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Retirement: For Businesses: SIMPLE IRA


A SIMPLE IRA plan is a written arrangement established under Section 408(p) of the Code that provides a simplified tax-favored retirement plan for small employers. Employees are permitted to make salary deferral contributions to the plan. An employer that chooses to establish a SIMPLE IRA plan must make either matching contributions or nonelective contributions. All contributions under a SIMPLE IRA plan are made to SIMPLE IRA accounts.


Just about any business with fewer than 100 employees can establish a SIMPLE. This includes:

  • Sole proprietors
  • Partnerships
  • S corporations
  • C corporations
  • Nonprofit organizations

Contribution Limits (for tax-year 2015)

Salary Deferral: 100% of eligible compensation up to a maximum of $12,500.
Employer: There are two options:

  • Matching: 100% up to 3% of eligible compensation, up to a maximum of $12,500.
  • Nonelective: 2% of eligible compensation up to a maximum of $5,100 (based on $255,000 compensation cap).

Catch-Up Contributions

For 2015, participants who have attained the age of 50 may contribute an additional $3,000 as a catch-up contribution. For subsequent years, the catch-up contribution amount is indexed for inflation.


Distributions from a SIMPLE IRA generally are includible as income for the year received. Withdrawals prior to age 59½ may be subject to a 10% additional tax. However, the additional tax is increased to 25% if the funds are withdrawn within two years of beginning participation.


The deadline to establish a SIMPLE IRA is October 1 in the year for which the SIMPLE plan is to be effective. In addition, there is a requirement to provide a summary description of the SIMPLE IRA plan at least 60 days prior to the beginning of the plan year (usually November 1).

How to Establish a SIMPLE IRA with Principal Funds

  1. Request the required paperwork to establish a SIMPLE IRA from your financial professional or from Principal Funds.
  2. The employer must complete the Adoption Agreement and the Participation Notice & Summary Description.
  3. The Participation Notice needs to be distributed to all employees covered by the plan.
  4. Each employee must complete a Principal Funds SIMPLE IRA Application and Salary Deferral Agreement.
  5. All paperwork should be returned to your financial professional.

Frequently Asked Questions

Do employees have to be included in the plan?
Any employee who meets the eligibility requirements must be included in the plan.

Does the employer have to make a contribution each year?
If the matching option is chosen and any eligible employee makes a contribution, then the employer must make a matching contribution.

If the employer adopted the plan with a nonelective employer contribution, then a contribution of 2% of eligible compensation must be made for each eligible employee.

Can an employer reduce the matching percentage amount?
Yes, the employer can lower that matching contribution amount to as low as 1% for two out of every five years, provided that employees are properly notified of the change in a timely manner.

Can a participant contribute to their own traditional IRA if they have a SIMPLE IRA?
Yes, an individual may still contribute the lesser of the applicable limit or 100% of compensation to an IRA. However, as a participant in the SIMPLE IRA, the individual would be considered covered by an employer-sponsored plan. This means that the deductibility of the IRA contribution may be limited.

I have a client who is a sole proprietor, has no employees, and makes $60,000 a year. Could the SIMPLE IRA be the right plan?

There are a number of variables. See table below:




Solo 401(k)

Deadline to set up

Tax filing deadline, plus extensions

October 1

December 31

Multiple employees allowed?




Maximum contribution

Employee: $0
Employer: 25%1 x $60,000 = $15,000
TOTAL: $15,000

Employee: $12,500
Employer: 3% x $60,000 = $1,800
TOTAL: $14,300

Employee: $18,000
Employer: 25% x $60,000 = $15,000
TOTAL: $33,000

Administration and expense

Administration is simple and cost is low.  Funding cost depends on number of employees and level of contributions.

Administration is simple and cost is low.  Funding cost depends on number of employees and level of contributions.

Funding cost depends on employer options; generally more expensive than SEPs and SIMPLEs.

1 If you contribute to your own SEP IRA, you must make a special computation to figure your maximum deduction for these contributions. Generally, the computation must take into account the deduction for one-half of your self-employment tax as well as the deduction for your own contributions. See IRS Publication 560 for more information.



To obtain a prospectus, download online or call Sales Support at 1.800.787.1621

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Sales Support at 1.800.787.1621.

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