A straightforward IRA is a retirement savings plan for small business owners and their employees

A straightforward IRA is a retirement account that small employers set up for themselves and their workers. The name stands for Savings Incentive Match Plan for Employees — Individual Retirement Account. Unlike a regular IRA that you open on your own, a straightforward IRA is created by an employer and funded through payroll deductions, much like a 401(k) but with simpler rules and lower costs to run.

The main reason employers choose a straightforward IRA over other retirement plans is that it requires far less paperwork and administrative work. There is no annual tax filing requirement for the plan itself, no complex compliance testing, and no need to hire a plan administrator. For workers, it means having an employer-sponsored retirement account without the employer needing to be a large corporation.

straightforward IRAs are available only to businesses with 100 or fewer employees. If your employer has more than 100 workers, they cannot offer a straightforward IRA — they would need to set up a different type of plan like a 401(k) or a SEP IRA instead.

Key Takeaways

  • A straightforward IRA is a retirement plan that small employers with 100 or fewer employees can set up for their workforce.
  • Employees contribute money through payroll deductions, and employers must either match contributions or make a non-elective contribution to all workers.
  • Contribution limits for 2024 are $16,000 per year for employees under 50, and $19,500 for employees 50 and older, with a catch-up provision.
  • Money withdrawn before age 59½ is subject to a 25% penalty during the first two years of plan participation, then 10% after that.
  • straightforward IRAs have no annual filing requirements with the IRS, making them much simpler for employers than 401(k) plans.

How contributions work in a straightforward IRA

Employees choose what percentage of their paycheck to contribute to the straightforward IRA, up to the annual limit set by the IRS. For 2024, that limit is $16,000 per year for workers under age 50. Workers age 50 and older can contribute an additional $3,500 per year as a catch-up contribution, bringing their total to $19,500.

The employer's role is to either match what employees contribute or make a contribution to everyone's account regardless of whether they contribute themselves. In a matching arrangement, the employer typically matches 1% to 3% of each employee's salary. In a non-elective arrangement, the employer contributes 2% of salary for all workers, whether or not those workers put money in their own accounts.

These contributions are made through payroll, which means the money comes out of your paycheck before taxes are calculated. This reduces your taxable income for the year. The employer's contributions are also tax-deductible for the business.

Withdrawal rules and early withdrawal penalties

Money in a straightforward IRA grows tax-free until you withdraw it. Once you turn 59½, you can withdraw money without penalty. If you withdraw before that age, the IRS charges a penalty on top of income tax.

The penalty is steeper during the first two years you participate in the plan. If you withdraw before age 59½ during years one or two, you pay a 25% penalty plus income tax on the amount withdrawn. After two years of participation, the penalty drops to 10%, which matches the standard early withdrawal penalty for other retirement accounts.

There are a few exceptions where you can withdraw without the early withdrawal penalty: if you become disabled, if you are facing a financial hardship as defined by the plan, or if you withdraw funds to pay unreimbursed medical expenses. However, you still owe income tax on the withdrawal in these cases. The rules for what counts as a hardship vary by plan, so check with your employer about what your specific plan allows.

straightforward IRA versus other retirement plans

A straightforward IRA is simpler than a 401(k) but offers lower contribution limits. With a 401(k), employees can contribute up to $23,500 in 2024 (or $31,000 if age 50 or older), compared to $16,000 in a straightforward IRA. A 401(k) also requires more paperwork from the employer, including annual compliance testing and potentially a Form 5500 filing with the Department of Labor.

A SEP IRA, another option for small business owners, allows only the employer to contribute — employees cannot put money in themselves. The employer can contribute up to 25% of an employee's compensation, which can be higher than a straightforward IRA in some cases. However, a SEP IRA offers no employer matching, so it does not encourage employee participation the same way.

For a sole proprietor or self-employed person with no employees, a Solo 401(k) or Solo Roth IRA might be better because they allow higher contributions and more flexibility. The right choice depends on your business size, how much you want to contribute, and how much administrative burden you are willing to take on.

Tax treatment of straightforward IRA contributions and withdrawals

Contributions you make to a straightforward IRA are made with pre-tax dollars, meaning they reduce your taxable income for the year. If you contribute $5,000 to your straightforward IRA and earn $50,000, you report only $45,000 as taxable income. This lowers your federal income tax bill for that year.

When you withdraw money in retirement, that withdrawal is taxed as ordinary income at whatever tax rate applies to you at that time. If you are in a lower tax bracket in retirement than you were while working, you pay less tax on the withdrawal. If you are in a higher bracket, you pay more.

Employer contributions are also pre-tax, which means they do not count as taxable income to you in the year they are made. You only pay tax when you withdraw the money.

Portability and rollovers from a straightforward IRA

If you leave your job, you can roll your straightforward IRA balance into another retirement account. During the first two years of participation in the plan, you can only roll it into another straightforward IRA. After two years, you can roll it into a traditional IRA, a Roth IRA, or another employer plan like a 401(k) at your new job.

A rollover means the money moves directly from one account to another without you touching it. This avoids the early withdrawal penalty and keeps the tax-deferred status of the money intact. If you withdraw the money yourself and deposit it later, you have only 60 days to complete the deposit, or the IRS treats it as a taxable withdrawal.

Some employers allow you to keep your straightforward IRA with them even after you leave the job, though you cannot make new contributions. Check with your former employer's plan administrator about what happens to your account after you separate from the company.

Setting up and maintaining a straightforward IRA

An employer sets up a straightforward IRA by choosing a financial institution — a bank, brokerage, or insurance company — to hold the accounts. The employer does not need to file any special forms with the IRS to establish the plan, though they must provide employees with a summary of the plan terms and contribution options.

Each year, the employer must either match employee contributions or make the non-elective 2% contribution. The employer also must notify employees of the contribution formula and any changes to it. Unlike a 401(k), there is no annual Form 5500 filing requirement, no nondiscrimination testing, and no requirement to hire a third-party administrator.

Employees receive statements showing their account balance and contributions, usually quarterly or annually depending on the financial institution. The employer is responsible for making sure payroll deductions are processed correctly and deposited into the plan on time — typically within a few days of payroll.

Frequently Asked Questions

Can I have a straightforward IRA and a regular IRA at the same time?

Yes, you can have both. However, your total contributions across all IRAs cannot exceed the annual limit. For 2024, if you contribute $10,000 to a straightforward IRA, you can contribute only $6,000 more to a traditional or Roth IRA (assuming you are under 50). The employer contributions to your straightforward IRA do not count toward this limit — only your own contributions do.

What happens to my straightforward IRA if my employer goes out of business?

Your straightforward IRA account belongs to you, not your employer. If the business closes, your account remains intact at the financial institution where it is held. You can continue to access your money and make withdrawals according to the normal rules. The employer straightforward stops making contributions.

Can I convert a straightforward IRA to a Roth IRA?

Yes, but only after you have participated in the straightforward IRA for at least two years. Once two years have passed, you can convert all or part of your straightforward IRA balance to a Roth IRA. You will owe income tax on the amount converted, but future withdrawals from the Roth IRA will be tax-free if you follow the rules.

Do I have to contribute to a straightforward IRA if my employer offers one?

No, contributions are voluntary for employees. However, if your employer uses a matching formula, you miss out on information programs if you do not contribute. If your employer uses the non-elective 2% contribution, you receive that money automatically whether or not you contribute yourself.

What if I need money before retirement — can I borrow from my straightforward IRA?

straightforward IRAs do not allow loans the way some 401(k) plans do. Your only option is to withdraw the money, which triggers the early withdrawal penalty and income tax unless you meet a specific exception like disability or an unreimbursed medical expense. Check your plan documents to see what hardship withdrawals your employer's plan allows.