Both plans allow for deferment of income tax on amounts contributed to the plans until they are dispersed, as well as on any earnings as long as they remain in the plans. But there are some key differences between the two plans.
A traditional IRA is set up by an individual on their own behalf to save for retirement, whereas a SIMPLE IRA is set up by a small business owner on behalf of an employee (including the owner if he or she is a sole proprietor). Only the owner of a traditional IRA makes contributions to the account, whereas both the employee and the employer make contributions to a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees.
To contribute to a traditional IRA requires only having earned income during the year. By contrast, small business owners who open SIMPLE IRAs for their employees may make additional stipulations about who can participate.
SIMPLE IRAs have much higher contribution limits than traditional IRAs, allowing you to save more in taxes upfront.
The contribution limits are also different:
- For traditional IRAs, the maximum allowable contribution in 2020 is the smaller of $6,000 (or $7,000 for those 50 and older) or total income for the year.
- With a SIMPLE IRA, an employee may contribute up to $13,500 per year in 2020. For those who are 50 years or older, the IRS catch-up provision allows an additional $3,000 for a total of $16,500 maximum contribution for 2020.
- The SIMPLE IRA contributions can be either matched dollar for dollar by the employer, up to 3% of the employee’s compensation—or the employer’s contribution can be a fixed amount of 2% of the employee’s compensation.
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