A SIMPLE IRA is a tax-advantaged investment account commonly used by self-employed individuals and small employers looking for an easy way to save for retirement.

Contributions to a SIMPLE IRA are tax-deductible in the year they are made, and both employers and employees can contribute. The annual employee contribution limit for a SIMPLE IRA is $13,500 for both 2020 and 2021. Employees 50 and older can make an extra $3,000 catch-up contribution if their plan allows it. The contribution is indexed to inflation and could increase in future years.

If your workplace offers a SIMPLE IRA or you're thinking about using one, here are the key things you should know.

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What you need to know about a SIMPLE IRA

SIMPLE IRAs, or savings incentive match plans for employees, are used most often by self-employed workers and employees of small businesses. They let you set money aside for retirement without forcing an employer to set up a more complicated employer-sponsored retirement plan such as a 401(k).

Many brokerage firms offer SIMPLE IRAs. Opening one is easy as long as you meet the requirements, including having fewer than 100 employees. Reporting and administrative responsibilities associated with a SIMPLE IRA are less onerous than establishing a 401(k) plan.

Rather than having special administration procedures, most financial institutions take care of SIMPLE IRA accounts very similarly to how they treat personal IRAs or brokerage accounts. You'll have to fill out some extra forms just to comply with requirements, but that's trivial. Employers only have to make sure that they get money deposited to SIMPLE IRAs correctly.

Types of contributions that can be made to a SIMPLE IRA

There are two types of contributions that can be made to a SIMPLE IRA:

  • Salary reduction contributions: These are contributions employees make out of their pay.
  • Employer contributions: These are made by employers. Employers have a choice of matching a portion of employee contributions or making non-elective contributions, which they must make regardless of how much employees invest. 

SIMPLE IRAs have lower limits than what you'd find with a 401(k) plan or certain other retirement plan options.

What is the SIMPLE IRA contribution limit for 2021?

There are two separate SIMPLE IRA contribution limits.

Employee contribution limit

The maximum SIMPLE IRA employee contribution limit is $13,500 for both 2020 and 2021. Employees who are 50 or older are also eligible to make additional catch-up contributions if their SIMPLE IRA plan permits it. The catch-up contribution limit is $3,000. That means a worker who is 50 or older could contribute a maximum of $16,500 in 2021.

Employees who contribute to any other employer plans with elective salary reductions are also subject to an aggregate limit of $19,500 in 2021. In other words, if you have both a 401(k) and a SIMPLE IRA, you can only contribute a maximum of $19,500 across both accounts. However, if you are 50 or older, catch-up contributions allow you to contribute up to an aggregate limit of $26,000 in 2020 and 2021.

Employer contribution limit

Employers can either:

  • Match their employees' contributions dollar-for-dollar up to a maximum of 3% of each employee's salary without any limit.
  • Make a contribution of 2% of each employee's salary (using only the first of $290,000 of salary in 2021) regardless of whether the employee makes contributions or not. 

Employers who opt for matching contributions are allowed to reduce the match below 3%. However, it must be at least 1%, and they can reduce the match for no more than two out of five years.

How to save more than the SIMPLE IRA contribution limit

There are other tax-advantaged retirement accounts you may be able to contribute to instead of, or in addition to, a SIMPLE IRA. Some of them have higher contribution limits.

The table below shows the maximum you can contribute to each type of retirement account in 2021.

  Simple IRA 401(k) Traditional/Roth IRA SEP IRA


$13,500 $19,500 $6,000 N/A
With catch-up contributions $16,500 $26,000 $7,000 N/A
Employer Matching contributions of up to 3% of any salary or 2% elective contribution on up to $290,000 in income Total limit (including employee and employer contributions) is $58,000 or $64,500 with catch-up contributions N/A  $58,000

If you are contributing to multiple types of retirement accounts, make sure you understand the rules. For example, you are limited in the amount you can contribute to a traditional IRA if you or your spouse is covered by a workplace retirement plan -- including a SIMPLE IRA -- and your income exceeds a certain threshold.

By exploring all of your retirement plan options, you can choose the plan(s) that allow you to save the most while reaping tax benefits that make building your retirement nest egg cheaper and easier.