Can You Contribute to a SIMPLE IRA if You Are Not Self-Employed?
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Saving for retirement is confusing, especially when different accounts come with their set of rules. Contributing to a SIMPLE (Savings Incentive Match Plan for Employees) IRA, even if you are not self-employed, is possible. However, there is a catch. SIMPLE IRAs are tied to employment, meaning you can only contribute if your employer offers the plan and you meet their eligibility criteria.
What Is SIMPLE IRA?
A SIMPLE IRA is a retirement plan for small businesses with 100 or fewer employees. It is a cost-effective alternative to a traditional 401(k), giving employees and employers a way to save for retirement without the administrative complexity of bigger plans.
Employers must contribute each year, either by matching what employees contribute (up to 3% of their pay) or by contributing 2% of every eligible employee’s salary, whether they contribute or not. Employees can then elect to defer part of their salary into the plan, similar to how 401(k) contributions work.
Who Is Eligible to Contribute?
To participate, you need to have earned at least $5,000 from your employer in any two previous years and expect to earn at least $5,000 in the current year. Employers can be more generous and lower this requirement, but they cannot make it more restrictive.
Certain employees can be excluded, such as union employees covered by a collective bargaining agreement or non-residents with no U.S. income.
Advantages of a SIMPLE IRA
SIMPLE IRAs are attractive because they are easy for employers to set up and operate. There are no annual IRS filings required for the employer, and employees are always 100% vested, meaning the money is yours right away.
For employees, this means a straightforward way to build retirement savings, with the added benefit of guaranteed employer contributions.
Things to Keep in Mind
While SIMPLE IRAs are convenient, they do have some downsides. The contribution limits are lower than a 401(k), and withdrawals before age 59 and a half are subject to a 10% penalty or 25% if you take the money out within the first two years of participating. Unlike a 401(k), you cannot take a loan from your SIMPLE IRA.
Another key point: you can only contribute through your employer. If you have income from another job or a side hustle, you cannot make additional SIMPLE IRA contributions from that separate income unless that employer also offers a SIMPLE IRA and you participate in their plan.
The Bottom Line
You do not need to be self-employed to contribute to a SIMPLE IRA, but you do need to work for an employer offering one. If your employer has a plan and you are eligible, it can be a great way to save for retirement with minimal hassle and an added boost of employer contributions.
If you have multiple income sources or want to save more, you can also contribute to a traditional or Roth IRA separately, as long as you stay within IRS annual contribution limits.