What Is a SIMPLE IRA? | The Motley Fool

How SIMPLE IRA Plans Work in 2025

Key Points

SIMPLE IRA provides lower cost retirement savings for small businesses, simpler than 401(k) plans.
Contributions include elective deferrals by employees and matching or non-matching by employers.
Eligible employees can contribute up to $16,500 in 2025 for most plans, with higher limits for older workers.

A SIMPLE IRA is a retirement savings plan for employers with 100 or fewer employees. While SIMPLE IRAs are, as the name implies, pretty simple, the name is actually an acronym for Savings Incentive Match PLan for Employees. Offering one can be a cost-effective way for small business owners to give their employees a retirement savings plan without the expenses or potential limitations of a 401(k).

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A couple counts out the coins from their retirement jar. — Image source: Getty Images.

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Pros and cons of a SIMPLE IRA

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Pros	Cons
Lower costs to establish and operate compared to a 401(k) plan.	Both the employee elective salary deferral and the maximum employer matching contribution percentage are lower than in a 401(k) plan.
SIMPLE IRA accounts usually let owners buy and sell any security or financial instrument they choose, with just a few limitations on risky stock options trades.	Inflexible contributions: Most employers must contribute a flat 2% up to a salary cap or provide a 3% match with no salary cap, though those with 26-100 employees can contribute a flat 3% or a 4% match.
Employer contributions vest immediately.	Extra penalty for rollovers and withdrawals within two years of establishing the account.

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How to establish a SIMPLE IRA

Employers can adopt a SIMPLE IRA plan by adopting one of the IRS’ model plans or by simply using the prototype plan available at their brokerage of choice. Then the employer must provide all eligible employees with plan details and let them know where contributions will be deposited. Finally, the employer sets up a SIMPLE IRA for each employee and fills out form 5305-S or 5305-SA, depending on whether the account is set up as a trust or custodial account. Most online brokerages will handle those details.

The deadline for establishing a SIMPLE IRA is Oct. 1 for the current tax year. If you’re a new employer established after Oct. 1, you can still set up a SIMPLE IRA “as soon as administratively feasible,” according to IRS rules.

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