SIMPLE IRA vs. traditional IRA: What's the difference?

Two popular options for saving for retirement are Savings Incentive Match Plan for Employees (SIMPLE) IRAs and traditional IRAs. Although they share similarities, SIMPLE IRAs are not the same as traditional IRAs, and each has advantages and disadvantages. Choosing to save for retirement with a SIMPLE IRA vs. traditional IRA is a matter of identifying which best suits your needs.

To understand which type of IRA is best to help you reach your retirement goals—or if you want to consider using both—explore the key differences, including eligibility, annual contribution limits and tax penalties for early withdrawals from IRAs.

SIMPLE IRAs are a type of retirement account that provides a convenient way for both employees and employers to contribute to an employee's retirement savings. They are established by small business employers and allow both the employer and employees to make contributions.

Like traditional IRAs, SIMPLE IRAs are a great way to experience the effect of compound interest with built-in tax advantages. But unlike traditional IRAS, they also offer benefits like employer matching, higher contribution limits and the simplicity of funding the account through payroll deductions.

Traditional IRAs are standalone retirement accounts that you can open whether you have an employer or not. You can open one at any financial institution that offers them. Because these aren't tied to an employer, you fully control the timing and amount of your contributions, and your investment options are likely to be much wider than a curated employer plan. Additionally, traditional IRAs have more flexible withdrawal rules.

Yes, you can have different kinds of retirement accounts at the same time. As long as you have earned income, you can open and fund a traditional IRA on your own. You also can contribute to a SIMPLE IRA if your employer offers one.

While you may not need to contribute to both, there are certain advantages to doing so:

• You can save more because you can contribute to each up to their respective limits.
• Having both may give you more flexibility while maximizing your retirement savings.

The main distinctions between SIMPLE and traditional IRAs are who qualifies to open and use each account, who can contribute to it, the annual contribution limits, and a small difference in the penalties for early withdrawal.

SIMPLE IRAs have specific eligibility requirements while traditional IRAs are more flexible. It's important to note, though, that if you have a SIMPLE IRA, you also can have a traditional IRA and vice versa. You don't have to choose just one if you're eligible for both.

If your employer offers a SIMPLE IRA, you're allowed to participate as long as you earned at least $5,000 in any two calendar years and expect to earn at least $5,000 in the current year (though your employer may choose to make these requirements less restrictive).

Only employers who have fewer than 100 employees who make $5,000 or more per year can offer SIMPLE IRAs if they don't offer any other retirement plan. People who work for themselves, such as contractors, freelancers, consultants and shop owners, can fall into this category.

If you are an employer considering establishing a SIMPLE IRA plan, you must allow all employees who qualify to participate in the plan.

To qualify for a traditional IRA, you or your spouse must have earned income from wages, salaries or tips from working. Income from real estate rentals, interest, dividends and other types of passive income doesn't count.

There are no age requirements or income thresholds to open a traditional IRA.

Far more contributions can be put into a SIMPLE IRA annually than a traditional IRA, so a SIMPLE IRA may help you build your retirement savings more robustly.

In 2025, you can contribute up to $16,500 per year if you're younger than 50 or up to $20,000 per year if you're 50 or older.Contributing is as simple as setting up automatic contributions from payroll.

Your employer will be required to make mandatory contributions to your SIMPLE IRA. See employer details above. You are immediately vested and will keep all employer contributions regardless of how long you participate in the plan.

SIMPLE IRAs are an employment-based retirement savings tool, and both the employer and employee can contribute.

If you're a business owner who offers a SIMPLE IRA plan, your company will have certain funding requirements. It won't be only the employees putting money in. You must either:

• Contribute a mandatory 2% of an employee's salary to their account, regardless of whether or how much the employee contributes.
• Elect to make a 100% matching contribution of up to 3% of the employee's salary.

In addition, employers may contribute an additional amount that is the lesser of 10% of each employee's compensation or $5,000. If made, this contribution must be applied uniformly.

Traditional IRAs have an annual contribution limit in 2025 of $7,000, or up to $8,000 if you're 50 or older. This limit, though, applies to all the traditional and Roth IRAs you hold in total. On its own, that's often not enough to meet retirement goals.

Both SIMPLE and traditional IRAs allow you to defer paying income taxes on the money and its earnings until you make withdrawals. Both accounts are designed with this tax advantage to encourage retirement savings that compound over time.

Because SIMPLE IRAs are funded with pre-tax dollars, your contributions will lower your taxable income for that year. Then, your investments will grow on a tax-deferred basis. This means you won't owe any taxes on that money until you start taking withdrawals.

Contributions are tax-deductible for the employer, within legal limits.

Traditional IRAs also allow contributions to grow tax-deferred until you make withdrawals.

You also may be able to deduct your contributions in the year they are made :

• If you make below the MAGI (modified adjusted gross income) listed, you can take a full tax deduction of your contributions.
• If you make between the maximum MAGI listed, you can take a partial deduction of your contributions.
• Although you still can contribute to an IRA, you will not be eligible for the tax deduction if your MAGI exceeds the top of the MAGI threshold.

Your investment choices between a SIMPLE IRA and a traditional IRA generally will be the same. Each allows you to invest in most securities, including stocks, bonds, certificates of deposit (CDs), mutual funds and exchange-traded funds (ETFs).

Because they are meant for retirement, both a SIMPLE and a traditional IRA have a penalty for taking money out before reaching age 59½ unless you qualify for an early IRA withdrawal penalty exception. Examples include giving birth, an adoption, educational expenses or a first-time home purchase.

• For both a SIMPLE IRA and a traditional IRA, there is a 10% penalty on top of taxes owed for early withdrawals.
• For SIMPLE IRAs only, that penalty increases to 25% if taken within the first two years of participating.

You also are subject to required minimum distributions (RMDs) with each account type. Between ages 73 and 75, depending on your birth year, you must begin to withdraw at least the RMD even if you are still working.