This is the third installment in a multi-part series on retirement accounts for self-employment income. We previously covered SEP IRA and Solo 401K basics. In this post, we’ll cover the SIMPLE IRA. You don’t have to be entirely self-employed to find this or the other two retirement account options relevant. If you have any self-employment income (even part-time side income), you could use these accounts to your benefit.
What is a SIMPLE IRA?
The SIMPLE IRA is a bit of a misnomer. It’s not just an easily-marketed and inviting name, but also a slightly deceiving acronym for “Savings Incentive Match PLan for Employees”.
Why deceiving? While it was created to be (and is) a “simple” retirement account option for employers with fewer than 100 employees (requires very little admin filing and costs to maintain), it is far from being the most “simple” of the three self-employed retirement account options for self-employed individuals, in my opinion.
SIMPLE IRAs are much like Traditional IRAs in some aspects, but particularly in that contributions are pre-tax (deductible from income). After-tax Roth SIMPLE IRA options are not available at the moment.
What are the Qualifications to Create & Contribute to a SIMPLE IRA?
As with the Solo 401K, there are no age restrictions with a SIMPLE IRA (there is with the SEP IRA).
There are, however, minimum income restrictions:
the employee (includes self-employed individuals) must have earned at least $5,000 in compensation during any 2 of the previous 5 years before the current calendar year, and
the employee expects to receive at least $5,000 during the current calendar year.
Similar to the Solo 401K and SEP IRA, you do not need to be full-time self-employed in order to be eligible. You could be part-time self-employed or earn a side income from a secondary job. Having an employer-sponsored 401K through another employer does not exclude you from being able to start and maintain a separate SIMPLE IRA.
You also do not need to have a registered corporation (LLC, S-Corp, etc.) in order to be eligible.
SIMPLE IRA Maximum Contribution Limits for 2022 and 2023
As an employee, you can put all of your net earnings from self-employment in to a SIMPLE IRA, up to:
- 2022 Maximum SIMPLE IRA Contribution (Under Age 50): $14,000
- 2023 Maximum SIMPLE Contribution (Under Age 50): $15,500
There are also additional catch-up contributions for individuals age 50 and older:
- 2022 Maximum SIMPLE IRA Catch-Up Contribution: $3,000
- 2023 Maximum SIMPLE IRA Catch-Up Contribution: $3,500
This makes the total maximum SIMPLE IRA contributions for those age 50+:
- 2022 Maximum SIMPLE IRA Catch-Up Contribution (Age 50+): $17,000
- 2023 Maximum SIMPLE IRA Catch-Up Contribution (Age 50+): $19,000
Separately, you can also match yourself as employer, with two options:
- match the employee contribution on a dollar-for-dollar basis up to 3% of the compensation (not limited by the annual compensation limit), or
- make non-elective contributions of 2% of the employee compensation up to the annual limit of $305,000 in 2022 and $330,000 in 2023.
Similar to the Solo 401K, if you contribute as an employee and participate in any other employer plan during the year (e.g. a 401K in your day job), the total amount of the salary reduction contributions that you can make to all plans you participate in as an employee (including self-employment) is limited to $20,500 in 2022 and $22,500 in 2023 (individuals age 50 or older can make an additional $6,500 catch-up contribution for 2022 and $7,500 for 2023). You may recognize that limit, as it is the same as the maximum 401K contribution limit.
For example, if you are under age 50 and contribute $12,500 to your day job employer-sponsored 401K in 2023, you can then only contribute $10,000 ($22,500 – $12,500) to your SIMPLE IRA as an employee. You could also match the 3% as your own employer.
SIMPLE IRA Contribution Deadlines
The contribution deadlines for SIMPLE IRAs for self-employed individuals are two-fold:
- For self-employed persons with no common-law employees, the latest date for depositing employee salary reduction contributions for a calendar year is 30 days after the end of the year (January 30th).
- Matching employer contributions are generally due by the tax deadline and IRA contribution deadline for that calendar year (typically April 15). Extensions are possible. If a contribution comes between January 1st and the tax deadline, you can characterize it for the previous or the present calendar year. Contributions for a calendar year must be made prior to filing your taxes for that year, or you will need to file an amended return.
SIMPLE IRA Contribution Calculators
If you want to double-check your math on how much you can contribute and compare to other retirement accounts, here are a few SIMPLE IRA contribution calculators that can lend a hand:
Can you Rollover a SIMPLE IRA Into Another Retirement Plan?
Yes. You can roll a SIMPLE IRA in to another SIMPLE, a Traditional IRA, SEP IRA, or even a Roth IRA – just as you can a Traditional 401K. There is a weird restriction that is unique to SIMPLE IRAs that I will highlight later in this post.
As with all pre to post-tax (Roth) retirement plan rollovers, any amount you roll over is considered taxable income in the year that you roll it over.
Where Can you Open a SIMPLE IRA Account?
All of the discount brokers in my “how to start an online broker account” article have a SIMPLE IRA option, including Vanguard, Schwab, and Fidelity.
Always be sure to research minimum balance requirements and any associated fees, including account maintenance or inactivity fees before creating your account. Investment offerings available for SIMPLE IRAs can vary as well, per broker.
SIMPLE IRA Withdrawal Rules
Users should definitely take note of SIMPLE IRA withdrawal rules, as they could have significant consequences.
- 10% Tax: You have to pay a 10% additional tax on the taxable amount you withdraw from your SIMPLE IRA if you are under age 59.5 when you withdraw the money unless you qualify for another exception to this tax.
- 25% Tax: The amount of the additional tax you have to pay increases from 10% to 25% if you make the withdrawal within 2 years from when you first participated in your employer’s SIMPLE IRA plan.
There are some exceptions to this rule, highlighted here.
SIMPLE IRA 2-Year Rollover/Transfer Penalty Rule
One consideration I alluded to earlier with SIMPLE IRAs is around an odd rule on rollovers. A SIMPLE IRA cannot be rolled over to another retirement plan without two years having passed from the date the employee first participated in the plan, without:
- including the amount in gross income.
- paying an additional 25% tax on this amount, unless you are at least age 59.5 at the time of the transfer or you qualify for another exception (see below) to the additional tax.
The only exception is a rollover from one SIMPLE IRA to another.
Other SIMPLE IRA Resources:
If you have any questions, definitely consult with a tax professional and/or a brokerage firm.
Outside of the SIMPLE IRA resources highlighted earlier, you should also check out the following articles:
- IRS SIMPLE IRA plan page
- IRS Publication 560, Retirement Plans for Small Businesses
- IRS Publication 4334, SIMPLE IRA Plans for Small Businesses
- FAQs regarding SIMPLE IRA Plans