SIMPLE IRA

Also called Savings Incentive Match Plan for Employees

A low-cost retirement plan for small employers where workers defer part of their pay and the employer must match or contribute a set percentage.

What it means

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is designed for businesses with 100 or fewer employees. Workers can defer part of their salary into an IRA, up to a limit the IRS sets each year that is lower than the 401(k) limit. The employer generally must either match employee deferrals dollar for dollar up to 3% of pay or contribute 2% of pay for every eligible employee, whether or not they contribute.

Employer contributions vest immediately. Withdrawals follow traditional IRA rules, with one notable twist: money taken out within the first two years of participation can face a 25% additional tax instead of the usual 10%.

Example

For example, an employee earning $50,000 defers 3% of pay, or $1,500. Under a 3% matching formula, the employer adds another $1,500, for $3,000 in total that year.

How it’s used

Small businesses wanting a simple alternative to a 401(k)
Employees of small firms saving through payroll
Employers wanting predictable plan costs

Strengths and weaknesses

Strengths

Low administrative cost and paperwork
Employer contributions are required and vest immediately
Payroll deferrals make saving automatic

Weaknesses

Lower contribution limit than a 401(k)
Mandatory employer contributions every year
Steeper 25% additional tax on early withdrawals in the first two years
Usually cannot be combined with another plan at the same employer

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.