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Account & Regulation

SIMPLE IRA

A retirement plan for small businesses with 100 or fewer employees. Lower contribution limits than a 401(k) but much simpler to run, with mandatory employer contributions.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan built for small businesses with 100 or fewer employees. It gives business owners an easy path to offer a retirement benefit without the complexity or cost of a full 401(k).

Key features

  • Employee contributions: workers defer pre-tax salary, up to an annual limit set by the IRS (between the IRA limit and the 401(k) limit)
  • Mandatory employer contribution: either a 3% match on employees who contribute, or a 2% non-elective contribution for all eligible employees
  • Tax-deferred growth: investments grow without annual tax
  • Simpler than 401(k): no annual non-discrimination testing, no Form 5500 filing, lower administrative cost
  • Early withdrawal penalty: 25% (higher than most plans) in the first two years of participation, 10% after
  • Cannot combine with another retirement plan: the business must pick SIMPLE IRA or 401(k), not both

When it makes sense

For a business owner who wants a basic retirement benefit for employees without hiring a plan administrator, the SIMPLE IRA is the quickest path. Once the business grows past 100 employees or wants higher contribution limits, moving to a full 401(k) becomes the next step.

Related Terms

401(k)

An employer-sponsored retirement plan where employees defer part of their salary into tax-advantaged investments. Contributions are pre-tax, growth is tax-deferred, and many employers offer a matching contribution.

403(b)

A retirement plan for employees of public schools, universities, churches, and certain nonprofits. Similar to a 401(k) in structure and contribution limits, with investments typically in annuities or mutual funds.

457(b)

A deferred compensation plan for state and local government employees and some nonprofits. Separate contribution limit from 401(k) and 403(b), and no early withdrawal penalty at separation of service.

HSA

A Health Savings Account: a triple-tax-advantaged account for medical expenses. Contributions are deductible, growth is tax-free, and qualified medical withdrawals are tax-free. Often used as a stealth retirement account.

Roth 401(k)

A 401(k) variant funded with after-tax dollars. Investments grow tax-free and qualified withdrawals in retirement are tax-free, combining the high contribution limits of a 401(k) with the Roth tax treatment.

Roth IRA

A retirement account funded with after-tax dollars. Investments grow tax-free, and qualified withdrawals in retirement are completely tax-free, including all earnings.