Simple IRA vs. Traditional IRA: What’s Best for You

A SIMPLE IRA is one of several retirement accounts offered by employers. These plans are designed to allow individuals to save money tax free while receiving matching contributions from their employer. A SIMPLE IRA differs from a traditional IRA in three key ways. First, it doesn’t require you to make annual contributions. Second, it allows you to contribute up to $12,500 annually. Third, it provides greater flexibility regarding where the funds are invested.


Simple IRA accounts let people save money for retirement without paying any taxes or penalties. They are easy to set-up and operate and there are no limits on how many dollars you can put into one account. These savings vehicles are great if you want flexibility and don't mind saving money without worrying about taxes and fees.

You can open simple IRAs with just $1,0000. Contributions are pre-tax dollars and after-tax withdrawals are taken out tax free.

Traditional IRA

vs "SIMPLE IRA": Which Is Better?"

A traditional IRA allows you to contribute up to $5,500 per year ($6,500 for those age 50 and older). You can make additional contributions during the year, but there is no maximum amount. Your earnings grow tax free, but withdrawals are subject to income taxes, plus 10% federal penalty.

With a simple IRA, you can contribute up to $12,000 per year ($15,000 for those age 50 and over), and you can continue making additional contributions throughout the year. Earnings grow tax free, but distributions are not taxable. If you withdraw funds prior to 59 ½, you must pay a 10% early withdrawal penalty. After 59 ½, you do not have to pay taxes or penalties on withdrawals.

So what makes one better than the other? Here are some key differences:

• With a traditional IRA, you cannot take out any of your account balance without paying a 10% penalty. With a SIMPLE IRA, you can access your entire account balance at anytime.

• With a traditional plan, you must wait until April 15th each year to file your taxes. With a SIMPLE plan, you can file your taxes whenever you want.

• With a SIMPLE IRA you can invest in stocks, bonds, mutual funds, ETFs, real estate, annuities, and life insurance policies. With a traditional IRA, investments must be in securities listed on the NYSE, Nasdaq, AMEX, or OTC markets.

• With a simple IRA, you don't have to worry about losing your money because it is protected by the IRS. With a traditional IRA you could lose your money if the financial institution holding your account goes bankrupt.

What Are the Traditional IRA and Roth IRA Contribution Limits?

Contributions to a traditional IRA are limited to $5,500 per individual ($6,500 for those over age 50), while contributions to a Roth IRA are unlimited. However, once you make a contribution, it cannot be withdrawn without incurring taxes. If you withdraw money from a traditional IRA, you will owe taxes plus 10% penalty. If you withdraw money form a Roth IRA, you will owe no taxes, but you will still owe a 10% early withdrawal fee.

Withdrawal limits are different depending on whether you are contributing via payroll deduction or by check. For example, if you contribute $2,400 per month for 12 months, you will pay $24,000 into your IRA. If you choose to do so by payroll deduction, you will receive a Form 8606 from your employer detailing how much you contributed each month. You can then take out up to $5500 per year without paying taxes. If you chose to contribute by check, you will receive a W-4 form from your employer detailing how many allowances you are entitled to claim. Then you can take out up to $6500 per year without paying income taxes.

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If you want to know what the limit is for your particular situation, contact us today. We will be happy to assist you.

What Is the SIMPLE IRA Contribution Limit?

A SIMPLE IRA is a type of Individual Retirement Account (IRA). Unlike traditional IRAs, contributions to a SIMPLE IRA do not require you to make a specific amount each month. Instead, you contribute up to $5,500 per year ($6,500 if you're 50 or older), and there is no minimum balance required. You can add money to your SIMPLE IRA throughout the year, and it grows tax deferred.

Contributions to a SIMPLE IRA must come out of your paycheck. If you work for a company that offers a 401(k) plan, you can roll over funds into a SIMPLE IRA. However, if you work for a company without a 401(k) program, you'll have to open a SIMPLE IRA account yourself.

If you already have a Traditional IRA, you can transfer funds from your existing IRA to a SIMPLE IRA. This is called "rolling over." For example, let's say you have a Traditional IRA worth $10,000 and you decide to move those funds into a SIMPLE account. Your contribution limit for the year is $5,500 ($6,500 if age 50 or older). So you'd put $5,500 into your SIMPLE IRA and keep the rest in your old IRA.

You can withdraw funds from a SIMPLE IRA at any time. But unlike a Traditional IRA, you cannot deduct contributions to a SIMPLE account. And withdrawals made before age 59½ may be subject to taxes and penalties.

The IRS limits how much you can contribute to a SIMPLE IRA per year. In 2018, the maximum annual contribution is $5,500. If you're 50 or older, you can also contribute another $1,000.

There is no minimum balance requirement to start a SIMPLE IRA. As long as you've contributed enough money during the previous three years, you can begin contributing again.

What Distinguishes a Traditional IRA from a Roth IRA?

Traditional IRAs are great because they allow people to save for retirement without paying taxes on their earnings until they take out the money. But there's one big drawback: You're taxed on all the money you put into the account.

A Roth IRA is different. Instead of paying taxes now, it lets you make contributions over your lifetime and avoid taxation altogether once you pull the money out. If you're younger than 59½, you'll still owe income taxes on withdrawals taken before you reach 70½.

Here's how the process works: Let's say you want to set up a traditional IRA. First, you open an account with a brokerage firm like Fidelity or Charles Schwab. Then, you deposit $5,000 in cash or check. Once you do that, you've contributed $5,000 to your IRA. At that point, you no longer owe any taxes on the money. Now, let's say you decide to start contributing another $1,000 next month. Your total contribution for the year is now $6,000.

Next, you wait three months, during which time you won't pay any federal income taxes on the earnings inside your IRA. After that, you can begin withdrawing the money. As long as you meet certain requirements, you can take out up to $10,000 every year without owing additional taxes.

If you're under 59½, you can withdraw the entire amount without incurring a 10% early withdrawal penalty. However, you must be at least 60½ to withdraw the full amount without paying a 10% penalty.

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Now, let's compare that to a Roth IRA. For starters, you can contribute $5,000 annually to a Roth IRA. So, if you wanted to contribute $5,100 in 2018, you could just write a check for $5,100 and send it to your broker. You'd be able to keep making annual contributions indefinitely. And unlike a traditional IRA, you wouldn't owe any taxes on those contributions.

The catch here is that you can only withdraw what you originally invested in the account. In our example above, you couldn't withdraw $10,000 from your Roth IRA even though you had already deposited $5,100. This is where things get interesting. Unlike a traditional IRA, you aren't required to pay taxes on the earnings within your Roth IRA. So, you could theoretically invest $5,000 in a Roth IRA today and never touch the principal again. Even better, you could continue investing throughout your career and never owe any taxes on the earnings.

How may a SIMPLE IRA plan be created?

To adopt a SIMPLE IRA, you must provide employees and their families with certain information about the plans and the plan itself. You must tell them what contributions are allowed, how much each employee can contribute, and how long the contribution period lasts. You must also inform them whether the funds in their SIMPLE IRAs grow tax deferred; grow tax free; or grow tax free and are withdrawn without being taxed. Finally, you must explain how the IRS determines eligibility for benefits under the SIMPLE IRA program.

Employees own and control the SIMPLER IRA. They decide how many dollars will go into their SIMPLER IRA accounts. If you want to set up a SIMPLE IRA account for your employees, contact one of our financial advisors today. We can help you determine the best way to set up a SIMPLER IRA plan.

What retirement strategy should you pick?

A SIMPLE IRA allows you contribute more money per year to your retirement account than a traditional IRA. A SIMPLE IRA offers lower initial investment costs than a traditional IRA. And it lets you invest in stocks and bonds. But there are pros and cons to each type of account. Here’s what you need to know about both types of accounts.


A SIMPLE IRA is one of the best ways to save for retirement. Employers are now able to set up a SIMPLE IRA account for their workers. This allows employers to make pre-tax contributions to individual accounts. Workers can choose how much money they want to put into the plan each month. They can even roll over funds from another retirement account.

Employees who contribute to a SIMPLER IRA will receive a tax break because the contribution is deductible. An employer can deduct contributions to a SIMPLE IRA up to $5,500 per worker per year. If you work for a small business, the limit is $17,500. For larger businesses, the limit is $22,000.

SIMPLE IRA Drawbacks

A SIMPLE IRA is a type of Individual Retirement Account (IRA) that allows employees to contribute up to $12,500 per year ($16,500 if you are 50 or older). This money can be contributed over a period of five years. Unlike traditional IRAs, there are no age restrictions on contributions, and it doesn't matter how much you make. You can even withdraw your entire contribution amount at once if you want to.

The main drawback of a SIMPLE IRA is that it does not allow for tax deferral. If you take out too much money during your career, you'll owe taxes on what you've withdrawn. But it's still worth considering because it can help you build savings faster.

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Traditional IRA Benefits and Drawbacks

Traditional IRAs allow you to make contributions up to $6,500 annually ($7,000 for couples), while Roth IRAs offer no contribution limits. You can withdraw funds tax-free from either type of account once you reach age 70½.

Withdrawals from a traditional retirement plan can be subject to income taxes if taken prior to reaching age 59½. However, withdrawals from a Simple IRA can be tax free regardless of age.

There are many other differences between traditional and Roth IRAs, including how much you can contribute each year, what types of investments are allowed, and whether there are any additional fees associated with opening one of these accounts.

Traditional IRA Pros

A traditional IRA is an investment tool that allows people over age 71 ½ to contribute pretax money into retirement accounts without having to pay any federal income tax. There are two main types: Traditional and Roth.

With a traditional IRA, the IRS will pay taxes on earnings when you withdraw them. With the Roth IRA, all earnings grow tax free. You decide whether to take out your contributions now or later, and there are no limits on how much you can put away.

Once you reach age 70 ½ you can start contributing to either type of account. If you do, you'll need to make sure you keep track of your contribution amounts. And remember, it's important to save enough money each month to cover your living expenses.

Traditional IRA Cons

The IRS says it wants to make sure that Americans understand how to use tax-advantaged accounts like 401(k) plans and Individual Retirement Accounts (IRAs). And one way to do this is to offer information about what's wrong with those types of accounts. So, the IRS recently published a list of "cons" associated with traditional IRAs. Here are some highlights:

1. You must start taking required distributions no later than April 1st of each year. This means that you cannot delay withdrawals indefinitely. If you wait too long, you'll pay taxes and penalties.

2. You're limited to withdrawing $5,500 per year ($6,500 if you're 50 or older), plus whatever amount you contributed during the prior year.

3. Your account balance grows less quickly than it does in a Roth IRA. For example, if you contribute $4,000 to a traditional IRA and invest it at a 7 percent return, it will grow to $8,000 over 20 years. But if you contribute the same amount to a Roth IRA, it will grow to just under $10,000.

4. There's no tax deduction for contributions to a traditional IRA, but there is a tax deduction for contributions to both a Roth IRA and a 401(k) plan.

5. You lose out on potentially larger returns if you withdraw money early.

6. You won't qualify for certain employer matching contributions if you take distributions from a traditional IRA.

Frequently Asked Questions

Is there a deadline to set up a SIMPLE IRA plan?

You can set up a SIMPLER IRA plan effective on any day between January 1 and October 31, provided you (or a predecessor employer) didn't already maintain such a plan. However, if you are a new employer that came about after October 31st, you can establish the plan as soon as administratively feasible after your business came about.

If you previously established a SIMPLER IRA, you must set up another one effective on January 1 and it must be maintained for at least five consecutive years.

The effective date cannot be before the actual establishment of the plan.

When must the SIMPLE IRA be set up for an employee?

A SIMPLE IRA must be established for each employee before the first date on which you are required to make a contribution to the employee's account. If you do not establish a SIMPLE IRA within 60 days of the beginning of the plan year, contributions to the SIMPLE IRA cannot exceed $5,500 ($6,500 if married filing jointly). You must deduct contributions to the SIMPLE IRAs from gross income. For 2018, the maximum deduction allowed is 50% of compensation.