A SIMPLE IRA gives small businesses and self-employed individuals an easy way to offer a retirement plan without the higher costs or complex rules of a 401k. It has lower contribution limits, but it’s straightforward to manage and offers meaningful tax benefits.
Here’s a breakdown of how much employees and employers can contribute for 2025.
SIMPLE IRA Contribution Limits
A SIMPLE IRA gives both employees and employers the chance to save for retirement. Employees can make salary-reduction contributions—either pre-tax or, if the plan allows, Roth contributions. Employers are also required to contribute each year, either through matching or nonelective contributions.
Employee Contribution Limits for 2025
✅ Salary Reduction Limit: $16,500
✅ Catch-Up for Age 50+: Additional $3,500, for a total of up to $20,000
✅ Special Age 60–63 Catch-Up (SECURE 2.0): $5,250 instead of $3,500, if your plan adopts this feature
401k Comparison
For 2025, the elective deferral limit for a 401k, 403b, or 457b is $23,500. The catch-up for those age 50+ is $7,500, and the special age 60–63 catch-up is $11,250 if allowed by the plan.
Contributing to Both a 401k and a SIMPLE IRA
You can participate in both during the same year, but your combined elective deferrals across all plans cannot exceed $23,500 in 2025 (or $31,000 if age 50+). Within that total, your SIMPLE IRA contributions are limited to $16,500 plus the applicable catch-up amount.
Employer Contribution Options for 2025
Employers must make contributions each year, choosing between two methods:
✅ 2% Nonelective Contribution: 2% of each eligible employee’s compensation, up to a compensation cap of $350,000.
✅ 3% Matching Contribution: Match up to 3% of each employee’s compensation (not limited by the compensation cap).
All employer contributions are tax-deductible and become immediately 100% vested for employees.
Mandatory Employer Contributions
Employer contributions are required every year under a SIMPLE IRA. Even during slow business years, contributions must still be made for all eligible employees.
Employers can temporarily lower the match below 3% (but not below 1%) for up to two out of five years, as long as they provide advance notice. This flexibility can help small businesses manage cash flow without losing plan compliance.
Are Contributions Tax Deductible?
A SIMPLE IRA can provide valuable tax advantages for both employees and employers. The type of contribution determines how the tax benefits apply.
✅ Employee Contributions:
Pre-tax salary-reduction contributions lower your taxable income for the year. If your plan allows Roth SIMPLE contributions, those are made with after-tax dollars and are not deductible.
✅ Employer Contributions:
All employer contributions, whether matching or nonelective, are tax-deductible to the business and are immediately 100% vested for employees.
Is a SIMPLE IRA Right for You?
A SIMPLE IRA can be a practical choice for small businesses that want to offer employees a retirement plan without the higher costs and paperwork of a 401k. It typically works best for companies with a stable workforce and consistent annual income, since employer contributions are mandatory each year.
If you’re self-employed or manage a small team, it could be worth comparing a SIMPLE IRA with a Solo 401k or SEP IRA. Each plan has unique benefits and flexibility around contribution limits, taxes, and participation rules. Exploring these options early can help you find the structure that aligns best with your business goals and retirement savings needs.
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