The SIMPLE IRA Matching Rules for Employers and Employees

SIMPLE IRA Highlights

As mentioned, the SIMPLE IRA is designed specifically for small businesses with 100 or fewer employees, including business owners and self-employed individuals.

Employers must make annual contributions to the plan, which can be done in one of two ways:

• Matching Contributions : Match employee contributions up to 3% of their compensation.
• Nonelective Contributions : Contribute 2% of each eligible employee's compensation, regardless of whether the employee makes contributions.

SIMPLE IRA contribution limits 2024

The employee contribution limits for a SIMPLE IRA Plan in 2024 are as follows:

• Employees under age 50: $16,000
• Employees age 50 and older: $19,500

For non-elective contributions, instead of matching contributions, an employer may provide non-elective contributions of 2% of each qualifying employee's pay. If the company makes this decision, it must make nonelective payments regardless of whether the employee opts to make salary reduction contributions. Employees can earn up to $3450,000 in 2024.

SIMPLE IRA contribution limits 2023

The employee contribution limits for a SIMPLE IRA Plan in 2023 are as follows:

• Employees under age 50: $15,500
• Employees age 50 and older: $19,500

Under the "nonelective" contribution formula for SIMPLE IRAs, an eligible employee must receive an employer contribution of 2% of their compensation, regardless of whether the employee contributes to their SIMPLE IRA. This means that even if the employee decides not to make any personal contributions, the employer is still obligated to contribute 2% of the employee's compensation to the SIMPLE IRA. For 2023, this contribution is based on compensation up to an annual limit of $330,000.

Penalties for Early Withdrawal

The withdrawal regulations for a SIMPLE IRA are identical to those for regular IRA withdrawals. You pay taxes on your money when it leaves your account, and if you withdraw before the age of 59½ for no qualified cause, such as the necessity to pay a major medical cost, you must also pay a 10% early withdrawal penalty. However, unlike standard IRAs and most other retirement accounts, SIMPLE IRAs have a 25% early withdrawal penalty if you remove funds during the first two years of ownership.

Exceptions to Additional Taxes

If you are 59½ or older, you can withdraw money from your SIMPLE IRA without paying additional taxes. You also don’t have to pay any additional taxes if, for example:

• Your withdrawal is not more than:
  • Your unreimbursed medical expenses that exceed 10% of your adjusted gross income (7.5% if your spouse is age 65 or older),
  • Your cost for your medical insurance while unemployed,
  • Your qualified higher education expenses, or
  • The amount to buy, build, or rebuild a first home
• Your withdrawal is in the form of an annuity
• Your withdrawal is a qualified reservist distribution
• You are disabled
• You are the beneficiary of a parted SIMPLE IRA owner
• The withdrawal is the result of an IRS levy
• The withdrawal is the result of an IRS levy

What is SIMPLE IRA Rollover?

A SIMPLE IRA Rollover transfers funds from an existing SIMPLE IRA to another retirement account, such as a traditional IRA or a 401(k) plan with a new employer. This allows for the consolidation of retirement savings into a single account or the transition of funds to an account with more investment options, potentially higher returns, or lower fees, thereby optimizing retirement savings management.

Transfers from SIMPLE IRAs

You have the option to transfer money in a tax-free rollover from your SIMPLE IRA to another IRA (except a Roth IRA) or an employer-sponsored retirement plan like a 401(k), 403(b), or governmental 457(b) plan. However, for the first two years after you start participating in your employer's SIMPLE IRA plan, you can only transfer money to another SIMPLE IRA. Transferring it to a different type of account during this period is considered a withdrawal. In that case, you would need to:

• Include the amount in your gross income, and
• Pay an additional 25% tax on this amount, unless you are at least 59½ years old at the time of the transfer or meet other exceptions to the extra tax.

After the initial 2-year period, you have more flexibility. You can make tax-free rollovers from your SIMPLE IRA to other types of non-Roth IRAs or to an employer-sponsored retirement plan. This allows for better management of your retirement funds. Additionally, you can roll over the money into a Roth IRA after the 2-year period, but you must include any previously untaxed money rolled over in your income. This means you will pay taxes on that amount at your current income tax rate.

Transfers to SIMPLE IRAs

Before 2015, a SIMPLE IRA could only accept transfers from another SIMPLE IRA. However, a new law in 2015 expanded the eligibility for transfers to include traditional and SEP IRAs, as well as employer-sponsored retirement plans such as a 401(k), 403(b), or 457(b) plan. Nonetheless, there are certain restrictions to be aware of:

• SIMPLE IRAs cannot accept rollovers from Roth IRAs or Roth accounts in employer-sponsored plans.
• This change applies explicitly to rollovers made after the two-year period starting from the date you initially participated in your employer’s SIMPLE IRA plan.
• The new law only applies to transfers to SIMPLE IRAs made after December 18, 2015, when the law was enacted. This clear timeline ensures you have the most accurate information for your financial planning.
• Transferring from a traditional IRA, SIMPLE IRA, or SEP IRA to a SIMPLE IRA is limited to one rollover per year.