SIMPLE IRA: Retirement Plan Designed for a Small Businesses

June 13, 2025

Many retirement plans that work well for large corporations often don’t translate well to the needs of small businesses. Complex administration, high costs, and rigid regulatory requirements can make traditional retirement plans impractical for business owners with fewer employees. Fortunately, the SIMPLE IRA offers a flexible, affordable alternative specifically designed to meet the unique needs of small businesses.

What Is a SIMPLE IRA?

SIMPLE IRA stands for "Savings Incentive Match Plan for Employees Individual Retirement Account." This plan aims to help employers and employees save for retirement. It does this by simplifying contributions and lowering administrative tasks.

The SIMPLE IRA is different from more complex retirement plans. It lets employees put part of their salary into their retirement account. Employers can either match these contributions or make a flat contribution based on employee wages.

One of the key advantages of the SIMPLE IRA is its accessibility for businesses with limited administrative resources. The plan requires minimal paperwork, no annual filings with the IRS, and straightforward ongoing management. However, eligibility is limited to businesses with 100 or fewer employees who earned at least $5,000 in the prior year.

How SIMPLE IRAs Operate

SIMPLE IRAs combine some of the best features of both traditional IRAs and 401(k) plans. Employees can choose to make salary deferrals.

These amounts are taken from their paychecks before federal income taxes are calculated. This helps lower their taxable income for the year. The funds then grow tax-deferred until they are withdrawn in retirement.

Employers must give eligible employees 60 days to decide if they want to participate. They can also choose their contribution levels during this time. For ongoing plans, this enrollment window typically runs from November 2 through December 31 for the following year.

During this time, employers must tell employees about their planned contributions for the year. They need to say if they will match contributions or make a nonelective contribution.

In terms of eligibility, most employees who have earned at least $5,000 in any two preceding calendar years and are expected to earn at least $5,000 in the current year may participate. Employers can adopt more generous eligibility standards if they choose but cannot impose more restrictive ones.

Contribution Rules and Limits

A key feature of the SIMPLE IRA is its dual contribution structure. Employers can choose between:

●     Matching Contributions: The employer matches employee salary deferrals dollar-for-dollar up to 3% of the employee's annual compensation. This percentage can be reduced to as little as 1% in any two out of five consecutive years.

●     Nonelective Contributions: Alternatively, the employer can contribute 2% of each eligible employee’s compensation, regardless of whether the employee makes salary deferrals.

Beginning in 2025, the annual contribution limits increased to $16,500 for employees under 50 and $20,000 for those 50 and older. A special catch-up contribution for employees aged 60 to 63 allows an additional $5,250 contribution during that window, per the SECURE Act 2.0.

The SECURE Act 2.0 also introduced higher contribution limits for certain small businesses. Employers with 25 or fewer employees can let workers contribute up to $17,600 each year. This amount includes any catch-up contributions.

Businesses with 26 to 100 employees can use these higher limits. They must increase employer contributions to 4% for matching or 3% for nonelective contributions.

Employers can also add extra uniform contributions. They can contribute up to 10% of each employee’s pay. This is capped at $5,100 in 2025.

Withdrawal Rules and Long-Term Savings Incentives

While SIMPLE IRAs offer generous tax advantages and flexibility, they are intended primarily as long-term savings vehicles. Early withdrawals come with significant penalties to discourage premature access. Generally, any distribution taken before age 59½ is subject to a 10% early withdrawal penalty in addition to regular income taxes. However, if withdrawals occur within the first two years of participating in the plan, the penalty increases to 25%.

There are rollover options available, but within the initial two-year period, SIMPLE IRA funds can only be transferred to another SIMPLE IRA. After the two-year window, participants can roll their funds into traditional IRAs or employer-sponsored retirement plans, subject to certain restrictions.

Starting at age 73, participants are required to begin taking required minimum distributions (RMDs) from their accounts, just like with other tax-deferred retirement accounts.

Advantages of SIMPLE IRAs for Small Businesses

For small-business owners, the SIMPLE IRA offers a compelling combination of simplicity, flexibility, and tax advantages:

●     Ease of Administration: No annual IRS reporting, limited paperwork, and straightforward setup make SIMPLE IRAs manageable for businesses without large HR departments.

●     Tax Benefits: Employer contributions are generally tax-deductible as a business expense. Employees benefit from pre-tax contributions and tax-deferred growth.

●     Employee Incentives: Matching contributions encourage employees to save and foster greater job satisfaction.

●     Adaptability: Employers can modify contribution methods annually based on the business’s financial health.

Potential Drawbacks to Consider

Despite its many advantages, the SIMPLE IRA is not without its limitations:

●     Lower Contribution Limits: Compared to 401(k) plans, contribution limits are lower, which may be a concern for highly compensated employees.

●     Limited Loan Options: SIMPLE IRAs do not allow participants to take loans against their accounts.

●     Reduced Creditor Protection: SIMPLE IRAs are not subject to ERISA protections, which means creditor protection may vary depending on state laws.

●     Exclusive Plan Rule: Employers who offer a SIMPLE IRA generally cannot maintain any other employer-sponsored retirement plan simultaneously.

Exploring Alternatives

Depending on a business’s growth and evolving needs, other retirement plans may be more suitable. Options like SEP IRAs, Solo 401(k)s, or pooled employer plans (PEPs) may offer higher contribution limits, greater flexibility, or enhanced benefits as your business grows.

Final Thoughts

For many small-business owners, the SIMPLE IRA strikes the right balance between cost, simplicity, and retirement savings opportunities. It allows businesses to support their employees' financial futures without the heavy administrative burdens associated with larger plans. Before starting any retirement plan, it’s smart to talk to a financial advisor or tax professional. They can help you choose the option that fits your business goals and financial needs.

Sources:

https://www.fidelity.com/learning-center/personal-finance/retirement/understanding-simple-ira

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.