is an easy and low-cost way to set up a retirement program for self-employed individuals and small businesses with 100 or fewer employees. Eligible employees can fund their own SIMPLE IRA accounts through regular salary deferrals and Employers make additional contributions.

A SIMPLE IRA may be appropriate for businesses with 100 or fewer employees seeking a low-cost plan that’s easy to administer and maintain.

If you are self-employed or own a business with 100 or fewer employees, you are eligible to establish a SIMPLE IRA plan, as long as it is the only retirement plan you fund. Companies maintaining another employer-sponsored retirement plan in the same year are not eligible. You must generally include all employees age 21 and over if they received at least $5,000 in compensation during any two prior years and if you reasonably expect that they will receive at least $5,000 in the current year.4

How is a SIMPLE IRA funded?

  • The plan is funded with contributions deducted from employees’ salaries, as well as annual employer contributions. Each eligible employee can decide whether or not to participate and how much to contribute, but employer contributions are mandatory.

What are the tax advantages of a SIMPLE IRA?

  • Employer contributions are tax-deductible. Earnings grow tax-deferred and are not taxed until they are withdrawn.

What are the SIMPLE IRA contribution limits?

  • Employees can contribute up to 100% of compensation or a maximum of $13,500 for 2021 or $14,000 for 2022. If the employee is age 50 or over, they may contribute up to $16,500 in 2021 and $17,000 in 2022.

What are the rules for withdrawing from a SIMPLE IRA account?

Withdrawals are penalty-free after age 59½. If you do not start Required Minimum Distributions (RMDs) by age 70½ (if you were born before July 1, 1949) or age 72 (if you were born on or after July 1, 1949), you will face a 50% penalty on the total amount of the distribution. Withdrawals before age 59½ are subject to a 10% penalty, and the penalty is increased to 25% if the withdrawal occurs within the first two years of participation in the SIMPLE IRA.

There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including:

  • Rollover of distributions to another IRA or employer plan

  • Higher education expenses for you or family members, including tuition, fees, books, supplies, and room and board (must be enrolled at least half-time)

  • First-time home purchase expenses ($10,000 lifetime limit) to buy, build, or rebuild a first home for you or your parents, children, or grandchildren (Note: You must not have owned a home within the past two years.)

  • Death or disability

  • Birth or adoption expenses

  • Certain medical expenses, including qualifying health insurance costs for certain unemployed individuals and non-reimbursed expenses exceeding 7.5% of adjusted gross income

  • Withdrawals made in equal installments over the account holder’s life expectancy