Both are tax-favored retirement plans, but they have unique rules
Tax-advantaged retirement accounts include both Roth IRAs and SIMPLE IRAs. While everyone who receives income from employment is qualified to finance a Roth IRA as long as their income is below specific thresholds, contributions to a SIMPLE IRA can only be made through your workplace. Learn more about the fundamental distinctions between a SIMPLE IRA and a Roth IRA. You'll discover who may donate, how much they may contribute, and the restrictions of each plan. Find out more about your options for retirement savings, including a Roth IRA and a SIMPLE IRA.What’s the Difference Between a Roth IRA and a SIMPLE IRA?
Individual retirement arrangements, sometimes known as individual retirement accounts, or IRAs, come in two different flavors: Roth IRAs and SIMPLE IRAs. When you invest for your retirement, both provide significant tax advantages. You can incur fees if you take money out of either account before retirement because they're both intended for retirement savings. You open a Roth IRA account on your own at the brokerage house of your choice. Contributions are never tax-deductible for tax purposes since they are always taxed at the time they are made. However, if you adhere to specific guidelines, your money grows tax-free and is entirely yours when you retire. Savings Incentive Match Plan for Employees is the acronym for the SIMPLE IRA. Only employees of businesses that provide them are eligible to donate. Businesses with 100 or fewer employees who don't provide another retirement plan typically have the option of using SIMPLE IRAs. SIMPLE IRAs operate similarly to conventional IRAs. Pretax salary deferrals are used to make contributions, while taxable withdrawals are made. You are in charge of funding a Roth IRA because it is an individual account that you open. In contrast, if you contribute to a SIMPLE IRA, your employer will match a portion of your contributions in accordance with one of the following formulas:- 2% non-elective contribution: Regardless of how much the employee contributes, the company contributes 2% of the employee's pay.
- 3% matching contribution: Up to 3% of the employee's donations are matched by the company dollar for dollar. The employer has the option to temporarily cut its contribution to 1%. Within a five-year period, it can only do so for two calendar years.
| Roth IRA | SIMPLE IRA | |
| Eligibility | Requires earned income; income limits apply | Employer can limit participation to employees with $5,000 of earnings in two prior years, or $5,000 of expected earnings for current year |
| Contribution limits | $6,000, or $7,000 if you’re 50 or older | $14,000, or $17,000 if you’re 50 or older |
| Withdrawal rules | Taxes and early-withdrawal penalties only apply to earnings | Taxes and early-withdrawal penalties apply to both contributions and earnings |
| Investment options | Individual chooses | Individual chooses, but may be limited by employer’s choice of financial institution |
Eligibility
You require earned income, which you obtain from a job or your own business, to finance a Roth IRA. Your income also can’t exceed the Roth IRA income limits. If your income exceeds $144,000 for single filers and $214,000 for married couples filing a joint return in 2022, you are not eligible to make a contribution. Additionally, you aren't allowed to contribute more than 100% of your taxable income for the year to a Roth IRA. Any employee who earned $5,000 or more in any of the two years prior to the current calendar year may join an employer-sponsored SIMPLE IRA. A worker must be permitted to make contributions if they are anticipated to make $5,000 in a calendar year. The guidelines cannot be made more restrictive by the employer, although they may have less stringent standards. For instance, they may permit participation from someone making only $2,000, but they couldn't make you earn at least $10,000. You might be able to make after-tax contributions to a traditional IRA and subsequently convert it to a Roth IRA if your income is too high to contribute to a Roth IRA. The converted amount will be subject to taxation. A backdoor Roth IRA plan is what this is.Contribution Limits
For those under 50, the maximum Roth IRA contribution in 2022 is $6,000. A $1,000 catch-up payment is also permitted for anyone over 50. Employees under 50 can use a SIMPLE IRA to postpone up to $14,000 of their pay. For employees 50 and older, a catch-up payment of up to $3,000 is permitted.Withdrawal Rules
You have unlimited access to your contributions with a Roth IRA. If you withdraw your earnings prior to age 59 12 or if the five-year requirement has not been satisfied, you will be subject to taxes and a 10% early withdrawal penalty. Because you fund a SIMPLE IRA with money you haven't paid taxes on, you aren't permitted to withdraw your contributions tax-free at any time. Withdrawals done prior to the age of 59 12 will incur an additional 10% penalty. The penalty rises to 25% if you withdraw money within the first two years of participating in the plan.Investment Options
Any financial institution that you pick allows you to start a Roth IRA. Any equities, bonds, mutual funds, or exchange-traded funds (ETFs) are acceptable investments for your money. But with a SIMPLE IRA, your employer may decide which bank will handle your account. You can also have the option to select the financial institution. You may invest the funds in any securities that the banking institution permits. IRAs of any kind are not permitted to hold certain investment kinds, such as life insurance and collectibles.A Best-of-Both-Worlds Option
You don't have to choose between a Roth IRA and a SIMPLE IRA if you're trying to make a decision. Even if your employer offers a SIMPLE IRA, you can still contribute to a Roth IRA. Making use of any employer match first is a good idea. Aim to contribute 3 percent, for instance, if your employer will match your contributions up to 3 percent, so that you don't forego the opportunity to receive free money. If you have more funds to invest, you can put them in a Roth IRA or increase your SIMPLE IRA contributions. However, for a lot of individuals, investing a Roth IRA after securing your company match will make sense. A Roth IRA has several flexible features in addition to the flexibility of withdrawal of contributions whenever you want. For instance, you may be able to withdraw up to $10,000 without incurring any fees to pay for your first home or to further your education. If you're able to, making contributions to both a Roth IRA and a SIMPLE IRA can be a wise choice. You can invest more money on a tax-advantaged basis by utilizing both types of accounts. Because Roth IRAs are financed with after-tax funds while SIMPLE IRAs are funded with pre-tax funds, you also benefit from tax diversification. You can get a tax break now on your SIMPLE IRA contributions if you don't know what your tax rate will be in retirement; however, you'll also have tax-free money from your Roth IRA when you retire.The Bottom Line
As mentioned, there are two types of tax-advantaged retirement accounts—a Roth IRA and a SIMPLE IRA—that might meet distinct needs for people who are saving for retirement. If your earned income is below specified thresholds, you can start a Roth IRA, but you can only open a SIMPLE IRA if your employer, which must have less than 100 employees, makes them available. If you are qualified, you can even open accounts for both types. Additionally, keep in mind that SIMPLE IRA contributions are always pretax and are taxed at the time of withdrawal, whereas Roth IRA contributions are made using after-tax money.