SIMPLE IRA Contribution Limits Guide

What a SIMPLE IRA Is

A SIMPLE IRA, short for Savings Incentive Match Plan for Employees, is a retirement plan that small employers can offer with far less paperwork and cost than a 401(k). It is governed by IRC §408(p). Each eligible employee gets an individual IRA, the employee can defer part of their salary into it, and the employer is required to chip in too. That mandatory employer contribution is the defining feature: unlike a 401(k), where a match is optional, a SIMPLE IRA employer must put money in every year.

SIMPLE IRAs are built for businesses with 100 or fewer employees that do not want to run a full 401(k). The trade-off for the simplicity is a lower employee deferral limit than a 401(k) and a few rules that catch people, especially the two-year holding period and the requirement that the employer cannot run another retirement plan at the same time.

Two Sources of Money

Every SIMPLE IRA contribution comes from one of two places: the employee salary reduction (your own deferral, the amount you choose to set aside), and the employer contribution (a match or a flat nonelective amount). No other contributions are allowed into a SIMPLE IRA. This guide covers both, plus the catch-up rules, the SECURE 2.0 changes, and how the plan compares to the alternatives.

2026 and 2025 Contribution Limits

The headline number is the employee salary deferral limit. For 2026 you can defer up to $17,000, up from $16,500 in 2025. That figure is the standard limit; a higher limit applies to certain small-employer plans, covered in the SECURE 2.0 section below. The deferral limit is per person, and if you participate in more than one elective-deferral plan in the same year, a combined limit applies (see "when rules do not apply").

Your deferral also cannot exceed your compensation for the year. A part-time employee earning $12,000 can defer up to $12,000, not the full $17,000. The SIMPLE IRA Contribution Calculator applies both the dollar limit and the compensation cap, and adds the employer contribution to show your total.

The Mandatory Employer Contribution: 3% Match vs 2% Nonelective

The employer must contribute to a SIMPLE IRA, and each year it picks one of two formulas. This is where most of the planning value lives, because the two formulas can cost very different amounts depending on how many employees actually defer.

The 3% Matching Contribution (Default)

The default is a dollar-for-dollar match on each employee's salary deferral, up to 3% of that employee's compensation. If you defer 3% or more of your pay, you get the full 3% match; if you defer less, the match equals what you put in. A key quirk: the match is figured on your actual compensation with no $360,000 compensation cap. An owner paying themselves $300,000 who defers enough gets a $9,000 match (3% of $300,000) on top of their own deferral.

The Reduced Match (As Low as 1%)

An employer can lower the match below 3%, but not below 1%, and only for no more than 2 out of any 5 consecutive years (IRC §408(p)(2)(C)). This flexibility lets a business through a tough year trim the cost temporarily. Employees must be told before the 60-day election period.

The 2% Nonelective Contribution

Instead of matching, the employer can make a flat 2% nonelective contribution to every eligible employee, whether or not the employee defers anything. The 2% is figured on compensation up to $360,000 for 2026 ($350,000 for 2025). The nonelective is attractive when the employer wants to fund everyone, or when few employees defer, but it costs money even for non-savers.

Catch-Up Contributions

If you are age 50 or older at the end of the year, you can add a catch-up contribution to your salary deferral. For 2026 the SIMPLE IRA catch-up is $4,000, up from $3,500 in 2025. The catch-up is part of your own deferral; it does not increase the employer contribution.

The Higher Age 60 to 63 Catch-Up

The SECURE 2.0 Act §109 created a higher "super" catch-up for employees who are age 60, 61, 62, or 63 at year-end. For SIMPLE plans that higher catch-up is $5,250 for both 2025 and 2026. At age 64 the catch-up drops back to the regular $4,000. So a 61-year-old in a standard plan can defer $17,000 plus $5,250, for $22,250 of their own money in 2026.

In a section 117 enhanced small-employer plan, the regular age-50 catch-up is $3,850 rather than $4,000, while the age 60 to 63 catch-up is still $5,250. The calculator selects the right catch-up automatically from the age band and plan type you choose.

SECURE 2.0 Changes: The $18,100 Limit, the Super Catch-Up, and Roth SIMPLE

The SECURE 2.0 Act of 2022 made several changes that now apply to SIMPLE IRAs. Three matter most.

The Higher $18,100 Limit (Section 117)

Section 117 created a higher employee deferral limit for "certain applicable" SIMPLE plans: $18,100 for 2026 (up from $17,600 for 2025), with a $3,850 age-50 catch-up. This higher limit applies automatically to employers with 25 or fewer employees. Employers with 26 to 100 employees can elect it, but only if they provide an enhanced employer contribution: a 4% match instead of 3%, or a 3% nonelective instead of 2%.

The Super Catch-Up (Section 109)

As covered above, section 109 added the higher $5,250 catch-up for ages 60 to 63. This is a permanent part of the SIMPLE IRA rules now, not a one-year provision.

Roth SIMPLE Deferrals (Section 601)

SECURE 2.0 section 601 allows SIMPLE IRA plans to accept Roth employee deferrals. A Roth SIMPLE deferral is made with after-tax dollars, so it does not lower your current income tax, but qualified withdrawals later are tax-free. Whether your plan offers a Roth option is up to the employer and the custodian. Employer matching and nonelective contributions can also be designated Roth under SECURE 2.0, though that is taxable to the employee in the year contributed.

The 2-Year Rule and the 25% Penalty

The single most important trap in a SIMPLE IRA is the two-year rule. The clock starts on the date the first contribution is deposited to your SIMPLE IRA, not on the plan's start date or your hire date. During those first two years, two restrictions apply.

• The 25% early-withdrawal penalty. If you take a distribution before age 59 and a half during the first two years, the additional tax is 25% instead of the usual 10%, under IRC §72(t)(6). This is on top of ordinary income tax on the distribution.
• Restricted rollovers. During the two-year window you can only roll a SIMPLE IRA into another SIMPLE IRA tax-free. Rolling it into a traditional IRA, a 401(k), or another non-SIMPLE plan is treated as a taxable distribution, with the 25% penalty if you are under 59 and a half.

After the two years are up, the SIMPLE IRA behaves like any other traditional IRA: the early-withdrawal penalty drops to 10%, and you can roll the balance into a traditional IRA, a 401(k), a 403(b), or another eligible plan tax-free. The practical lesson is to avoid putting money you might need soon into a SIMPLE IRA in its first two years.

SIMPLE IRA vs SEP IRA vs 401(k)

The SIMPLE IRA sits between the SEP IRA and the 401(k). It allows employee deferrals (a SEP does not) but caps them lower than a 401(k). The right choice depends on who is funding the plan and how much they want to contribute.

For a self-employed person with no employees who wants to contribute as much as possible, a SEP IRA or Solo 401(k) usually wins because the ceilings are far higher. Compare them in the SEP IRA vs Solo 401(k) Calculator. A SIMPLE IRA shines when a small employer wants its employees to be able to defer their own salary without the cost and complexity of a 401(k). Remember that an employer cannot run a SIMPLE IRA and another qualified plan in the same year.

Eligibility, Setup, and Deadlines

Both the employer and the employee have to clear eligibility tests.

Employer Eligibility

• Had 100 or fewer employees who earned at least $5,000 in the prior calendar year.
• Does not maintain another qualified retirement plan (the exclusive plan rule), with limited SECURE 2.0 exceptions for transitions.

Employee Eligibility

By default an employee must have earned at least $5,000 in any two prior calendar years and be reasonably expected to earn $5,000 in the current year. The employer can set lower thresholds (down to zero) to let more employees in, but cannot make them stricter.

Setup Forms and Deadlines

A SIMPLE IRA plan is established using one of two IRS model forms:

• Form 5304-SIMPLE - employees each choose the financial institution that holds their IRA.
• Form 5305-SIMPLE - the employer chooses a single financial institution for all accounts.

A new plan must generally be set up between January 1 and October 1 of the year it takes effect, so it is in place before contributions begin. The employer must give employees a 60-day election window (generally November 2 to December 31 for the next year) to choose their deferral. Employee deferrals must be deposited within 30 days after the end of the month they were withheld; employer contributions are due by the employer's tax-filing deadline, including extensions.

Taxes, Rollovers, and Withdrawals

A traditional SIMPLE IRA employee deferral is pre-tax for federal income tax: it is left out of box 1 of your W-2, so it lowers the income tax you owe. It is not exempt from Social Security and Medicare (FICA) tax, however, so your payroll taxes are unchanged. You do not take a separate deduction on your return, because the money was never included in your taxable wages in the first place. Employer matching and nonelective contributions are not included in your income and are deductible by the business.

The account grows tax-deferred, and withdrawals in retirement are taxed as ordinary income. Early withdrawals before age 59 and a half generally add the 10% penalty (25% in the first two years, as covered above). SIMPLE IRAs are subject to required minimum distributions starting at age 73, the same as other traditional IRAs - see our RMD guide.

Rollovers

After two years of participation, you can roll a SIMPLE IRA into a traditional IRA, a 401(k), a 403(b), or another eligible plan tax-free, and you can also do a Roth conversion (taxable). Within the first two years, only SIMPLE-to-SIMPLE rollovers are tax-free. A SIMPLE IRA you no longer contribute to can be left in place, rolled over, or, once eligible, converted to a Roth - model the cost of a conversion in our Roth Conversion Tax Calculator.

Practitioner Insight (LMN Tax Inc.)

Real-World Scenarios

When the General Rules Do Not Apply

• Two plans, one combined limit. If you defer into a SIMPLE IRA at one job and a 401(k) or 403(b) at another, your total elective deferrals cannot exceed the higher 401(k) ceiling ($24,500 for 2026). The SIMPLE deferral counts against that shared limit.
• Self-employed compensation. For an owner, "compensation" is net earnings from self-employment after the deductible half of SE tax and after the contribution itself, not gross Schedule C profit. The match math is more involved than a W-2 employee's.
• The exclusive-plan rule. An employer cannot maintain a SIMPLE IRA and another qualified plan (like a 401(k) or SEP) for the same employees in the same year, with narrow SECURE 2.0 transition exceptions.
• Mid-year terminations. A SIMPLE IRA generally must run for the full calendar year; an employer cannot stop it mid-year. Switching to a 401(k) requires waiting until the next plan year, with SECURE 2.0 providing a limited mid-year replacement option in some cases.
• Roth deferrals do not cut income tax. If your plan offers Roth SIMPLE deferrals and you choose them, those dollars are after-tax, so they do not reduce current income tax.
• State tax. Most states follow the federal pre-tax treatment, but a few differ. The federal pre-tax benefit is the larger and more uniform one.
• Excess contributions. Deferring over the limit, or an employer overfunding, triggers correction rules and possible excise tax; fix excess deferrals and earnings promptly.

Frequently Asked Questions

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