How does a SIMPLE IRA work?
Last updated August 2026
Short answer
It sits between a SEP and a 401(k): employees can fund it themselves, unlike a SEP, and it costs the employer far less to run than a 401(k).
Who can offer one
Businesses with 100 or fewer employees who earned at least $5,000 in the preceding year.
The employer cannot maintain another qualified plan for the same year, which keeps the arrangement genuinely simple.
Employees are generally eligible if they earned at least $5,000 in any two preceding years and are expected to earn that much again, and the employer may set easier terms.
The 2026 contribution figures
$17,000 in employee deferrals, or $18,100 in certain applicable plans under SECURE 2.0.
Catch-up from age 50 is $4,000, or $3,850 in those certain applicable plans, and $5,250 at ages 60 to 63.
The employer contribution is on top of the employee deferral rather than inside it.
The mandatory employer contribution
Option one is a dollar-for-dollar match on up to 3% of compensation, paid only to employees who defer.
Option two is 2% of compensation for every eligible employee, whether or not they contribute anything.
The employer chooses annually and must notify employees before the election period, so the terms are known before people decide how much to defer.
Try it in Walnut
Walnut connects to your brokerage, including a SIMPLE IRA at a mainstream custodian, and reads what is inside it with the rest of your accounts.
The two-year rule
The clock starts on the date of your first contribution to the plan, not on the plan year.
Within those two years, a withdrawal that is not rolled into another SIMPLE IRA attracts a 25% additional tax instead of the usual 10%.
Rollovers to a 401(k) or a traditional IRA are also restricted during the period, so an employee leaving early has fewer options than they would from any other plan.
Where it fits
For a small employer, it delivers a real retirement benefit without the cost, testing and filing a 401(k) brings.
For employees, the deferral limit is lower than a 401(k) but the employer contribution is guaranteed rather than discretionary.
Businesses that outgrow it, or that want higher limits for owners, usually move to a 401(k), which requires terminating the SIMPLE at a year end.
What happens if the business grows
A SIMPLE IRA is limited to employers with 100 or fewer employees who earned at least $5,000 in the preceding year.
Exceeding that triggers a grace period before the plan has to be replaced, generally with a 401(k).
Switching is not instant: a SIMPLE generally must run for the full calendar year, so the change happens at a year end rather than mid-stream.
Sources
The 2026 deferral and catch-up figures, including the certain applicable plan amounts, are from IRS Notice 2025-67. Plan mechanics, employer contribution options and the two-year rule are in Publication 560. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
How does a SIMPLE IRA work?
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Employees of a business with 100 or fewer employees defer salary into their own IRA, and the employer must contribute as well, either matching up to 3% of pay or giving 2% of pay to everyone eligible. It is cheaper to administer than a 401(k) and the employer contribution is mandatory.
How much can I defer in 2026?
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$17,000, or $18,100 in certain applicable plans under SECURE 2.0. The catch-up from age 50 is $4,000, or $3,850 in those certain applicable plans, and $5,250 at ages 60 to 63.
What must the employer contribute?
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Either a dollar-for-dollar match on up to 3% of compensation for employees who defer, or a non-elective 2% of compensation for every eligible employee whether they defer or not. The choice is made annually and announced in advance.
What is the two-year rule?
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Money withdrawn within two years of your first contribution, and not rolled to another SIMPLE IRA, is subject to a 25% additional tax rather than the usual 10%. It is the harshest early withdrawal penalty in the system.
Can the employer skip a year?
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No. Unlike a SEP, the employer contribution is required every year the plan exists, which is the main reason a business might prefer a different plan when income is unpredictable.
Is money immediately vested?
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Yes. All contributions, employee and employer, are fully vested from the moment they are made, so there is no schedule to work through.
Can I have a SIMPLE IRA and a 401(k)?
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Not from the same employer in the same year. Deferrals across a SIMPLE IRA and an unrelated employer's 401(k) do count toward one overall deferral limit, so the interaction needs checking if you hold two jobs.
Is there a Roth option?
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SECURE 2.0 allows Roth SIMPLE IRA contributions, though provider support has been uneven. Confirm with the custodian rather than assuming the option is live.
What happens if we grow past 100 employees?
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A grace period applies before the plan has to be replaced, generally with a 401(k). The switch happens at a year end rather than mid-stream, since a SIMPLE generally must run for the full calendar year.
Can I roll an old 401(k) into a SIMPLE IRA?
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After the two-year period has passed, yes, a SIMPLE IRA can accept rollovers from other eligible plans. During the first two years the account can only receive transfers from another SIMPLE IRA.