Can I Have a SIMPLE IRA and a Roth IRA at the Same Time?

Saving for retirement often involves using multiple accounts to maximize tax advantages. A SIMPLE IRA and a Roth IRA serve different purposes, but some individuals wonder if they can contribute to both. Understanding how these accounts interact helps in making informed financial decisions.

Eligibility Requirements

Qualifying for a SIMPLE IRA depends on employment status. It is available only to employees of businesses that offer the plan, typically small companies with 100 or fewer employees. Employers must contribute, either by matching up to 3% of an employee’s salary or making a fixed 2% contribution for all eligible workers. Employees cannot opt out of employer contributions but can decide whether to make their own salary deferrals.

A Roth IRA is available to anyone with earned income, but contributions are restricted based on modified adjusted gross income (MAGI). For 2024, single filers can contribute fully if their MAGI is below $146,000, with a phase-out up to $161,000. Married couples filing jointly can contribute fully if their MAGI is below $230,000, with a phase-out up to $240,000. Those exceeding these limits cannot contribute directly but may use a backdoor Roth IRA strategy.

Contribution Rules for Each

A SIMPLE IRA and a Roth IRA have separate contribution limits, allowing individuals to contribute to both. In 2024, the SIMPLE IRA allows up to $16,000 in salary deferrals, with an additional $3,500 catch-up contribution for those 50 and older. These contributions are deducted from payroll and must be made by year-end. Employer contributions do not count toward this limit.

A Roth IRA has a lower cap, with a limit of $7,000 for those under 50 and $8,000 for those 50 and older. Unlike a SIMPLE IRA, Roth IRA contributions are made with after-tax dollars and can be deposited anytime before the tax filing deadline, typically April 15 of the following year. This flexibility allows individuals to adjust contributions based on their financial situation rather than relying solely on payroll deductions.

Tax Treatment Differences

SIMPLE IRA contributions are made with pre-tax dollars, reducing taxable income in the year they are made. This provides an immediate tax benefit, but withdrawals in retirement are taxed as ordinary income. Early withdrawals before age 59½ incur a 10% penalty, which increases to 25% if taken within the first two years of participation.

A Roth IRA follows a different tax structure. Contributions are made with after-tax dollars, so there is no immediate tax deduction, but qualified withdrawals in retirement are entirely tax-free. To qualify, the account must be open for at least five years, and the account holder must be at least 59½ before withdrawing earnings. Unlike a SIMPLE IRA, Roth IRA contributions can be withdrawn at any time without taxes or penalties, offering greater flexibility.

Coordination With Employer Plans

Participating in a SIMPLE IRA does not limit Roth IRA contributions, but it affects broader tax planning. Employees with a SIMPLE IRA are considered covered by a workplace retirement plan, which can phase out tax deductions for traditional IRA contributions based on income.

For those with multiple employer-sponsored plans, IRS rules under 26 U.S. Code 402(g) impose a combined elective deferral limit of $23,000 for 2024 across all employer plans, including SIMPLE IRAs and 401(k)s. If an individual contributes to both a SIMPLE IRA and a 401(k) in the same year, total elective deferrals cannot exceed this limit.

Distribution Requirements

SIMPLE IRAs require account holders to begin taking required minimum distributions (RMDs) by April 1 of the year after they turn 73. These distributions are taxed as ordinary income, and failing to withdraw the required amount results in a 25% penalty, reduced to 10% if corrected within two years. Early withdrawals before age 59½ incur penalties, with an increased 25% penalty if taken within the first two years.

Roth IRAs do not have RMDs during the account holder’s lifetime, allowing funds to grow tax-free indefinitely. This makes them useful for estate planning, as beneficiaries can inherit the account with favorable tax treatment. Contributions can be withdrawn at any time without tax or penalty, but earnings are only tax-free if the account has been open for at least five years and the owner is at least 59½. Otherwise, earnings withdrawals may be subject to income tax and a 10% penalty, though exceptions exist for qualified expenses such as first-time home purchases or higher education costs.