SIMPLE IRA in 2025: Everything You Need to Know

When planning for retirement, many people focus on 401(k) plans or traditional IRAs, but there’s another option that’s ideal for small businesses: the SIMPLE IRA. This retirement plan provides tax advantages, employer contributions, and an easy-to-manage structure, making it a great choice for businesses with 100 or fewer employees.

With new contribution limits for 2025, now is a great time to explore whether a SIMPLE IRA is the right choice for you. In this article, we’ll explain what a SIMPLE IRA is, how it works, its benefits, potential drawbacks, and recent updates for 2025.

What Is a SIMPLE IRA?

A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a tax-advantaged retirement plan designed for small businesses that want to offer retirement benefits without the complexity and cost of a 401(k).

The key features of a SIMPLE IRA include:

• Employer contributions are required – Unlike a 401(k), where employer contributions are optional, SIMPLE IRAs require employers to contribute to their employees’ retirement accounts.
• Employees can contribute pre-tax dollars – Employees can elect to defer part of their salary into a SIMPLE IRA, lowering their taxable income.
• Tax-deferred growth – Contributions and investment gains grow tax-free until retirement.
• Lower administrative costs – SIMPLE IRAs are easy to set up and have fewer reporting requirements than a 401(k).

A SIMPLE IRA is an ideal retirement savings plan for small businesses looking for a cost-effective way to help employees save for retirement.

How a SIMPLE IRA Works in 2025

A SIMPLE IRA allows both employees and employers to contribute to retirement savings in a tax-advantaged way. Here’s a step-by-step breakdown of how it works:

1. Employee Contributions

Employees can elect to contribute a portion of their salary to a SIMPLE IRA on a pre-tax basis. This means contributions reduce taxable income for the year.

For 2025, the employee contribution limits are:

• $16,500 per year for employees under age 50
• $19,500 per year for employees 50 and older (with an additional $3,500 catch-up contribution)
• NEW: Employees aged 60 to 63 can contribute an extra $5,250, exceeding the standard catch-up contribution.

These limits allow employees to save more for retirement while lowering their taxable income.

2. Employer Contributions

Unlike some retirement plans where employer contributions are optional, SIMPLE IRAs require employers to contribute to employee accounts. Employers have two choices:

1. Matching Contributions – Employers match employee contributions dollar-for-dollar up to 3% of the employee’s salary.
2. Nonelective Contributions – Employers contribute 2% of each eligible employee’s salary, regardless of whether the employee makes contributions.

These mandatory contributions help employees grow their retirement savings faster and provide a valuable benefit to attract and retain talent.

3. Tax Benefits of a SIMPLE IRA

One of the biggest advantages of a SIMPLE IRA is its tax benefits:

• For Employees: Contributions are made pre-tax, reducing taxable income. Investments grow tax-deferred, meaning no taxes are owed until funds are withdrawn.
• For Employers: Contributions are tax-deductible as a business expense, which can help lower overall tax liability.

This makes the SIMPLE IRA a powerful retirement tool for both employees and business owners.

4. Investment Options

Like a traditional IRA, a SIMPLE IRA allows employees to invest in:
✔ Stocks
✔ Bonds
✔ Mutual funds
✔ Exchange-traded funds (ETFs)

Employees have the flexibility to build a diversified portfolio to align with their retirement goals.

5. Withdrawals and Penalties

Withdrawals from a SIMPLE IRA follow standard retirement plan rules:

• Withdrawals before age 59½ are subject to income tax + a 10% penalty.
• NEW: If an employee withdraws funds within the first two years of participating, the penalty increases to 25%.

After age 59½, withdrawals are taxed as ordinary income, but no penalty applies.

Pros and Cons of a SIMPLE IRA

Advantages of a SIMPLE IRA

• Easy to Set Up and Administer – Unlike 401(k)s, SIMPLE IRAs have minimal paperwork and administrative requirements.
• Guaranteed Employer Contributions – Employees benefit from mandatory matching or nonelective contributions.
• Tax-Deferred Growth – Contributions and investment earnings grow tax-free until withdrawal in retirement.
• Lower Costs Compared to 401(k)s – No expensive setup fees or compliance testing.
• New Higher Contribution Limits – The 2025 increase allows employees, especially those aged 60-63, to save even more.

Disadvantages of a SIMPLE IRA

• Lower Contribution Limits Compared to a 401(k) – The 2025 SIMPLE IRA limit is $16,500, while a 401(k) allows up to $23,500.
• Mandatory Employer Contributions – Small businesses must commit to contributing, which could be a financial strain.
• Strict Withdrawal Penalties – A 25% early withdrawal penalty applies if funds are taken within the first two years of participation.
• No Roth Option – SIMPLE IRAs do not offer a Roth version, meaning all withdrawals in retirement are taxable.

Who Should Consider a SIMPLE IRA?

A SIMPLE IRA is best suited for:

• Small Business Owners – If you have 100 or fewer employees, a SIMPLE IRA is an affordable way to offer a retirement benefit.
• Self-Employed Individuals – If you work alone or have a few employees, a SIMPLE IRA may be a good choice, though a Solo 401(k) or SEP IRA might be better in some cases.
• Employees Looking for a Tax-Advantaged Retirement Plan – If your employer offers a SIMPLE IRA, it’s a great way to save for retirement with employer contributions.

How to Set Up a SIMPLE IRA in 2025

For employers interested in setting up a SIMPLE IRA, follow these steps:

1. Choose a Plan Provider – Banks, brokerage firms, and investment companies offer SIMPLE IRAs.
2. Complete IRS Forms – Use Form 5304-SIMPLE (if employees choose their provider) or Form 5305-SIMPLE (if the employer selects the provider).
3. Set Up Employee Accounts – Employees open their own SIMPLE IRA accounts with the chosen provider.
4. Start Making Contributions – Deduct employee contributions from payroll and deposit employer contributions accordingly.

Final Thoughts: Is a SIMPLE IRA Right for You?

A SIMPLE IRA remains an easy-to-manage and cost-effective retirement plan in 2025, making it a strong option for small business owners and employees.

With new contribution limits, required employer contributions, and tax advantages, it’s a great option for those who want a straightforward plan. However, individuals should compare it with other retirement plans like a 401(k) or SEP IRA to determine the best fit for their financial goals.

Looking for Guidance?

If you’re seeking personalized advice, consider reaching out to a financial professional. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 or contact us here to schedule an appointment with an independent trusted and licensed financial professional.

🧑‍💼Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities.