As a business owner wanting to save for retirement, there are many retirement plans to choose from. Each has its pros and cons, depending on whether or not you have employees, how much you can stock away each year, and how easy you want the administration of the plan to be.
As you consider the top retirement planning tips for business owners, you’ll see that some of the most common retirement plans for business owners include: 401(k) plans (traditional and solo), SEP IRAs, SIMPLE IRAs, and Defined Benefit Plans (like a Cash Balance Plan).
Today, we dive deeper into a SIMPLE IRA and help you understand how it works, when to use (or not use) one, and provide the SIMPLE IRA contribution limits for 2025 so you know how much you can put away for retirement each year.
What Is a SIMPLE IRA?
A SIMPLE IRA (short for Savings Incentive Match Plan for Employees) is a retirement plan for companies with 100 or fewer employees. As a business owner, you can contribute towards your own retirement account, but you must also contribute on behalf of your employees.
The main benefit of a SIMPLE IRA vs other retirement plans for business owners is that it’s easier to set up and administer. SIMPLE IRAs are less complex and less expensive than 401(k) plans, making them an attractive option for small businesses that want to offer retirement benefits without the burdens of nondiscrimination testing and Form 5500 filings.
Because the paperwork lives on a one‑page IRS form, many owners view the SIMPLE IRA as a “set‑and‑run” solution. A SIMPLE IRA is often the first step up from a Traditional or Roth IRA when businesses hire their first employee.
A SIMPLE IRA allows you to get the tax advantages of many of the other retirement plan types. Your contributions (both for yourself and your employees) are tax-deductible, lowering your business’s taxable income. Plus, employees’ salary deferrals go in pre-tax, reducing their current taxable income.
How Does a SIMPLE IRA Work?
The SIMPLE IRA works like a blend between a traditional IRA and a small-scale 401(k) in that it allows for both employer and employee contributions to help build retirement savings.
But unlike a 401(k), where employer contributions are often optional, SIMPLE IRAs require you to either match employee contributions up to 3% of compensation or make a 2% nonelective contribution for all eligible employees, even if they don’t contribute.
Here a few other important notes about how a SIMPLE IRA works:
- Vesting: All contributions (yours and your employees’) are immediately 100% vested which means that employees own the money right away.
- Investments: Each participant has their own SIMPLE IRA account, where they can invest the funds in mutual funds, stocks, bonds, or other investment options offered by the plan provider.
- Withdrawals: Since contributions are pre-tax, withdrawals are taxed as ordinary income in retirement. If funds are withdrawn before age 59½, participants may face a 25% penalty if taken within the first two years of participation, or a 10% penalty after two years — plus taxes.
In order to be eligible for a SIMPLE IRA in the first place, your business must have 100 or fewer employees who earned at least $5,000 in compensation during the previous year. If your business has 100 or more employees, you may want to consider other options such as a 401(k) or a defined benefit plan.
SIMPLE IRA Example
We know that the 3% match or 2% nonelective contribution options can get confusing sometimes, so here are a couple of examples of how each one works.
SIMPLE IRA Example 1: 3% Match Option
Let’s say you have an employee, Sarah, who earns $50,000 per year.
- Sarah decides to contribute 5% of her salary = $2,500 for the year.
- As the employer, you are required to match up to 3% of her compensation:
→ $50,000 × 3% = $1,500 employer match. - Even though Sarah contributed $2,500, you only need to match up to the 3% cap, not the full amount she defers.
If another employee, John, also earns $50,000 but chooses not to contribute anything, you do not have to make any employer match for him.
SIMPLE IRA Example 2: 2% Nonelective Contribution Option
Now, let’s say you choose the nonelective option instead.
- For all eligible employees, you must contribute 2% of compensation, even if they contribute nothing.
- Sarah earns $50,000 → $50,000 × 2% = $1,000 employer contribution.
- John, who earns $50,000 and doesn’t contribute → $1,000 employer contribution (even though he puts in $0).
So it ultimately comes down to whether you want to only contribute for employees who participate or contribute for all eligible employees, no matter what.
SIMPLE IRA Contribution Limits 2025
When it comes to SIMPLE IRA contributions, employees can defer up to $16,500 of their salary in 2025. If they are 50 or older, they can do a $3,500 catch-up on top of that. And employees who are ages 60, 61, 62, and 63 in 2025 can make a “super catch-up” contribution of $5,250 (for a total of up to $21,750). These limits are slightly lower than the 401(k) contribution limits for 2025.
Don’t forget that the IRS adjusts the contribution limits each year for inflation. Here’s a summary of the numbers above to keep handy.
SIMPLE IRA Max Contributions 2025 Overview
| Limit Type | 2025 Amount |
| Employee salary‑deferral | $16,500 |
| Age‑50 catch‑up | + $3,500 (total $20,000) |
| Age 60‑63 “super” catch‑up (SECURE 2.0) | + $5,250 (total $21,750) |
| Employer match | Up to 3 % of pay |
| Employer nonelective | 2 % of pay (max comp $350,000) |
Note that employee deferrals must reach each participant’s SIMPLE IRA within 30 days after the month withheld. You may deposit the employer match or nonelective contribution as late as your company’s tax‑filing deadline, extensions included.
Who Can Benefit Most from a SIMPLE IRA?
First, understand that when you open a SIMPLE IRA, you’re basically making a trade-off to a more modest, predictable employer contribution in order to gain more simplicity versus setting up an entire 401(k) plan. That trade-off often appeals to three broad camps of business owners:
- Solo founders who want to keep things simple (pun intended). When you wear every hat in the company, extra filings feel like kryptonite. A SIMPLE IRA hinges on Form 5304‑SIMPLE or 5305‑SIMPLE—signed, filed nowhere, and usually produced by your custodian’s online wizard.
- Tight‑knit teams under 100 people. A 401(k) boosts morale, but annual testing and audit fees can eat away at margins. Because the SIMPLE match is deemed “safe harbor,” you avoid those extras while still offering real employee value.
- Businesses with lumpy cash flow. If you want to lock in a predictable cost, you can choose the 2% nonelective contribution, or do the 3% match if you’re ok with flexible funding depending on each payroll period. Either route can be more flexible than the SEP IRA’s employer‑only contribution of up to 25 % of pay, which can feel onerous when revenue dips.
Let’s take a look at the comparisons between the most common retirement plan types to see if any of the other ones could be a better fit for your business.
SIMPLE IRA vs. SEP IRA, Solo 401(k), and Traditional 401(k)
So which of the most common retirement plan types might be best on your business’ stage of growth? Here’s a comparison:
| Feature | SIMPLE IRA | SEP IRA | Solo 401(k) | Traditional 401(k) |
| Who can start | ≤ 100 employees | Any size | Owner + spouse | Any size |
| Employee salary deferrals | Yes | No | Yes | Yes |
| Employer funding | 3 % match or 2 % flat | Up to 25 % of pay | Profit‑share + deferral | Flexible match |
| 2025 employee limit | $16,500 | N/A | $23,500 | $23,500 |
| Loans allowed | No | No | Yes | Yes |
| Admin complexity | Low | Low | Medium | High |
If you aim to attract high‑earning talent, need loan provisions, or want profit‑sharing flexibility, the 401(k) family may serve you better. But if you prioritize time, clarity, and a reliable tax deduction, the SIMPLE IRA delivers maximum ROI per minute spent.
How to Launch a SIMPLE IRA in Five Steps
Before you start mapping out how to implement a SIMPLE IRA in your business, it helps to understand some of the timing guidelines. Most business owners start new SIMPLE IRAs on January 1 so each employee’s 60‑day election window lines up neatly with open enrollment.
Also, be sure to pick your funding formula with care—you can switch each year, but only after advance notice. Ok, now on to how you can set up a SIMPLE IRA for your business:
- Choose a provider. Compare investment menus, custodial fees, and payroll integration. Most financial advisors, major brokerages, and local banks all host SIMPLE plans.
- Complete the plan agreement. You choose one of these forms to establish the plan:
- 5304-SIMPLE if employees can choose their own financial institution for their SIMPLE IRA accounts.
- 5305-SIMPLE if you, as the employer, will designate a single financial institution to hold all employee accounts.
- These forms serve as the official plan document and don’t get filed with the IRS — you just keep them on file.
- Notify employees. Give eligibility rules, the chosen employer formula, and salary‑deferral forms at least 60 days before January 1 (or the plan’s start date).
- Open individual SIMPLE IRA accounts. Each eligible worker fills out an application to create their individual SIMPLE IRA account.
- Fund on schedule. Route employee deferrals within 30 days; deposit employer money by your business tax deadline.
You’ll need to keep good payroll and contribution records showing how much was withheld from employee paychecks and how much you contributed as the employer. While there’s no IRS filing requirement like a Form 5500 (used for 401(k)s), you should retain these internal records for audits or employee inquiries.
At year’s end, the financial institution typically handles sending Form 5498 to the IRS and employees, showing contributions to each SIMPLE IRA.
Can You Combine a SIMPLE IRA With Other Retirement Accounts?
If you have a SIMPLE IRA, you might wonder what other retirement accounts you can contribute to in order to boost your retirement planning outcomes. Let’s take a look.
1) Can you contribute to a traditional or Roth IRA along with a SIMPLE IRA?
Yes! Even if you’re contributing to a SIMPLE IRA, you can still contribute to a traditional IRA or Roth IRA — but income limits apply for deductibility or Roth eligibility.
For 2025, the traditional IRA or Roth IRA contribution limit is $7,000 (or $8,000 if age 50+). Roth IRA eligibility phases out at certain income levels (e.g., for single filers you can contribute fully if your income is under $150,000 or $236,000 for married filers in 2025).
Note that traditional IRA deductions may be reduced if you (or your spouse) are covered by a workplace plan like a SIMPLE IRA.
2) Can you contribute to a 401(k) at the same time?
Not usually through the same employer. If your employer offers a SIMPLE IRA, they generally cannot also offer a 401(k) or another qualified retirement plan at the same time.
However, if you work two jobs and one offers a SIMPLE IRA and the other offers a 401(k), you could technically contribute to both — but you’d need to watch your combined elective deferral limits across all jobs.
3) Can you make after-tax or SEP contributions as the employer?
You cannot combine a SIMPLE IRA with a SEP or profit-sharing plan at the same time for the same employees.
Final Thoughts and Your Next Steps
A SIMPLE IRA is exactly what its name promises: simple. It allows you to contribute money towards your retirement savings, trims the red tape, delivers real tax savings, and shows employees that you care about their long‑term security.
Yet no plan lives in a vacuum. As your business scales, your hiring goals, cash flow, and personal savings targets will evolve. A 401(k) or cash‑balance pension may replace your SIMPLE IRA down the road.Want help opening a SIMPLE IRA account for your business? Or want to discuss other alternatives to help you save for retirement? Schedule a call with one of our financial advisors in Tampa for complimentary one-on-one guidance.
Disclosure :
Jaffe Tilchin Investment Partners is a Registered Investment Advisor. Certain representatives of Jaffe Tilchin Investment Partners are also Registered Representatives offering securities through APW Capital, Inc., Member FINRA/SIPC. 100 Enterprise Drive, Suite 504, Rockaway, NJ 07866 (800)637-3211 Check the background of this firm on FINRA’s BrokerCheck
