How Much Can You Contribute to a SIMPLE IRA?

A Savings Incentive Match Plan for Employees, commonly known as a SIMPLE IRA, is a type of retirement savings plan tailored for small businesses, generally those with 100 or fewer employees. It allows both employees and their employers to make contributions to a traditional IRA established for each participating employee. This plan structure is designed to be less complex and costly to administer compared to more conventional retirement plans. The amount of money that can be contributed annually is governed by specific limits set by the Internal Revenue Service (IRS).

These regulations define the maximum amounts for employee salary deferrals and establish the rules for mandatory employer contributions.

Employee Contribution Limits

The amount an employee can contribute from their salary into a SIMPLE IRA is capped each year. For 2025, an employee can defer up to $16,500 of their compensation. However, for employers with 25 or fewer employees, this limit increases to $17,600. These contributions reduce the employee’s taxable income for the year, offering an immediate tax benefit.

To help individuals nearing retirement save more, the regulations allow for catch-up contributions. For 2025, participants age 50 or over can contribute an additional $3,500. For employers with 25 or fewer employees, this catch-up amount is higher, at $3,850.

Beginning in 2025, a new rule allows employees aged 60 to 63 to make an even larger catch-up contribution of $5,250. These contribution limits are subject to cost-of-living adjustments.

Mandatory Employer Contributions

A defining feature of a SIMPLE IRA plan is the requirement for the employer to make contributions on behalf of their employees. The employer must choose one of two contribution methods each year and communicate this decision to employees before the annual 60-day election period.

The first option is a matching contribution. Under this method, the employer matches the employee’s salary deferral contributions dollar-for-dollar, up to a maximum of 3% of the employee’s compensation. An employer can elect to reduce the 3% match, but not below 1%, for up to two years in any five-year period.

The second option is a non-elective contribution. With this method, the employer contributes a flat 2% of each eligible employee’s compensation, regardless of whether the employee contributes. The amount of compensation taken into account for this calculation is capped annually, at $350,000 for 2025.

Employers with 26 to 100 employees can choose to adopt the higher employee contribution limits. If they do, they are required to provide a higher employer contribution, either through a 4% matching contribution or a 3% non-elective contribution.

Contribution Deadlines and Correcting Excess Amounts

For employee salary deferrals, the employer must deposit the funds into the employee’s SIMPLE IRA no later than the 30th day of the month following the month the amounts were withheld. The deadline for the employer’s matching or non-elective contributions is later, tied to the due date of the employer’s federal income tax return, including any extensions.

Contributing more than the annual limit results in an excess contribution. These excess amounts are subject to a 6% excise tax for each year they remain in the account.

To avoid the penalty, the participant must withdraw the excess amount, along with any net income attributable to that excess, from their SIMPLE IRA by the tax filing deadline for the year the excess contribution was made.

Early Withdrawal Penalties

Withdrawing funds from a SIMPLE IRA before age 59 1/2 typically results in a 10% early withdrawal penalty on the amount withdrawn, in addition to regular income tax. However, a stricter 25% penalty applies if a withdrawal is made during the first two years of an employee’s participation in the plan. After the two-year period has passed, the penalty for early withdrawals reverts to the standard 10%.