Simple IRA Rules and Limits A common question I get from people is “What the heck is a SIMPLE IRA?”.

Most people have never heard of a SIMPLE IRA and are curious to know how it differs from a 401(k).

A SIMPLE IRA stands for Savings Investment Match Plan for Employees.

One of the key differences of why your employer may offer a SIMPLE IRA versus a 401(k), is that SIMPLE IRAs are geared for employers with less than a 100 employees.

In addition to that, the administrative cost of a SIMPLE IRA for your employer is considerably much less than what a 401(k) would be.

These are the common reasons why you might see an employer offering a SIMPLE IRA versus a 401(k).

Here are the 7 things that you should know about the SIMPLE IRA.

1.  Your Employers Contributions are 100% Vested.

With most 401(k)s you must work for the employer for a certain number of years to be vested.  This means if you were to leave that employer you could take that employer’s matching contribution with you.  But with the 401(k) you have anywhere from three to five years before you’ve satisfied the 401(k) vesting schedule, which is different with SIMPLE IRA.

With the SIMPLE IRA, you are 100% vested whenever the employer deposits that into your account.

This is definitely a huge difference than the 401(k).

2.  Employers Have To Match in a SIMPLE IRA

Each year, the employer is required to make a contribution to your SIMPLE IRA account whether it be in the form of a match or what’s called a non-elected contribution.  Matching contribution states that the employer has to match at least what you match.  So, if you’re matching 3%, the employer has to match 3% as well.  Note that 3% is the most that the employer has to match, which could be considerably different than compared to a 401(k).

The employer does have the option to reduce the matching amount to 1% for two of a five year period.  What that means is that if the employer does do this, that they have to match the full 3% for the remaining three of those five years.  The calculation can be a little tricky, but know that your employer is matching no matter what.

If the employer chooses to not match, they may do a “non-elect contribution”. That means they will contribute 2% of your salary.  Even if you are contributing 3% of your salary, they will only contribute the 2%.

3. Employees Control the Investments

With most 401(k)s, you are limited to the investment options that your employer provides you.  This is considerably different when compared to the SIMPLE IRA.  Being a self employed retirement plan, the SIMPLE IRA gives you the discretion of what exactly you want your money invested into.  If you want to buy individual stocks, mutual funds, ETFs, or CDs, you are allowed.  This is the same feature that a SEP IRA offers.

4. Employees can contribute 100% of income into a SIMPLE IRA.

You are allowed to contribute up to $12,000 (2013 and 2014) per year in a SIMPLE IRA.  If you’re over the age of 50, you’re allowed a catch-up contribution, which is 2,500 (2014).  Please note that the $11,500 is far less than the $16,500 that you are eligible to contribute to a 401k.

Update: Simple IRA contribution limits have increased for 2015.  The amount is now $12,500 per year with the additional catch up of $3,000.

5. SIMPLE IRA’s Do Not Allow Loans

A lot of 401(k)s have loan provisions that allow the employee to borrow against their money if need be.  With SIMPLE IRAs, this is not the case.  Keep that in mind if you’re thinking that this might be a last resort place to draw money out.

6. The SIMPLE IRA Two-year Rule.

This is something that should be definitely noted within the SIMPLE IRA.  Most retirement plans — 401(k)s, regular IRAs, or Roth IRAs, etc. — have the 10% early withdrawal penalty if under the age of 59.5.  But with the SIMPLE IRA, it takes it one step further.

If the SIMPLE IRA that you’ve started is less than two years and you cash it out, instead of the normal 10% penalty, you will be subject to a 25% penalty in addition to ordinary income tax.

Do not overlook this.  Keep in mind that doesn’t apply to just cashing it out.  If you were attempting to rollover your SIMPLE IRA into a rollover IRA, the 25% penalty would apply as well.  Remember to just wait the two years before converting into either a regular IRA or cashing it out.

7. 2015 Contributions Have Increased

Just in case you missed in number 4, the contributions limits have increased for 2015.  The increase in 2014 and 2015 will be from $12,000 to $12,500.   The catch up contribution has increase from $2,500 to $3,000.  That means that for somebody that turns 50 in the year 2015 and has access to a Simple IRA can contribute a total of $15,500.


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Comments | 10 Responses

  1. Dan H says

    My work offers a simple Ira that has a $75 dollar annual fee and a $95 rollover fee but matches 3 percent. I’m 25 and this is my first Ira I’m looking to start. Is it wise to open this account with my job or should I look around for a different simple IRa with a smaller, if any, annual fee? Thankyou.

    • says

      @ Dan

      I would stick with the Simple IRA plan you have. The $75 fee is annoying, but hopefully the free money will make up for it. Most brokerage firms will have some sort of IRA fee although $75 is on the higher side.

  2. says

    Very informative post. This definitely points out a positive to working for a bigger company that offers benefits like a Simple IRA. Working for an entrepreneur can offer flexibility but you miss out on benefits like this. Planning for retirement is hard enough when you have programs like Simple IRAs. Trying to accomplish this on your own can be nearly impossible.

  3. Mari says

    I have about 26k balance on a 401k from my old employer and I would like to rollover the 401k to either an IRA or a Roth IRA. right now my income is low, (I’d say about 18k a year). I have been reading about the differences on the two types of accounts and I am leaning towards the Roth IRA, however, I saw your web video which mentioned that a rollover to an Roth IRA is a taxable income, my question is if I do that now how can I calculate how much tax I have to pay next year, I am on a tight budget right now therefore should I consider opening a simple IRA. Thx

    • says

      @ Mari Your tax bracket is based on how much income you make. If you’re making $18k per year and you decide to convert the entire 401k balance of $26k, you would add that to your income total and that’s what tax bracket you would be in.

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