A straightforward IRA is a retirement savings plan for small business owners and self-employed people

A straightforward IRA is a retirement account that small employers set up for their workers. The name stands for Savings Incentive Match Plan for Employees — it is a way for a business with fewer than 100 employees to offer retirement savings without the paperwork and cost of a traditional 401(k).

The account belongs to the employee, not the employer. Money goes in through payroll deductions, grows tax-deferred, and the employee controls where it is invested. The employer's job is to set up the plan and, in most cases, contribute money on behalf of workers each year.

straightforward IRAs are common in small professional offices, family businesses, and service companies where owners want to offer retirement benefits but do not have the resources to run a larger plan.

Key Takeaways

  • A straightforward IRA is a retirement plan that small employers set up; employees own the accounts and contribute through payroll deductions.
  • Employers must either match employee contributions dollar-for-dollar up to 3 percent of pay, or contribute 2 percent of pay for all workers regardless of whether they contribute.
  • In 2024, employees can contribute up to $16,000 per year; those 50 and older can add an extra $3,500 catch-up contribution.
  • Money in a straightforward IRA grows tax-free until withdrawal, and withdrawals before age 59½ usually trigger a 25 percent penalty in the first two years, then 10 percent after that.
  • A straightforward IRA is simpler and cheaper to run than a 401(k), but offers lower contribution limits and fewer investment options.

How contributions work: employee and employer roles

Employees contribute to their straightforward IRA through automatic payroll deductions. The amount comes out of each paycheck before taxes, which lowers the employee's taxable income for the year. An employee can change their contribution amount or stop contributing at any time, though the employer may have rules about when changes take effect.

The employer must make a contribution too. There are two ways to do this. The first is a matching contribution: the employer matches what the employee puts in, up to 3 percent of the employee's gross pay. If an employee earns $50,000 and contributes 3 percent ($1,500), the employer adds $1,500. If the employee contributes only 1 percent ($500), the employer adds only $500.

The second option is a non-elective contribution: the employer contributes 2 percent of pay for every employee, whether or not the employee contributes anything. This means a $50,000-per-year employee gets a $1,000 employer contribution automatically.

Most employers choose the matching option because it costs less if workers do not contribute much. The employer picks which method to use when setting up the plan and can switch methods once per year.

Contribution limits and catch-up rules

For 2024, an employee can contribute up to $16,000 of their own money per year to a straightforward IRA. This limit changes slightly each year based on inflation. Employees 50 and older can make an additional catch-up contribution of $3,500, bringing their total to $19,500.

The employer's contribution is separate and does not count against the employee's limit. If an employer matches 3 percent and the employee contributes the full $16,000, the employer still adds their 3 percent match on top of that.

These limits explore only to the straightforward IRA itself. If an employee also has a 401(k) or other retirement account elsewhere, the limits for each plan are separate — but the employee should track total contributions across all plans to stay within IRS rules.

How money grows and when you can withdraw it

Money in a straightforward IRA grows tax-deferred, meaning you do not pay income tax on investment gains, interest, or dividends while the money sits in the account. You only pay tax when you withdraw the money in retirement.

You can withdraw money from a straightforward IRA at any age, but the IRS charges a penalty if you withdraw before age 59½. For the first two years you own the account, the penalty is 25 percent of the amount withdrawn. After two years, the penalty drops to 10 percent. On top of the penalty, you owe regular income tax on the withdrawal.

There are a few exceptions where you can withdraw without penalty: death, disability, a series of equal payments over your lifetime, and in some cases a financial hardship. The rules for hardship withdrawals are strict, and you will need to document the hardship to your plan administrator.

At age 73, the IRS requires you to start taking required minimum distributions — a set amount each year based on your age and account balance. If you do not take the distribution, you owe a penalty.

straightforward IRA versus other retirement plans

A straightforward IRA is simpler and cheaper to set up than a 401(k), which is why small employers choose it. A 401(k) requires more paperwork, annual testing to make sure the plan does not favor highly paid employees, and often a third-party administrator. A straightforward IRA has almost none of that.

The trade-off is lower contribution limits. In 2024, a 401(k) allows up to $69,000 in total contributions (employee plus employer), while a straightforward IRA caps out at $19,500 for employees 50 and older. If a business owner wants to save more for retirement, a 401(k) or Solo 401(k) may be a better fit.

A straightforward IRA also offers fewer investment choices. The employer picks a financial institution to hold the plan, and employees can usually only invest in the funds that institution offers. A 401(k) often gives workers a wider range of mutual funds and other options.

For a self-employed person with no employees, a Solo 401(k) or SEP IRA may make more sense because they allow much higher contributions and more control over the plan.

Tax treatment and what happens at retirement

Contributions to a straightforward IRA reduce your taxable income in the year you make them. If you earn $60,000 and contribute $10,000 to a straightforward IRA, you report only $50,000 as taxable income on your tax return. 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 that year. If you are in the 22 percent tax bracket, a $10,000 withdrawal costs you $2,200 in federal tax (before any state tax).

If you leave a job, you can roll your straightforward IRA balance into a traditional IRA at another financial institution. This does not trigger any tax or penalty — it is a direct transfer from one account to another. Rolling over gives you access to more investment options and may lower your fees.

Who can set up a straightforward IRA and what it costs

Any business with 100 or fewer employees can set up a straightforward IRA. The business must have at least one employee (other than the owner) to establish the plan, though some financial institutions allow self-employed people to open a straightforward IRA if they have no employees.

The cost to set up a straightforward IRA is usually low or free. Most banks and investment firms that offer straightforward IRAs do not charge a setup fee. Some charge annual maintenance fees of $25 to $100, and some charge per-employee fees. Investment fees (the cost of the mutual funds or other investments inside the account) vary by fund.

The employer must give employees written notice of the plan terms and their right to contribute. The employer also has to file a one-page form with the IRS when the plan is first set up. After that, the main work is processing payroll deductions and making the required employer contributions each year.

Frequently Asked Questions

Can I have a straightforward IRA and a 401(k) at the same time?

No. If your employer offers a straightforward IRA, you cannot also participate in that employer's 401(k). However, if you have a second job with a different employer that offers a 401(k), you can participate in both plans — though your total employee contributions across all plans cannot exceed the annual limit for that year.

What happens to my straightforward IRA if I leave my job?

Your straightforward IRA stays yours. The money does not go back to the employer. You can leave it where it is, roll it into a traditional IRA at another bank or brokerage, or roll it into a 401(k) if your new employer allows it. You control the account and can access it whenever you need to, subject to the withdrawal penalties described above.

Can I borrow money from my straightforward IRA?

No. Unlike a 401(k), a straightforward IRA does not allow loans. If you need cash, your only option is to withdraw money, which triggers the penalty and taxes described above. This is one reason some people prefer a 401(k) if they think they might need to borrow from their retirement savings.

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

No. Contributing is optional. However, if your employer uses the non-elective contribution method (2 percent for all employees), you receive that contribution whether you contribute or not. If your employer uses the matching method, you only get the match if you contribute.

What if my employer stops offering the straightforward IRA?

Your account remains yours and continues to grow. You cannot make new contributions, but you can keep the money invested and withdraw it whenever you want (subject to penalties before age 59½). You can also roll the balance into a traditional IRA or another retirement plan without penalty.