From Bogleheads

The SIMPLE (Savings Incentive Match Plan for Employees) IRA was established in 1996 by the Small Business Job Protection Act.[1] At year end 2016, SIMPLE IRAs held approximately $106 billion dollars of assets, comprising a 1% share of total IRA assets.[2][note 1]

SIMPLE IRA's may be sponsored by employers (including governmental employers, non-profit employers, self-employed individuals and business owners) with 100 or fewer employees. Employers who maintain a SIMPLE IRA cannot contribute to any other employer-sponsored retirement plan in the same year.[3]

Types of SIMPLE plans

The IRS allows two types of SIMPLE plans to be set up by employers: form 5304-SIMPLE[4] and form 5305-SIMPLE[5] plans. From the employee's perspective, there is a major difference between these plan types.

Form 5304-SIMPLE plans give each employee the freedom to select the financial institution that will act as custodian for their SIMPLE plan account. Using the "Model Salary Reduction Agreement" that their employer gives them at least once a year (no later than 60 days before the beginning of the next calendar year), the employee is allowed to select the financial institution that will serve as the trustee, custodian, or issuer of their SIMPLE IRA. Even if their employer has a "preferred" financial institution, the employee is nevertheless free to request that an account be set up for them at an alternative institution. If taking advantage of this option, the employee must allow their employer time to set up their new account.

In some cases form 5304-SIMPLE plans are set up to allow salary reduction and account custodian changes more often than once a year. Refer to Article II, subparagraph 2b ("Timing of Salary Reduction Elections") on page 1 of the form to see if your employer has opted for more frequent changes. Choices could be semi-annually, quarterly, monthly, or daily.

Form 5305-SIMPLE plans do not allow employees the freedom to select their own account custodian. Rather the employer designates the financial institution that all employees must use. If you are unhappy with this choice of financial institution, you would need to work with your employer to change to a better financial institution. Since this requires a modification of the SIMPLE plan itself, such a switch can only be made at the beginning of a calendar year.[6]


  1. Employers may make matching or nonelective contributions to an employee's account.
  2. In general, all employees who receive at least $5,000 in compensation for the current calendar year and who received at least $5,000 during any two previous years are eligible.
  3. Employees covered under collective bargaining agreements for which retirement benefits were the subject of good-faith bargaining can be excluded.
  4. Nonresident aliens with no U.S.-source income can be excluded.
  5. If you choose matching contributions, you must match each employee's contribution up to 3% of eligible compensation. If you choose nonelective contributions, you must contribute 2% of eligible compensation for each eligible employee, even if the employee chooses not to contribute.[7]

The employee contribution can be up to 100% of compensation (earned income, for self-employed individuals), up to the following limits:

Contribution Limits[8]
Year Under Age 50 Age 50 or Older
2007 $10,500 $13,000
2008 $10,500 $13,000
2009-2012 $11,500 $14,000
2013-2014 $12,000 $14,500
2015-2018 $12,500 $15,500
2019 $13,000 $16,000
2020-2021 $13,500 $16,500
2022 $14,000 $17,000
2023 $15,500 $18,000

The employee contribution counts toward the employee's combined salary deferral limit along with 401(k), 403(b) and SARSEP plans ($19,500 in 2021, $20,500 in 2022, excluding catch-up contributions).[9]

Contributions made to a SIMPLE IRA qualify for the Retirement Savings Contributions Credit (Saver's Credit) if you meet the filing and income requirements.[10]

Tax Treatment of Contributions

SIMPLE IRA contributions are deductible to the employer (to the extent they would be if paid as salary) and are not included in employees' income, though the contributions out of salary, but not matching or nonelective contributions, are subject to FICA and FUTA taxes.[11] The SIMPLE IRA itself is subject to the same tax rules as other IRA's, including exemption from tax on most investment income.


SIMPLE IRA's are subject to most of the same rules governing withdrawals, and their tax consequences, as other IRA's. Employees are always fully vested and can withdraw any amount at any time.

As with other IRA's, withdrawals, other than rollovers, are ordinary income (as SIMPLE IRA's never include after-tax contributions), and are subject to a 10% penalty before age 59 1/2, subject to certain exceptions. Until the second anniversary of the first contribution to an employee's account, rollovers are permitted only to other SIMPLE IRA's. During this period, the 10% penalty is increased to 25%. SIMPLE IRA's are subject to the same required minimum distributions, beginning at age 72, as other IRAs.[12]


Some SIMPLE plans (including those established with the IRS model plan Form 5305-SIMPLE) require the use of a "designated financial institution" as trustee or custodian of the employees' SIMPLE IRA's. In that event, the employees must be given the option of transferring their balances to any other SIMPLE IRA, or, after the 2-year period, any other IRA, without any cost or penalty. The financial institution may require notice prior to the start of a year. Cost-less transfers may be limited to new contributions; surrender penalties could be imposed on withdrawals of past contributions. Monthly transfers are sufficient for this purpose.

Special considerations for Vanguard SIMPLE IRAs

Vanguard imposes an annual $25 account fee per fund (waived if Vanguard assets exceed $50,000) on SIMPLE IRAs.[13] Vanguard's SIMPLE IRA imposes a five fund maximum limit. Using a traditional IRA (when available, after the expiration of the 2-year period) would avoid the $25 Vanguard SIMPLE IRA account fees.

Trustee-to-trustee transfers to Vanguard are executed by: (1) filling out an IRA Transfer Request; (2) including a recent SIMPLE IRA account statement; and (3) having Vanguard execute the transfer. Trustee-to-Trustee transfers do not affect annual contribution limits to personal IRA accounts.


  1. SIMPLE IRA assets 1997 - 2016 (in billions).
    Source: Investment Company Institute. 2017. "The U.S. Retirement Market, Second Quarter 2017" (September).
    Year Assets Share
    1997 $1 (*)%
    1998 $4 (*)%
    1999 $9 (*)%
    2000 $10 (*)%
    2001 $14 1%
    2002 $16 1%
    2003 $23ᵉ 1%
    2004 $34 1%
    2005 $42 1%
    2006 $52 1%
    2007 $62 1%
    2008 $46 1%
    2009 $61 1%
    2010 $69 1%
    2011 $68 1%
    2012 $78 1%
    2013 $95 1%
    2014 $100 1%
    2015 $100ᵉ 1%
    2016 $106ᵉ 1%
    • Share is the percentage of total IRA assets.
    • (*)% = less than 0.5 percent
    • ᵉ Data are estimated.

    Sources: Investment Company Institute, Internal Revenue Service Statistics of Income Division, and Government Accountability Office


  1. Small Business Job Protection Act
  2. ICI Retirement Market, spreadsheet Report: The U.S. Retirement Market, Second Quarter 2017 (xls)
  3. SIMPLE IRA Plan FAQs - Establishing a SIMPLE IRA Plan
  4. 5304-SIMPLE, IRS
  5. 5305-SIMPLE, IRS
  6. Refer to the last section of Establishing a SIMPLE IRA Plan titled "Timing of Setting Up a SIMPLE IRA Plan".
  7. Vanguard SIMPLE IRA Overview
  8. IRS announcement of 2023 retirement contribution limits, viewed 22 October 2022.
  9. Vanguard Who can contribute and how much
  10. Retirement Savings Contributions Credit (Saver's Credit), Publication 571, IRS
  11. Operating a SIMPLE IRA Plan, from the IRS, viewed June 19, 2015.
  12. IRS Pub 590 p.74.
  13. Vanguard SIMPLE IRA, Vanguard

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