One of the easiest and most convenient ways to save for retirement for both small business owners and self-employed individuals is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. It's much the same as the traditional IRA, but it's designed with small businesses in mind. Just as with any other traditional IRA, contributions are tax deductible and investments benefit from tax-deferred growth until withdrawal.

The SIMPLE IRA differs from the standard and SEP (Simplified Employee Pension) IRAs in that employees participate in funding their own accounts. However, the employer is required to make a contribution to the account on the employee's behalf. This contribution can be either a dollar-for-dollar match of up to 3% of salary, or a flat 2% on annual salaries up to $270,000. The most dramatic difference when comparing the SIMPLE IRA to the SEP is the size of the contribution limit, which is a modest $12,500 for 2017. Individuals aged 50 or older can also make a $3,000 catch-up contribution. By comparison, SEP accounts don't allow for employee elective deferrals and catch-up contributions,  but they do allow for total annual contributions of $54,000. Under some circumstances, the financial institution holding the account or the terms of the SEP plan may allow an employee to make regular contributions to the SEP IRA just as he or she would to a self-directed IRA. In such a case, an employee over 50 would be allowed to make a catch-up contribution. However, the employee contribution limit would be the same as that for a traditional IRA.

While many tax and retirement contribution rules are changing in 2018, the rules around SIMPLE IRAs are going to remain the same. Shifts in tax law will affect things like Roth IRAs more than SIMPLE IRAs. The contribution limits will be the same in 2018 as they were in 2017. The only slight change to be aware of is an increase of $100 in the maximum for employer contributions to bring that figure to $5,500. This shift only matters for those earning more than $270,000 for 2018. This is because the limit on the dollar match for the 2% option is going up slightly in 2018, from $270,000 to $275,000.

Otherwise, however, the SIMPLE IRA is staying the same. For more small businesses, the changes will not matter. You can continue using a SIMPLE IRA the same way you did in 2017 without worrying very much about the small increase in limits. This means that SIMPLE IRAs will remain an easy and attractive option for small business retirement plans in 2018. Overall, SIMPLE IRAs offer ease and some tax advantages for small businesses and are therefore a great option for entrepreneurs who own a small business.

For small business owners, the SIMPLE IRA is practical if there is any discussion of expanding your business. By comparison, adding employees to a SEP plan can be a cumbersome process. Just remember that the SIMPLE IRA is limited to companies with 100 employees or fewer who earn more than $5,000 each annually. Importantly, the small business owner can have no other retirement plan besides the SIMPLE IRA.

Employees also are immediately vested in the SIMPLE IRA, and can make withdrawals at will. However, an "unqualified" withdrawal made before the age of 59½ will invoke a 10% penalty from the IRS, plus the funds withdrawn will be subject to tax. If the withdrawal is made within the first two years of participation in the SIMPLE IRA, the penalty is a painful 25%.

There are, however, certain circumstances that are considered qualified reasons for making an early withdrawal, which your employees may find attractive. Some of these include:

  • Death or disability

  • The withdrawal is used to pay for qualifying higher-education expenses

  • The withdrawal is $10,000 or less and is used toward a first-time home purchase

  • The funds are used to pay an IRS levy, a large unreimbursed medical expense, or to pay health insurance payments while unemployed

This article was updated March 5, 2018.

Editor's Note: Looking for Employee Retirement Plans for your company? If you would like information to help you choose the one that's right for you, use the questionnaire below to have our partner, BuyerZone, provide you with information for free:

Editor's Note: Looking for Employee Retirement Plans for your company? If you would like information to help you choose the one that's right for you, use the questionnaire below to have our partner, BuyerZone, provide you with information for free:

Editorial Disclosure: Inc. writes about products and services in this and other articles. These articles are editorially independent - that means editors and reporters research and write on these products free of any influence of any marketing or sales departments. In other words, no one is telling our reporters or editors what to write or to include any particular positive or negative information about these products or services in the article. The article's content is entirely at the discretion of the reporter and editor. You will notice, however, that sometimes we include links to these products and services in the articles. When readers click on these links, and buy these products or services, Inc may be compensated. This e-commerce based advertising model - like every other ad on our article pages - has no impact on our editorial coverage. Reporters and editors don't add those links, nor will they manage them. This advertising model, like others you see on Inc, supports the independent journalism you find on this site.