Can I Have a SIMPLE IRA and a 401(k)?

Navigating retirement savings can be complex, especially when considering multiple plans. A common question is whether one can contribute to both a SIMPLE IRA and a 401(k). In many situations, this is possible, but specific rules and contribution limits apply. Understanding these regulations is important for maximizing retirement savings while remaining compliant with Internal Revenue Service (IRS) guidelines.

Coordinating Employee Contributions Across Plans

Employee elective deferrals are subject to aggregate annual limits across various retirement plans, including 401(k)s, 403(b)s, and SIMPLE IRAs. For 2025, the standard elective deferral limit for a 401(k) is $23,500. The general elective deferral limit for a SIMPLE IRA is $16,500 for 2025. If an individual participates in both, their combined contributions cannot exceed the higher 401(k) limit.

Individuals aged 50 and over are eligible to make additional catch-up contributions. For 401(k) plans, the catch-up contribution limit for those age 50 and older is an additional $7,500 in 2025. For SIMPLE IRAs, the catch-up contribution limit for those age 50 and older is $3,500 in 2025.

The aggregate limit means if an individual contributes the maximum to a SIMPLE IRA, any remaining portion of the 401(k) deferral limit can be contributed to a 401(k) plan. For instance, an individual under age 50 contributing the full $16,500 to a SIMPLE IRA could then contribute up to an additional $7,000 to a 401(k) to reach the $23,500 overall elective deferral limit for 2025. This approach is relevant for individuals working for multiple employers or self-employed individuals with a solo 401(k) also participating in an employer-sponsored SIMPLE IRA.

Understanding Employer Contributions

Employer contributions to retirement plans operate under separate rules and do not count against an employee’s personal elective deferral limit. For SIMPLE IRAs, employers are generally required to make contributions. These can be either a 2% non-elective contribution, where the employer contributes 2% of each eligible employee’s compensation (up to a compensation limit of $350,000 for 2025) regardless of employee participation, or a dollar-for-dollar matching contribution up to 3% of the employee’s compensation.

For 401(k) plans, employer contributions can take various forms, including matching contributions, profit-sharing contributions, or non-elective contributions. Many employers match a percentage of an employee’s contributions, such as 50% or 100% of the employee’s contribution up to a certain percentage of their salary. Profit-sharing contributions allow employers to contribute a portion of their profits, while non-elective contributions are made on behalf of all eligible employees regardless of their own deferrals.

While employer contributions do not affect the employee’s elective deferral limits, they are subject to their own overall limits. For 401(k) plans, the total contributions from both employee and employer cannot exceed the Section 415(c) limit, which is the lesser of 100% of the employee’s compensation or $70,000 for 2025. Employer contributions in both plan types are generally tax-deductible for the business.

Tax Considerations for Dual Plans

Both SIMPLE IRAs and 401(k) plans offer tax advantages for retirement savings. Contributions to traditional versions of these plans are typically made on a pre-tax basis, reducing an individual’s taxable income in the year they are made. Investments within both types of accounts grow tax-deferred, meaning taxes on earnings are not paid until distributions are taken in retirement.

If a 401(k) plan offers a Roth option, contributions are made with after-tax dollars, but qualified withdrawals in retirement, including earnings, are entirely tax-free. Distributions from traditional pre-tax accounts are taxed as ordinary income upon withdrawal in retirement.

Early withdrawals from either a SIMPLE IRA or a 401(k) before age 59½ are generally subject to a 10% additional tax penalty, in addition to being taxed as ordinary income. For SIMPLE IRAs, this penalty increases to 25% if the withdrawal occurs within the first two years of an individual’s participation in the plan. Specific exceptions apply, though withdrawn amounts are still typically subject to income tax.