What is a SIMPLE IRA?

SIMPLE IRAs are like safe-harbor 401(k)s for small businesses. A SIMPLE IRA is a type of retirement plan for small businesses. A business can only start a SIMPLE IRA if they have fewer than 100 employees who earned $5,000 or more in compensation for the year.

As the name implies, a SIMPLE IRA provides an easier method for making contributions to both employees’ and the employers’ retirement accounts. Employees may choose to make salary reduction contributions to their SIMPLE IRA while employers are required to make either matching or non-elective contributions.

The employer contributions are required for the plan to have it’s safe harbor status, which makes it a very inexpensive and low-maintenance plan because it does not require auditing or top-heavy testing. Contributions are directly deposited into the employees’ and employers’ SIMPLE IRAs and the contributions grow tax-deferred.

Contributions which the employer makes to employees’ accounts are tax-deductible for the business. The employee’s contributions are made on a pretax basis, and all withdrawals from the account in retirement are taxed as income, following the rules for Traditional IRAs.