Differences Between a Traditional IRA & a Simple IRA

Although they both have "IRA" in their names and they both offer tax-deferred retirement savings, there are a number of differences between traditional IRAs and SIMPLE IRAs. Understanding them can help you decide where you should make your contributions or whether consolidating your retirement accounts is an option.

Contribution Limits

You can contribute up to $5,500 each year -- $6,500 if you're 50 or older -- to a traditional IRA, but your employer isn't allowed to make any contributions on your behalf. SIMPLE IRAs allow both employee and employer contributions. As of 2015, you can contribute up to $12,500, or $15,500 if you're over 50, through payroll deductions. Your employer must make a contribution on your behalf, either matching your contributions up to 3 percent of your salary or contributing 2 percent to your account regardless of how much you contribute.


You must be younger than age 70 1/2 to be eligible to contribute to a traditional IRA. With SIMPLE IRAs, your employer must cover you if you've earned at least $5,000 in two of the past five years and you expect to earn $5,000 or more in the current year. Your employer can set less restrictive requirements, such as covering everyone who is expected to make $3,000 in the current year, but it can't make the requirements more strict. Only companies with fewer than 100 employees can create SIMPLE IRAs.

Increased Penalties for Early Withdrawals

Both SIMPLE IRAs and traditional IRAs impose a 10-percent early withdrawal penalty on distributions taken before age 59 1/2. But if you cash out a SIMPLE IRA within two years of opening it, you'll owe a 25-percent penalty instead of the typical 10-percent penalty.

Transferring Funds Between Accounts

You must wait two years after opening a SIMPLE IRA to roll the money over into a non-SIMPLE account, including a traditional IRA. As soon as this waiting period is over, however, you can move the money to a traditional IRA without any tax consequences. SIMPLE IRAs can't accept rollovers from any type of account other than another SIMPLE IRA. You can't move money from a traditional IRA to your SIMPLE IRA.