SIMPLE IRA FAQs

SIMPLE stands for Savings Investment Match Plan for Employees. This plan offers self-employed individuals and small businesses with 100 or fewer employees to set up tax-advantaged retirement plans. A SIMPLE IRA account follows the same investment, distribution and rollover rules as traditional IRAs.

It is funded by employer contributions and elective employee income deferrals.

A salary reduction contribution is an amount an employee elects to have contributed to his or her SIMPLE IRA, rather than be paid in cash. 

An employer is generally required to either:

• Match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation, or
• Make non-elective contributions of 2% of the employee’s compensation.

To participate in the plan, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year.

Each eligible employee may make a salary reduction contribution and the employer must make either a matching contribution or a non-elective contribution. No other contributions may be made under a SIMPLE IRA plan.

Employees can contribute a maximum amount; the maximum is increased periodically to account for inflation. See IRS Guidelines for current information. 

Yes. Those nearing retirement, ages 50 and older may make an additional catch-up contributions. The total combined contributions for both SIMPLE IRA and 401(k) are subject to a combined limit and age guidelines. See IRS Guidelines for current information,

Yes. Employer contributions are deductible as business expenses.
There is also tax-deferred growth potential and pretax contributions for participants/employees.

Yes, you must. Employees may not be excluded from participating in a SIMPLE IRA plan based solely on their age. Employees who are age 70 ½ or over may make salary deferral contributions to their SIMPLE IRAs. Employers must continue to make matching or non-elective contributions to employees’ SIMPLE IRAs even after an employee reaches age 72.

Yes. Your employer cannot require you to retain any portion of the contributions in your SIMPLE IRA or otherwise impose any withdrawal restrictions.

Withdrawals can be made at any time, however a 10% early withdrawal penalty may apply if you are under the age of 59 ½. This penalty increases to 25% tax if you withdraw within 2 years from the time you first participated in the plan.

Exceptions in which the additional 10% or 25% tax doesn’t apply are:

• You are age 59 ½ or older.
• Your withdrawal is not more than:
  • Your unreimbursed medical expenses if they exceed 10% of your adjusted gross income (7.5% if you or your spouse is age 65 or older),
  • Cost for your medical insurance while you’re unemployed,
  • Your qualified higher education expenses, or
  • First time home buying, building or rebuilding (up to $10,000)
• Your withdrawal is in the form of an annuity
• Your withdrawal is a qualified reservist distribution
• You’re disabled
• You’re the beneficiary of a deceased SIMPLE IRA

Yes. Tax-free rollovers are allowed to:

• Another IRA (except a Roth IRA), or
• An employer-sponsored retirement plan (such as a 401(k), 403(b), or governmental 457(b) plan).

However, during the 2-year period beginning when you first participated in your employer’s SIMPLE IRA plan, you can only transfer money to another SIMPLE IRA. Otherwise, you’re considered to have withdrawn the amount and you must:

• Include the amount in your gross income, and
• Pay an additional 25% tax on this amount (unless you qualify for an exception (see above).

After the 2-year period, you can also rollover SIMPLE IRA money into a Roth IRA, but you must include it in your income.