The Roth SIMPLE IRA Under the SECURE 2.0 Act

The SECURE 2.0 Act of 2022 introduced the ability for employees to make Roth contributions to their SIMPLE IRA plans. This change allows individuals to choose a different tax treatment for their retirement savings. Participants can now tailor their strategy to their personal financial outlook by selecting either pre-tax or post-tax contributions for their retirement savings.

The New Roth SIMPLE IRA Option Explained

The SECURE 2.0 Act altered SIMPLE IRA plans by permitting an after-tax contribution feature. Employees can now choose to make their salary deferrals as traditional, pre-tax contributions, or as Roth, post-tax contributions. This decision impacts when the employee pays income tax, as Roth contributions are made from income that has already been taxed. The choice allows an individual to align their savings strategy with their expectations about future income and tax rates, a decision previously unavailable within this framework.

The law also gives employers a choice for their contributions. An employer can make matching or non-elective contributions on a pre-tax basis, or they may permit these contributions to be made on a Roth basis. If an employer makes Roth contributions, those funds are included in the employee’s income for that year.

This structure can result in an employee having one or two accounts. If an employee elects Roth for their savings and the employer contributes on a pre-tax basis, the employee will have a Roth SIMPLE IRA for their own money and a traditional SIMPLE IRA for the employer’s funds. If the employer also makes Roth contributions, all funds could be held in a single Roth SIMPLE IRA.

Contribution Rules and Financial Limits

Contributions to a SIMPLE IRA are governed by specific annual limits. For 2025, the base employee contribution limit is $16,500. The SECURE 2.0 Act created higher limits for certain businesses. For employers with 25 or fewer employees, the limit is automatically increased to $17,600. Employers with 26 to 100 employees can also offer this higher limit, but only if they provide a more generous employer contribution.

The plan includes catch-up contributions for older employees. Employees age 50 or over can contribute an additional $3,500. Beginning in 2025, a higher catch-up amount of $5,250 is available for participants who are ages 60, 61, 62, or 63. For plans that offer the higher employee contribution limits, the standard age 50 catch-up is also increased to $3,850.

Employer contributions are a mandatory component of a SIMPLE IRA plan. Employers have two options: make a non-elective contribution of 2% of compensation for every eligible employee, or match employee contributions dollar-for-dollar, up to 3% of compensation. To unlock the higher employee contribution limits, employers with 26 to 100 employees must increase their contribution to either a 4% match or a 3% non-elective contribution.

For example, consider an employee under age 50 earning $70,000 at a company with 40 employees that has opted to offer the higher limits. The employee contributes $17,600 to their Roth SIMPLE IRA. Because the employer chose to offer the higher limit, they must provide at least a 4% match. The employer would contribute $2,800 (4% of $70,000). Depending on the employer’s plan design, this contribution could be made to either a traditional SIMPLE IRA or, if the employer allows, to the employee’s Roth SIMPLE IRA.

Employer Steps for Plan Implementation

Before employees can make Roth contributions, the employer must take several administrative actions. The first step is to contact the financial institution that serves as the plan’s trustee to verify it can accept and separately account for Roth SIMPLE IRA contributions.

Once the provider’s capability is confirmed, the employer must amend their plan documents to officially include the Roth option. This typically involves updating the plan agreement, often established using an IRS model form, to formally record the decision. This amendment is a necessary step for compliance, ensuring the plan’s operation aligns with its written terms.

Employers are also required to notify employees of the new option. This communication must be delivered in advance of the 60-day salary deferral election period that occurs before the start of the calendar year. The notice must explain that the Roth option is available and detail the process for making that election. This ensures every eligible employee has an “effective opportunity” to make an informed choice, and these steps must be completed before any Roth contributions can be withheld from payroll.

Employee Election and Participation Process

To participate in the Roth feature, an employee must make a formal election after the employer has adopted the provision and notified staff. The choice is documented on a salary deferral agreement, where the employee specifies the contribution amount and selects the Roth (post-tax) treatment. This election must be made before contributions are withheld from a paycheck.

The decision is made during the plan’s annual election period, which occurs in the fall for contributions made during the following calendar year. Once submitted, the salary deferral agreement serves as the official instruction for payroll. The election is binding for the entire calendar year, and an employee cannot switch between traditional and Roth contributions mid-year. Any change must be made during the next open election period for the subsequent year.

Taxation and Rollover Regulations

A “qualified distribution” from a Roth SIMPLE IRA is entirely free from federal income tax. To be qualified, a distribution must meet two conditions: the withdrawal must occur after the account owner reaches age 59½, and it must be made after a five-year holding period is satisfied. The five-year clock starts on January 1 of the first year a contribution was made to any Roth IRA for the individual.

In contrast, distributions from a traditional SIMPLE IRA are fully taxable as ordinary income in the year they are received. This is because neither the contributions nor the earnings have been previously taxed.

The rules for moving funds out of a SIMPLE IRA are specific. After an initial two-year period, which begins on the date the first contribution was deposited into the employee’s SIMPLE IRA, funds can be rolled over to other retirement accounts. This two-year waiting period is a unique feature of SIMPLE IRAs, designed to encourage the plan’s use for ongoing retirement saving.

Money from a Roth SIMPLE IRA can be moved into another Roth account, such as a Roth IRA or a designated Roth account in a 401(k) plan. Similarly, funds from the traditional SIMPLE IRA can be rolled over to other pre-tax retirement accounts, like a traditional IRA or a 401(k).