SIMPLE IRA and How It Works

Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) is a type of traditional IRA available for small businesses with 100 or fewer employees. As the name suggests, it’s an easy-to-manage retirement plan that lets you save tax-deferred money.

You won’t have to pay taxes as your investment grows, but you will be taxed with regular rates upon withdrawal. Just like any other retirement savings plan, there will be certain limitations to your SIMPLE IRA. For instance, starting 2022, employees’ contributions are not allowed to exceed $14,000. If you're 50 or older, however, you can make catch up contributions. This means; you can put more money in your account (up to $3,000)

For employees to qualify, their earnings must be at least $5,000 within 2 years (non-consecutive) and are expected to receive as much during the calendar year. On the other hand, employers are required to make contributions each year through either:

  • A matching contribution of up to 3% of your employees compensation
  • A 2% non-elective contribution in your employees account.

If employers opt for the latter, they will be contributing to all employees, regardless of the amount they save.

A SIMPLE IRA appeals to small businesses because it entails minimal paperwork and lower management cost. However, they have to follow specific standards of the IRS. Whether this is the best option for you or your employees’ retirement depends on the type of business you run.

In this post, I’ll walk you through the benefits and drawbacks of a SIMPLE IRA, how you can invest, as well as its tax implications.

The Benefits and Drawbacks of a SIMPLE IRA

SIMPLE IRA comes with benefits and drawbacks.
Here’s what you should keep in mind before setting up these plans: 

Benefits of Starting a SIMPLE IRA

Easy set-up

You can open a SIMPLE IRA account without much hassle. You’ll only have to fill out minimal paperwork and you won’t even have to pay an expensive upfront cost.

Tax savings

Contributions to a simple IRA are made with pre-tax dollars. This can help reduce your taxable income for the year and can save you money on your taxes.

Retirement savings

Since you invested on a tax deferred basis, you won’t have to pay taxes on investment growth, but only upon withdrawals made in retirement.

Tax credit

Employers who set up SIMPLE IRA can get a 50% tax credit on start-up costs for a maximum of $500 per year for the next three years. This is in addition to the tax advantage you receive on the contributions made to your employees’ retirement plan. 

Immediate vesting

Employees can immediately receive money deposited by the employer. This aspect is unique to SIMPLE IRA, and may not be present with other employer-sponsored IRAs.

Drawbacks of Starting a SIMPLE IRA 

Lower contribution and catch-up limits

As mentioned, the contribution for SIMPLE IRA max out at $14,000 for 2022. Once you are 50 or over you can make catch-up contributions, but only up to $3,000. Both are lower as compared to the contribution limits of SEP and a regular 401 (k) plan.

No Roth option

Unfortunately, there is no option for SIMPLE IRA that would allow you to enjoy tax-free growth and withdrawals. But if this is what you want to go for, a Roth 401k can be a good alternative.

High withdrawal penalties

Taking your money out from a SIMPLE IRA within two years of opening it, will incur a whopping 25% penalty. So, if you ever decide to invest, be sure you want to keep your money in there for a long, long time. The same rule applies if you rollover into other IRAs within the first two years.

How to Invest in Precious Metals IRAs?

Setting up a Precious Metals IRA can be a bit more challenging than Traditional IRAs. Well, you shouldn’t need to worry because we’ve listed what you would need to do:

1.  Mutual Funds

Your contributions can be pooled into a mutual fund to invest in the collection of stocks, bonds or other money market instruments. This option can be relatively safe, but it may give lower returns than the other investment alternatives.

2. Individual Stocks

Buying individual stocks can be risky, but it also offers the potential of getting higher returns.

3. Exchange-Traded Funds (ETFs)

ETFs are a type of mutual fund that trade like stocks on an exchange. They offer the diversification of a mutual fund, but with the added benefits and features of stocks.

4. Bonds

A low risk, low return type of investment that pays periodic interest payments to investors. You can earn a fixed-income from investments as these pay a steady rate of return. 

In a SIMPLE IRA, employees make their own investment decisions and the employer’s job is to provide each qualified employee an annual statement indicating the amount of contributions they made for the year. 

There is no minimum investment requirement for employees to start a SIMPLE IRA, although you should note – some fund families offering mutual funds may require so.

What are the Tax Implications of a Simple IRA Investment

With SIMPLE IRA, you can invest with pre-tax dollars, and grow your investments tax-deferred until they're withdrawn in retirement. 

Employees who participate will have their contributions deducted directly from their paycheck. Employers can contribute to their employees’ accounts in two ways: They may choose to match with employees contributions up to 3% of their compensation, or make a 2% non-elective contribution. 

If they choose the former, the contribution limit in 2022 is $14,000 for those under 50, and a catch-up contribution of up to $3,000 dollars may apply if the employee is beyond 50 years of age. With this option, they can also elect to contribute less than 3%, provided it must be at least 1% for no more than 2 years out of any given 5-year period

On the other hand, the non-elective option will be based on a maximum of compensation of $305,000 in 2022, which means the contribution to an employee's account should be no more than $6,100. 

Although these contributions will not be subjected to federal income tax, salary reductions like medicare, social security, and federal unemployment taxes still apply. 

How to Invest in Your Retirement with a SIMPLE IRA

Setting up a SIMPLE IRA isn’t very complicated, so you can get your account up and running in no time. Here’s what you have to do:

1. Choose a financial institution.

First, you would need to find a reputable financial institution, a brokerage firm or a bank, to serve as a trustee. They will be the ones to collect and invest the contributions from employers and employees. Your employers can also make you decide which financial institution you would want to invest your money on.

2. Select the type of plan you want.

If your employer wants to create a SIMPLE IRA through a financial institution of their choice, you’ll be required to complete IRS Form 5305. But if they let you decide which financial institution you want to invest in, you’ll fill out IRS Form 5304 instead. Employers can choose to either cover all their employees without any restrictions, or to limit the employees covered based on their pre-existing compensation and expected earnings for the year.

3. Complete the account set up

The last step would be to set up the retirement plan. In general, you or your employer can open an account on any date between January 1st and October 1st as long as you did not previously maintain a SIMPLE IRA plan.  By following these 3 simple steps, you can make the most of your account and secure a comfortable retirement.


Setting up a Precious Metals IRA can be a bit more challenging than Traditional IRAs. Well, you shouldn’t need to worry because we’ve listed what you would need to do:

What is a SIMPLE IRA?

A SIMPLE IRA is an employer-sponsored plan that allows employees to save on a pre-tax basis. Contributions to a SIMPLE IRA will grow tax deferred, and taxes will only apply upon withdrawal of funds.

Who is eligible to open a SIMPLE IRA?

A small business with no more than 100 employees that earn $5,000 or more during the preceding calendar year can open a SIMPLE IRA for their workers. For the 100 employee requirement, they must take into account all employees, regardless if they participate or not.

How much can I contribute to a SIMPLE IRA?

The maximum contribution to a SIMPLE IRA is 3% of employees’ salaries if your employer chooses to match contributions, or a fixed 2% if they opt for the non-elective plan. For employees, they can only contribute a maximum of $14,000 with potential for catch-up fees of up to $3,000 if they’re 50 or older.

What investment options are available in a SIMPLE IRA?

Investment choices vary from provider to provider, but you can typically invest in mutual funds, stocks, bonds, and exchange-traded funds (ETFs). You can also roll over your contributions and earnings from one SIMPLE IRA to another tax-free. Note though, if the rollover is with a different IRA, you can only do so after 2 years of participation.

Can I withdraw money from my SIMPLE IRA before retirement?

Yes, you can withdraw money from your SIMPLE IRA at any time, although early withdrawals may be subject to certain penalties. If you take out money before age 59-1/2, you will have to pay a 10% additional tax. However, if it occurred within the first 2 years of participation, the penalty will be increased to 25%.

How is a SIMPLE IRA taxed?

Contributions to a SIMPLE IRA are made pre-tax. This can lower your overall tax bill and help you save for retirement at the same time. Earnings on contributions grow tax-free, and you will only be taxed as regular income upon withdrawal of funds in retirement.

What are the benefits of a SIMPLE IRA?

A SIMPLE IRA can be a great way to save for retirement, thanks to its tax advantages and flexible withdrawal rules. Plus, there is no minimum balance requirement, making it a great option for smaller accounts.

What are the drawbacks of a SIMPLE IRA?

The main drawback of a SIMPLE IRA is that you are limited in how much you can contribute each year. Additionally, early withdrawals are subject to steep penalties.

How does a SIMPLE IRA compare to other retirement savings options?

A SIMPLE IRA is similar to a SEP IRA in many ways. Both allow you to make pre-tax contributions, grow earnings tax-free, and take distributions on retirement. However, a SEP IRA has a higher annual contribution limit, and penalties for early withdrawal are less steeper. It also offers the same tax deferred advantage, but only employers are allowed to make contributions.  

In comparison to a 401(k) plan, which can be offered by almost any employer, a SIMPLE IRA is specially designed for small businesses with no more than 100 employees. 

In general, although SIMPLE IRA can be less demanding in paperworks and management costs, it entails lower contribution limits and higher penalties as compared to other employer-sponsored retirement plans.


If you want to have an easy-to-manage retirement plan with minimal paperwork and lower upfront cost, a SIMPLE IRA can be a great option. However, just like any other IRAs, it  has to follow specific IRS standards and comes with its own limitations and penalties. 

Remember to check with your financial adviser first before setting up your account and choosing investments. If you have more questions, we’re here to help!

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