Introduction to SIMPLE IRAs

Introduction to SIMPLE IRAs

A SIMPLE IRA is a retirement plan for small businesses with up to 100 employees. Two account types—employer and participant—work together to form a SIMPLE IRA.

With this plan, eligible employees can fund their own accounts through regular salary deferrals, and employers can supplement employee accounts with annual contributions.

Key information related to SIMPLE IRAs:

Employer eligibility

Employers are eligible to establish a SIMPLE IRA plan, if they meet the following requirements:

  • They are self-employed or own a business with 100 or fewer employees
  • It is the only retirement plan they fund
Participant eligibility

Employers must include all employees who:

  • Are age 21 or over
  • Earned at least $5,000 in any two years before establishing the plan
  • Are expected to earn at least $5,000 in the current year

Employers can choose less restrictive eligibility requirements, but their requirements may not be more restrictive. Employers also can exclude collective bargaining unit employees, non-resident aliens, acquired employees, and employees earning less than the defined compensation threshold.

Key account features

SIMPLE IRA features include:

  • Low-cost plan
  • Funded mainly by employees
  • Employer-matched contributions of up to 3% of annual compensation
  • Business expense deductions for employee contributions
  • Tax-deferred earnings
  • Easy administration with no tax filing
  • Access to retirement planning tools and resources
Pricing
  • Minimum opening deposit: $0
  • $0 account open or maintenance fees
Deadlines
  • Employers must establish new plans by October 1 to begin funding for the current
    year.
  • Plans established after October 1 can begin funding the following January
    1 for the next year.
  • Employers must contribute to the plan annually by their
    tax-filing deadline, including extensions.
Employer contributions

Employer contributions are required annually. Employers can choose from two different methods:

  • Employer Matching Contributions—The employer is generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation. This requirement does not apply if the employer makes non-elective contributions. However, an employer may choose to make a matching contribution less than 3%, but it must be at least 1% and for no more than 2 out of 5 years. The employer must notify the employees of the lower match within a reasonable period before the 60-day election period. 
  • Non-elective Contribution Method—Instead of matching contributions, an employer can choose to make non-elective contributions of 2% of each eligible employee’s compensation. If an employer makes this choice, it must make non-elective contributions whether or not the employee chooses to make Salary Reduction Contributions. Contribution limits apply.

    Note: It is the business owner/plan administrator's responsibility to ensure the business has the earned income to make contributions and prove the source of funds if audited by the IRS. Schwab, as the custodian of the account, is not responsible to monitor source of funds.
Employee contributionsEligible employees can defer salary, up to 100% of compensation to an annual maximum contribution limit. Eligible employees can also receive an employer match.
Tax ramificationsEmployer contributions are tax deductible and participants do not pay taxes on assets until they are distributed. See Introduction to tax reporting for more information.

For information about withdrawal penalties, distribution requirements, and more, refer to the following table:

Available features
Rollovers

Participants must wait two years from the initial contribution date before rolling over a SIMPLE IRA. Rollover guidelines include:

Rollover to:Rules
  • Traditional IRA
  • SEP-IRA
60-day rollovers are allowed only once per 12 consecutive months per taxpayer, regardless of the number of IRAs owned. This limit applies to all individual IRAs—including traditional, ROTH, SEP, and SIMPLE—and treats them as one IRA for the purpose of the rollover limit. Direct rollovers and direct conversions are excluded from the limit.
  • Another SIMPLE IRA
  • QRP
  • Individual 401(k)
Receiving plans may accept or reject the rollover.
ConversionsSIMPLE IRAs can be converted directly to a Roth IRA two years after the initial contribution date. The two-year holding requirement applies to account holders of all ages.
Distributions

Normal and early distributions:

While SIMPLE IRA contributions are meant for retirement, participants may withdraw funds at any time. The distributed amount will be subject to ordinary income tax and, if under age 59 1/2, it may be subject to a 10% federal tax penalty (which increases to 25% if the withdrawal occurs within two years from the date an employee began participating in the plan). State tax penalties may also apply.

Hardship withdrawals:
Because you can withdraw funds at any time, there is no need to show a hardship to take a distribution.

Required minimum distributions (RMDs):

  • Participants must begin taking RMDs annually, beginning the year in which the participant reaches the federal RMD age.
  • Participants who do not fulfill the annual distribution requirement, risk being assessed a 50% IRS penalty on the undistributed amount. If the distribution is corrected in a timely manner (within two years), the excise tax on the failure is further reduced to 10%.
    • The SECURE Act raised the federal RMD age from 72 to 73 at which individuals must begin taking RMDs from their retirement accounts.
    • Important: The new law only applies to individuals who turn 73, after December 31, 2022. If an individual turned 72, in 2022, this new law does not apply. That individual must take an RMD in 2022, 2023, and beyond.
Withdrawal penalties

The IRS will impose a 10% penalty on withdrawals before age 59 1/2 without an applicable penalty exception. The penalty increases to 25% if taken within the first two years. Penalty exceptions include:

  • Substantially equal periodic payments in the form of annuity
  • Qualifying higher education expenses
  • Up to $10,000 toward qualified first-time home purchases
  • Withdrawals due to disability or death
  • Non-reimbursed medical expenses exceeding 10% of adjusted gross income
  • Qualified reservist distributions
  • A qualified birth or adoption distribution 

Schwab does not determine if a distribution qualifies for an exception. Clients should consult with a tax advisor.

BeneficiariesClients can designate beneficiaries when opening the plan. They should update their beneficiary designations after significant life events such as marriage, divorce, or the birth or legal adoption of a child.
Comparison chartSmall Business Retirement Plans: Review this side-by-side comparison of the different business retirement plans offered by Schwab.

Why do contributions for SIMPLE IRAs have to be reported on Form 5498 for the year they are made?
The IRS requires that Schwab report contributions to SIMPLE IRAs in the year that the funds are deposited to the account. However, your clients may still report contributions to claim a tax deduction based on the tax year for which the contribution was made.

Are SIMPLE IRAs governed by ERISA?
There is limited applicability to ERISA, with SIMPLE IRAs having multiple exceptions.

Can my client put an IRA rollover into a SIMPLE IRA?
Yes, the IRS now allows traditional, qualified plan, and other SIMPLE IRA assets to be rolled over as long as the SIMPLE IRA has met the two-year establishment requirement. Inherited and Roth assets cannot be rolled into a SIMPLE.

How does Schwab know how to allocate SIMPLE IRA contributions?
With each contribution check, clients must submit a SIMPLE IRA Contribution Transmittal Form. This form advises Schwab how to allocate the money into SIMPLE IRA employee accounts and whether the funds represent an employer contribution or salary deferral.

The following are available to assist you:

How to open a SIMPLE IRA
How to roll over assets to a Schwab account
Introduction to cash options and investments
Introduction to custodial IRAs
Introduction to required minimum distributions (RMDs)
Introduction to Retirement Plan Solutions
Introduction to inherited IRAs
Introduction to Roth IRAs
Introduction to SEP-IRAs
Introduction to traditional IRAs

Participants should consult with their tax advisor if they have any questions about tax implications.

Find forms, guidelines, and other tax information at irs.gov.

To select a form from the Schwab Advisor Center, go to the Forms library

For more information, see:

Resource: Schwab IRA and ESA Account Agreement
Resource: Schwab Retirement Plan Brokerage Account Agreement
Resource: Account Agreement Amendments 
Resource: Charles Schwab Pricing Guide
Resource: Cash Features Disclosure Statement