2020 SIMPLE IRA Limits: What Retirement Savers Should Know

Employers understand the value of providing benefits to their workers. Especially in a tough job market, benefits like health insurance, a retirement plan, or flexible work hours can make the difference between landing a great employee or having that person choose another employer. But it can take a lot of effort to set up benefits like a full-blown 401(k) retirement plan.

With that in mind, the federal government came up with an alternative designed primarily for small businesses. The SIMPLE IRA offers many of the same benefits as 401(k) plans, but as the name suggests, it's easier for businesses to set them up and maintain them than it would be for more complex retirement plans.

Employees with SIMPLE IRAs are getting some good news for 2020. But before we get to that, let's first look at what SIMPLE IRAs are and how they work.

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The basics of SIMPLE IRAs

Simple is just a word, but the SIMPLE in SIMPLE IRA stands for "savings incentive match plans for employees." The main purpose of SIMPLE IRAs is to provide a tax-favored retirement savings vehicle that lets both employers and employees make contributions toward building up a retirement nest egg. The reason lawmakers picked the name was to emphasize that the requirements for administering a SIMPLE IRA are easier to meet than for more complicated 401(k) and similar plans.

Like most retirement plans, the SIMPLE IRA rules let you make up to a certain maximum contribution each year. The good news for participants in 2020 is that they'll be able to contribute a bit more if they want, as the maximum will rise by $500, to $13,500. Those who are 50 or older get to make an additional catch-up contribution of $3,000, making their maximum $16,500.

Workers get to elect how much they put into their SIMPLE IRAs, but once they do, employers are then required to make additional contributions. They have two options: They can do a dollar-for-dollar match up to 3% of each employee's salary with no set maximum or set up a provision to contribute 2% of the salary up to a maximum of $5,700 in 2020.

Are SIMPLE IRAs better or worse than 401(k)s?

The ease of setup and operation makes SIMPLE IRAs an attractive alternative for many businesses. In many cases, if SIMPLE IRAs didn't exist, small businesses might not be able to establish any retirement plan benefits for their employees.

SIMPLE IRAs are easier not just for employers, but also for workers, because the accounts end up looking a lot like a regular IRA. Participants can generally choose a wide range of investments rather than being limited to a set menu from their employer.

On the other hand, the biggest downside of SIMPLE IRAs is that their contribution maximums are less than 401(k)s. In 2020, those under 50 will be able to set aside $19,500 in a 401(k), and those 50 or older will get a $26,000 maximum.

Yet even the lower SIMPLE IRA limits are adequate for most savers. Moreover, for those who are self-employed, the ability to make both employer and employee contributions provides some flexibility along with retirement savings -- and if you bring on employees later on, the costs involved with including them in the plan won't be too high.

Go the SIMPLE route

If you like to max out your retirement savings, then getting to save an extra $500 in a SIMPLE IRA in 2020 will come as good news. For those looking for an easy-to-administer retirement plan option geared for small businesses and self-employed workers, SIMPLE IRAs are definitely worth examining closely.

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