A Simple IRA and a Roth IRA Are Different Account Types

No — a Simple IRA and a Roth IRA are two separate account structures with different tax rules and contribution limits

A Simple IRA is a retirement account designed for small employers and self-employed people. It lets you and your employer contribute pre-tax dollars, which lowers your taxable income in the year you contribute. When you withdraw money in retirement, those withdrawals are taxed as ordinary income.

A Roth IRA works the opposite way. You contribute after-tax dollars — money you've already paid income tax on — but then your withdrawals in retirement are tax-free. A Roth IRA has no employer involvement; it's an individual account you open on your own.

The two accounts also have different contribution limits, income restrictions, and withdrawal rules. Choosing between them (or between a Simple IRA and other retirement accounts) depends on your current tax bracket, whether your employer offers a plan, and how long you have until retirement.

Key Takeaways

• A Simple IRA is employer-sponsored and uses pre-tax contributions that reduce your current taxable income, while a Roth IRA is individual and uses after-tax contributions that produce tax-free withdrawals later.
• Simple IRA contribution limits are lower than traditional or Roth IRA limits, and your employer may be required to contribute on your behalf.
• Roth IRAs have income limits that can prevent high earners from contributing directly, while Simple IRAs do not.
• Simple IRAs have a two-year holding period before you can roll funds to another account; Roth IRAs have no such restriction.
• If your employer offers a Simple IRA, you cannot also contribute to a traditional or Roth IRA in the same year without special rules.

How contributions are taxed differently

With a Simple IRA, your contributions come out of your paycheck before federal income tax is withheld. If you contribute $3,000 to a Simple IRA, your taxable income for that year drops by $3,000. You pay no income tax on that $3,000 now, but you will pay ordinary income tax on it when you withdraw it in retirement.

With a Roth IRA, you contribute money you've already paid income tax on. If you earn $50,000 and contribute $3,000 to a Roth, you still owe income tax on the full $50,000. The $3,000 goes into the Roth after tax. When you withdraw that $3,000 (plus any earnings) in retirement, you owe no federal income tax on it.

This difference matters most if you expect to be in a higher tax bracket in retirement than you are now. If you think you'll earn less in retirement, a Simple IRA's upfront deduction may save you more money overall. If you think you'll earn more, a Roth's tax-free withdrawals may be the better choice.

Contribution limits and employer requirements

For 2024, you can contribute up to $16,000 per year to a Simple IRA if you're under 50, or $19,500 if you're 50 or older. These limits are set by the IRS and change yearly. By contrast, traditional and Roth IRAs have a combined limit of $7,000 per year (or $8,000 if you're 50 or older).

The catch: if your employer offers a Simple IRA, your employer must contribute to your account. They can either match your contributions dollar-for-dollar up to 3 percent of your salary, or contribute a flat 2 percent of your salary whether you contribute or not. This employer contribution is assistance programs, but it also means your employer is involved in your retirement savings.

A Roth IRA has no employer involvement. You fund it entirely on your own, and no one else contributes to it. You also cannot contribute to a Roth IRA if your income exceeds certain thresholds — for 2024, the limit phases out between $146,000 and $161,000 for single filers. A Simple IRA has no income limit.

Withdrawal rules and early access

With a Simple IRA, you can withdraw money at any time, but withdrawals before age 59½ are subject to a 10 percent early withdrawal penalty plus income tax on the amount withdrawn. There is an exception: if you've had the Simple IRA for at least two years, you can roll it to a traditional IRA or another retirement account without penalty. If you try to roll it before two years have passed, the withdrawal is treated as a taxable distribution.

With a Roth IRA, you can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. You can only withdraw earnings (the investment gains) before age 59½ if you meet specific conditions, such as using the money for a first home purchase or may have access to education expenses. If you don't meet those conditions, earnings withdrawn early are taxed and penalized.

Both accounts require you to begin taking withdrawals at age 73 (as of 2023, under the SECURE 2.0 Act). With a Simple IRA, these required minimum distributions are taxed as ordinary income. With a Roth IRA, required minimum distributions are not taxed, though you must still take them.

Income limits and who can open each account

A Simple IRA is available only if your employer offers one, or if you're self-employed and set one up for yourself. You cannot open a Simple IRA on your own if you work for an employer who doesn't sponsor one.

A Roth IRA is open to anyone with earned income, regardless of whether their employer offers a retirement plan — but only if their income is below the phase-out range. For 2024, single filers can contribute the full amount if their modified adjusted gross income is under $146,000. The contribution amount phases out between $146,000 and $161,000, and you cannot contribute at all above $161,000.

If you earn too much to contribute directly to a Roth IRA, you may be able to use a "backdoor Roth" strategy, which involves contributing to a traditional IRA and then converting it to a Roth. This strategy has its own rules and tax consequences, and you should understand them before attempting it.

Can you have both at the same time

If your employer offers a Simple IRA, you generally cannot contribute to a traditional IRA or Roth IRA in the same year. The IRS treats these as conflicting arrangements. However, there are narrow exceptions: if you have a Simple IRA from a previous employer and you're now self-employed, you may be able to open a Solo 401(k) or SEP IRA for your self-employment income while keeping the Simple IRA from your employer job.

If you leave an employer who offered a Simple IRA, you can roll the balance to a traditional IRA or Roth IRA after the two-year holding period. Once the funds are in a traditional or Roth IRA, you can then contribute to that Roth IRA in future years (subject to income limits for the Roth).

The two-year rule is strict: if you roll a Simple IRA to another account before two years have passed, the IRS treats it as a taxable distribution, not a rollover. This is one of the most important differences between a Simple IRA and other retirement accounts.

When a Simple IRA makes sense versus a Roth IRA

A Simple IRA makes sense if you work for a small employer who offers one and you want the employer contribution to boost your retirement savings. The lower contribution limits mean you're saving less than you could with a 401(k), but the simplicity and employer match are valuable. A Simple IRA also makes sense if your income is too high to contribute to a Roth IRA directly.

A Roth IRA makes sense if you're early in your career, expect to earn more later, and want tax-free withdrawals in retirement. It also makes sense if you want flexibility — you can withdraw your contributions anytime without penalty, and you have no required minimum distributions during your lifetime. A Roth is also useful if you want to leave money to heirs, since they inherit the account tax-free (though they must withdraw it within ten years under current rules).

If you're self-employed and don't have a Simple IRA through an employer, a Solo 401(k) or SEP IRA may give you higher contribution limits than a Roth IRA alone, while still allowing you to open a Roth if your income permits.

Frequently Asked Questions

Can I convert a Simple IRA to a Roth IRA?

Yes, but only after you've held the Simple IRA for at least two years. Once two years have passed, you can roll the balance to a traditional IRA and then convert it to a Roth. The conversion is a taxable event — you'll owe income tax on the amount converted in that tax year.

What happens to my Simple IRA if I change jobs?

You can roll it to a traditional IRA at your new employer's plan, or to an IRA you open yourself. If you roll it within 60 days, there's no tax or penalty. If you wait longer than 60 days, the IRS treats it as a withdrawal and you owe income tax plus a 10 percent penalty (unless an exception applies).

Do I have to take withdrawals from a Simple IRA?

Yes, starting at age 73. The IRS requires you to withdraw a minimum amount each year based on your age and account balance. If you don't take the required amount, you owe a 25 percent penalty on the shortfall (reduced to 10 percent in some cases). A Roth IRA has no required minimum distributions during your lifetime.

Can I contribute to both a Simple IRA and a Roth IRA in the same year?

No, not if your employer offers the Simple IRA. The IRS prohibits dual contributions. However, if you leave that employer and become self-employed, you may be able to open a Solo 401(k) or SEP IRA for your self-employment income while keeping the old Simple IRA.

Which account saves me more money in taxes?

It depends on your current tax bracket versus your expected tax bracket in retirement. If you're in a high tax bracket now and expect to be in a lower one later, a Simple IRA's upfront deduction saves more. If you're in a low bracket now and expect to be in a higher one later, a Roth's tax-free withdrawals save more. A tax professional can model both scenarios for your situation.