For small business owners and employees seeking an easy way to save for retirement, the Simple IRA is one of the most efficient and affordable choices available. While it is designed to be simple, details like eligibility, contribution limits, rollover rules, and employer requirements can sometimes be confusing. This guide explains the Simple IRA with real-world examples, case studies, and clear explanations to help both employers and employees understand the plan and use it effectively.
A Simple IRA, or the “Savings Incentive Match Plan for Employees Individual Retirement Account” (quite a mouthful), is a retirement plan aimed at small businesses with 100 or fewer employees. It is easier and cheaper to manage than a 401(k), yet it still offers valuable tax benefits.
What are the key characteristics of a Simple IRA, you ask? They are:
Let’s look at a case study to understand what is possible with Simple IRAs in action.
Case Study: BrightStar Physical Therapy, a health clinic with 12 employees, wanted to offer retirement benefits to its team members without the high administrative costs of a 401(k). By offering a Simple IRA, they gave employees a tax-advantaged way to save for retirement while keeping their internal processes easy to manage. The health clinic chose a 3% matching option, and within six months, most employees participated. This retirement option helped the health clinic to boost overall employee retention and satisfaction while reducing the overall turnover rate.
Understanding Simple IRA contribution limits helps both employees and employers plan effectively. These limits are higher than standard IRA limits and change periodically due to inflation.
Employees can contribute for the tax year 2025 (note that these limits have increased by $500 in tax year 2026):
Note that all contributions are made before taxes are withheld, which lowers overall taxable income.
Employers must choose one of two options for contribution requirements:
Comparing a Simple IRA to other plans can help businesses decide if it is the best choice. Let’s compare some of the options.
Simple IRA vs. 401(k)
A Simple IRA has:
A 401(k) offers higher contribution limits and more plan flexibility, but it requires much more administrative work and costs.
Simple IRA vs. SEP IRA
A Simple IRA allows both employers and employees to contribute. Alternatively, a SEP IRA (“Simple Employee Pension”) only allows employer contributions. Also, Simple IRAs require annual employer contributions, while SEP IRA contributions are optional and can change each year based on profits.
Here are some practical tips and considerations for employers considering Simple IRAs for their employees.
Businesses with changing staffing levels may benefit from the 2% non-elective contribution. Those looking to encourage employee participation, though often prefer the 3% match option.
Many employees do not fully understand pre-tax benefits or the value of employer contributions. Annual training or short informational sessions can greatly increase participation and appreciation for the benefit.
Late contribution deposits can cause compliance problems. Automating payroll deductions helps maintain clean and accurate deposit timelines.
Investment options, customer service, and administrative support can differ among retirement providers. Conduct an annual review to make sure the plan meets the needs of the business and its employees.
Now let’s take a look at some common mistakes that employees tend to make when managing their Simple IRA contributions.
Mistake 1: Not using catch-up contributions.
Employees age 50 and older often forget they can add an extra $4,000 during tax year 2025 (remember the increase by $500 in tax year 2026).
Mistake 2: Triggering the 25% early withdrawal penalty.
The two-year rule is one of the most overlooked aspects of the Simple IRA. This can lead to costly mistakes, which can negatively impact your overall retirement portfolio.
Mistake 3: Overlooking periodic review of investment.
Employees should periodically monitor their asset allocation and adjust it according to their retirement goals and risk tolerance.
Mistake 4: Missing Out on the Employer Match.
Not contributing enough to get the full employer match is like passing up free money.
Yes, they can contribute both as an employer and as an employee.
Yes, but income limits might affect your eligibility for a Roth IRA.
Yes, but the transition must start on January 1, and employees need to be notified properly.
In most cases, yes. However, employers may set limits on how often you can change your contributions.
The Simple IRA provides a clear, cost-effective way for small businesses to offer retirement benefits to their employees. By understanding what a Simple IRA is, the contribution limits, and overall rules, business owners and employees can make informed choices that support their long-term financial health and needs. Whether you are a small business looking into retirement benefits or an employee wanting to increase your savings, the Simple IRA offers flexibility, tax benefits, and can be easy to use. This makes it a solid foundation for retirement planning and contributes to the overall financial well-being of your employees.
Looking for more financial information, useful recommendations, and tips concerning your financial well-being? Contact Preferred Trust Company today for a free consultation to help maximize your retirement options and meet your financial investment needs.