Is a SIMPLE IRA the Same as a Traditional IRA?
One of the most popular retirement accounts is an IRA, or Individual Retirement Account. IRAs allow individuals to put money aside over time to save up for retirement, with tax benefits similar to those of other retirement plans.
Two common IRAs are the SIMPLE IRA and the Traditional IRA, both of which have their own benefits, downsides, and rules around who can open an account. For investors trying to decide which IRA to open, it helps to know the differences between SIMPLE IRAs and Traditional IRAs.
SIMPLE IRA vs Traditional IRA: Side-by-Side Comparison
Although there are many similarities between the two accounts, there are some key differences. This chart details the key attributes of each plan:
| SIMPLE IRA | Traditional IRA | |
|---|---|---|
| Offered by employers | Yes | No |
| Who it’s for | Small-business owners and their employees | Individuals |
| Eligibility | Earn at least $5,000 per year | Under 70 ½ years old and earned income in the past year |
| Tax deferred | Yes | Yes |
| Tax deductible contributions | Yes, for employers and sole proprietors only | Yes |
| Employer contribution | Required | No |
| Fee for early withdrawal | 10% plus income tax, or 25% if money is withdrawn within two years of an employer making a deposit | 10% plus income tax |
| Contribution limits | $15,500 in 2023 $16,000 in 2024 |
$6,500 in 2023 $7,000 in 2024 |
| Catch-up contribution | $3,500 additional per year for people 50 and over | $1,000 additional per year for people 50 and over |
SIMPLE IRAs Explained
The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is set up to help small-business owners help both themselves and their employees save for retirement. It’s a retirement plan that small businesses with fewer than 100 employees can offer employees who earn at least $5,000 per year.
A SIMPLE IRA is similar to a Traditional IRA, in that a plan participant can make tax-deferred contributions to their account, so that it grows over time with compound interest. When the individual retires and begins withdrawing money, then they must pay income taxes on the funds.
With a SIMPLE IRA, both the employer and the employee contribute to the employee’s account. Employers are required to contribute in one of two ways: either by matching employee contributions up to 3% of their salary, or by contributing a flat rate of 2% of the employee’s salary, even if the employee doesn’t contribute. With the matching option, the employee must contribute money first.
There are yearly employee contribution limits to a SIMPLE IRA: in 2023, the annual limit is $15,500, with an additional $3,500 in catch-up contributions permitted for people over age 50. In 2024, the annual limit is $16,000, with an additional $3,500 in catch-up contributions permitted for people over age 50.
Benefits and Drawbacks of SIMPLE IRAs
It’s important to understand both the benefits and downsides of the SIMPLE IRA to make an informed decision about retirement plans.
SIMPLE IRA Benefits
There are several benefits — for both employers and employees — to choosing a SIMPLE IRA:
• For employers, it’s easy to set up and manage, with online set-up available through most banks.
• For employers, management costs are low compared to other retirement plans.
• For employees, taxes on contributions are deferred until the money is withdrawn.
• Employers can take tax deductions on contributions. Sole proprietors can deduct both salary and matching contributions.
• For employees, there is an allowable catch-up contribution for those over 50.
• For employers, the IRA plan providers send tax information to the IRS, so there is no need to do any reporting.
• Employers and employees can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.
SIMPLE IRA Drawbacks
Although there are multiple benefits to a SIMPLE IRA, there are some downsides as well:
• Employers must follow strict rules set by the IRS.
• Other employer-sponsored retirement accounts have higher limits, such as the 401(k), which allows for $22,500 per year in 2023 and $23,000 in 2024. (Check out our IRA calculator to see what you can contribute to each type of IRA.)
• If account holders withdraw money before they reach age 59 ½, they must pay a 10% fee and income taxes on the withdrawal. That penalty jumps to 25% if money is withdrawn within two years of an employer making a deposit.
• There is no option for a Roth contribution to a SIMPLE IRA, which would allow account holders to contribute post-tax money and avoid paying taxes later.
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What Is a Traditional IRA?
The Traditional IRA is set up by an individual to contribute to their own retirement. Employers are not involved in Traditional IRAs in any way. The main requirements to open an IRA are that the account holder must have earned some income within the past year, and they must be younger than 70 ½ years old at the end of the year.
Pros and Cons of Traditional IRAs
When it comes to benefits and downsides, there’s not too much of a difference between Traditional vs. SIMPLE IRAs, given what an IRA is. That being said, there are a few that are unique to this type of plan.
Traditional IRA Pros
Some of the upsides of a Traditional IRA include:
• It allows for catch-up contributions for those over age 50.
• One can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.
• Contributions are tax-deferred, so taxes aren’t paid until funds are withdrawn. If you’re hoping to pay taxes now instead of later, you might weigh a Traditional vs. Roth IRA.
Traditional IRA Cons
Meanwhile, downsides to a Traditional IRA include:
• They have much lower contribution limits than a 401(k) or a SIMPLE IRA, at $6,500 in 2023 and $7,000 in 2024.
• Penalties for early withdrawal are also the same: if you withdraw money before age 59 ½, you’ll pay a 10% fee plus income taxes on the withdrawal.
Is a SIMPLE IRA or Traditional IRA Right for You?
The SIMPLE IRA and Traditional IRA are both individual retirement accounts, but the SIMPLE is set up through one’s employer — typically a small business of 100 people or less. The Traditional IRA is set up by an individual. In other words, whether a SIMPLE IRA is an option for you will depend on if you have an employer that offers it.
There are many similarities in the attributes of the plans, if you’re choosing between a SIMPLE IRA vs. Traditional IRA. However, two major distinctions are that the SIMPLE IRA requires employer contributions (though not necessarily employee contributions) and allows for a higher amount of employee contributions per year.
Can I Have Both a SIMPLE IRA and a Traditional IRA?
Yes, it is possible for an individual to have both a SIMPLE IRA through their employer and also a Traditional IRA on their own — though they may not be able to deduct all of their Traditional IRA contributions. The IRS sets a cap on deductions per calendar year.
In 2023, single people with an AGI (adjusted gross income) of more than $73,000 are restricted to a partial deduction; those with AGI above $83,000 may not take a deduction at all. Married couples filing jointly with an AGI of $116,000 to $136,000 may take a partial deduction; those with AGI above $136,000 may not take a deduction at all.
In 2024, single people with an AGI (adjusted gross income) of more than $77,000 are restricted to a partial deduction; those with AGI above $87,000 may not take a deduction at all. Married couples filing jointly with an AGI of $123,000 to $143,000 may take a partial deduction; those with AGI above $143,000 may not take a deduction at all.
Can You Convert a SIMPLE IRA to a Traditional IRA?
If you’re hoping to convert a SIMPLE IRA to a Traditional IRA, you’re in luck — you can roll over a SIMPLE IRA into a Traditional IRA. However, you can’t roll over the funds from a SIMPLE IRA to a Traditional IRA within the first two years of opening a SIMPLE IRA. Otherwise, you’ll get hit with a 25% penalty in addition to the regular income tax you must pay on your withdrawal.
Once that two-year period is up, however, you can roll over the money from your SIMPLE IRA — even if you’re still working for that employer. Just note that you can only roll over money from a SIMPLE IRA one time within a 12-month period.
Can You Max Out a Traditional and SIMPLE IRA the Same Year?
While you cannot max out a SIMPLE IRA and another employer-sponsored retirement plan like a 401(k), you can max out both a Traditional IRA and a SIMPLE IRA.
The maximum contribution for a SIMPLE IRA in 2023 is $15,500 (plus $3,500 in catch-up contributions), while the maximum for a Traditional IRA is $6,500 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $22,000 across both plans in a year — or $26,500 if you’re 50 or older.
The maximum contribution for a SIMPLE IRA in 2024 is $16,000 (plus $3,500 in catch-up contributions), while the maximum for a Traditional IRA is $7,000 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $23,000 across both plans in a year — or $27,500 if you’re 50 or older.
Are SIMPLE IRAs Most Similar to 401(k) Plans?
There are a lot of similarities between SIMPLE IRAs and 401(k) plans given that they are both employer-sponsored retirement plans. However, while any employer with one or more employees can offer a 401(k), SIMPLE IRAs are reserved for employers with 100 or fewer employees. Additionally, contribution limits are lower with SIMPLE IRAs than with 401(k) plans.
Another key difference between the two is that while employers can opt whether or not to make contributions to employee 401(k), employer contributions are mandatory with SIMPLE IRAs. On the employer side, SIMPLE IRAs generally have fewer account fees and annual tax filing requirements.
Opening an IRA With SoFi
Understanding the differences between retirement accounts like the SIMPLE and Traditional IRA is one more step in creating a personalized retirement plan that works for you and your goals. While a SIMPLE IRA is only an option if your employer offers it, you’ll want to weigh the pros and cons of a SIMPLE IRA vs. Traditional IRA if both are on the table for you. As we’ve covered, the two types of IRAs share many similarities, but a SIMPLE IRA is not the same as a Traditional IRA.
If you’re looking to start saving for retirement now, or add to your investments for the future, SoFi Invest® online retirement accounts offer both Traditional and Roth IRAs that are simple to set up and manage. By opening an IRA with SoFi, you’ll gain access to a broad range of investment options, member services, and a robust suite of planning and investment tools.
FAQ
Do you pay taxes on SIMPLE IRA?
Yes, you will pay taxes on a SIMPLE IRA, but not until you withdraw your funds in retirement. You’ll generally have to pay income tax on any amount you withdraw from your SIMPLE IRA in retirement. However, if you make a withdrawal prior to age 59 ½, or if money is withdrawn within two years of an employer making a deposit, you’ll have to pay income taxes then, alongside an additional tax penalty.
Is a SIMPLE IRA better than a Traditional IRA?
When comparing a SIMPLE IRA vs. traditional IRA, it’s important to understand that each has its pros and cons. If your employer offers a SIMPLE IRA, they require employer contributions, and they have higher contributions. At the end of the day, though, both allow you to save for retirement through tax-deferred contributions.
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