A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.
Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions. As an employee, you can contribute a percentage of your salary up to a limit of $12,000 for 2014. If you're 50 or older, you can make an additional $2,500 "catch up" contribution.
What makes a SIMPLE IRA unique is that the employer is required to make a contribution on the employee's behalf - either a dollar-for-dollar match of up to 3% of salary or a flat 2% of pay - regardless of whether the employee contributes to the account. Your employer must make a contribution even if you choose not to, and all employees must receive the same type of contribution.
To set up a SIMPLE IRA an employer must have 100 or fewer employees earning more than $5,000 each - including all employees who have worked at any point in the calendar year. And the employer cannot have any other retirement plan besides the SIMPLE IRA.
If your employer offers a SIMPLE IRA, you qualify to contribute if you earned at least $5,000 a year during any two years before the plan was set up, and if you expect to earn at least $5,000 this year.
Finally, your company can lower the matching contribution to 1% or 2% of total compensation in any two out of five years that the plan is in effect. In the other three years, the company must make either a 3% match or the 2% flat contribution.