Since January 1, 2023, Roth contributions to a SIMPLE IRA have been allowed under Section 601 of the SECURE 2.0 Act. Both your own salary deferrals and your employer’s matching or nonelective contributions can be designated as Roth, meaning the money goes in after taxes and, if the rules are met, comes out tax-free in retirement.1United States Senate Committee on Finance. SECURE 2.0 Act of 2022 Before this change, every dollar in a SIMPLE IRA was pre-tax.
What Actually Changed
SECURE 2.0 struck the provision in Internal Revenue Code Section 408A that had prohibited designating a SIMPLE IRA as a Roth IRA.2Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs Small business employees now have a tax diversification option that used to belong only to 401(k) and 403(b) participants.
The Roth option is voluntary at both ends. Your employer isn’t required to offer it, and even if they do, you can still make traditional pre-tax contributions instead. If the plan allows, you can split your deferrals between the two.3Internal Revenue Service. IRS Notice 2024-02
2026 Contribution Limits
The base salary deferral limit for a SIMPLE IRA is $17,000 in 2026. Employees of employers with 25 or fewer employees can defer up to $18,100 under a higher SECURE 2.0 ceiling. Employers with 26 to 100 employees can also use the $18,100 limit, but only if they provide a 4% match or a 3% nonelective contribution.4Internal Revenue Service. SIMPLE IRA Plan
Catch-up contributions apply for older workers:
- Age 50 and older: an additional $4,000 in 2026.
- Ages 60 through 63: an additional $5,250 in 2026, a new higher catch-up created by SECURE 2.0.
These caps apply to the combined total of your traditional and Roth deferrals. If you also participate in another employer plan in the same year, your combined elective deferrals across all plans cannot exceed $24,500 for 2026.5Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
One boundary worth flagging: the mandatory Roth catch-up rule for high earners making $150,000 or more, which applies to 401(k), 403(b), and governmental 457(b) plans, does not apply to SIMPLE IRAs. Regardless of income, you can make SIMPLE IRA catch-up contributions on either a pre-tax or Roth basis.6Internal Revenue Service. IRS Notice 2023-62
How Your Roth Salary Deferrals Are Taxed
When you elect Roth treatment for your own contributions, those amounts stay in your taxable income for the year. Your employer withholds federal income tax, Social Security, and Medicare on the full amount before the money goes to your SIMPLE IRA. On your W-2, Roth salary deferrals appear in Box 12 with Code S, and the same amount is included in Box 1, Box 3, and Box 5.3Internal Revenue Service. IRS Notice 2024-02
Practically, that means your take-home pay drops more with a Roth election than it would with a traditional pre-tax deferral of the same amount, because the contribution is coming out of after-tax pay.
How Employer Roth Contributions Are Taxed (The Part That Surprises People)
If your employer designates their matching or nonelective contribution as Roth, the money goes straight into your retirement account, not your paycheck. But the amount is still included in your gross income for the year it’s deposited.7Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
Two features make this easy to miss at tax time. First, no federal income tax, Social Security, Medicare, or federal unemployment tax is withheld on employer Roth contributions. Second, they aren’t reported on your W-2 at all. Instead, you get a Form 1099-R, because the IRS treats the transaction as if the employer made a traditional contribution and then immediately converted it to Roth.3Internal Revenue Service. IRS Notice 2024-02
If you don’t adjust your W-4 withholding or make estimated payments to cover the tax on that income, you can end up owing at filing time. Watch for the 1099-R and make sure your tax preparer sees it.
All SIMPLE IRA contributions, traditional or Roth, vest immediately. You own 100% of your own deferrals and your employer’s contributions from the day they’re deposited.
The Two-Year Rule for Rollovers
SIMPLE IRAs carry a two-year waiting period that limits what you can do with the money early on. The clock starts on the first day your employer makes a contribution to your SIMPLE IRA, and it applies to Roth and traditional contributions alike.8Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
During those first two years, you can only transfer or roll over the funds to another SIMPLE IRA. Moving money to a traditional IRA, a Roth IRA, or any other retirement account inside the two-year window is treated as a taxable distribution, and the early withdrawal penalty is 25% rather than the usual 10%.8Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
After the two years are up, you can roll SIMPLE IRA assets into a Roth IRA. Pre-tax amounts rolled over are included in your taxable income for that year, just like any conversion. Amounts already taxed as Roth are not taxed again.
Qualified Distributions and the Five-Year Clock
For the earnings on your Roth SIMPLE IRA to come out completely tax-free, the withdrawal has to qualify. Two conditions have to be met: you’re at least 59½ (or the distribution is due to disability or death), and your Roth SIMPLE IRA has been open for at least five tax years.
The five-year clock starts on January 1 of the first tax year for which a Roth contribution was made. A first Roth SIMPLE contribution deposited in March 2024 starts the clock on January 1, 2024, and the five-year period ends December 31, 2028.
If you take money out before meeting both conditions, your own Roth contributions come out tax-free because you already paid tax on them. The earnings portion is taxed as ordinary income and may also be hit with the 10% early withdrawal penalty, which becomes 25% during the first two years of plan participation.8Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
Keep your own records of cost basis. That includes every dollar you contributed as Roth plus any employer Roth contributions that were included in your income. Custodians track this, but personal records protect you if data is ever lost or your account moves between institutions.
Making the Election
To designate contributions as Roth, you fill out a salary reduction agreement from your employer specifying the amount and the Roth designation.9Internal Revenue Service. Form 5304-SIMPLE – Savings Incentive Match Plan for Employees of Small Employers The election has to be in place before the contribution is withheld from your paycheck.3Internal Revenue Service. IRS Notice 2024-02
For established SIMPLE IRA plans, the annual election period runs from November 2 through December 31, though employers can add additional election windows.10U.S. Department of Labor. SIMPLE IRA Plans for Small Businesses Not every custodian is set up to handle Roth employer contributions yet. Employee Roth deferrals are more widely supported; the employer side is still catching up. Ask your employer or plan provider before you assume the option is available.
Check your first pay stub after the change takes effect. Confirm the Roth contribution shows under the correct designation and that tax withholding reflects your full salary. Corrections within the same tax year are simple; fixing errors across tax years means amended W-2s.
Is a Roth Election Right for You?
The upfront tax cost of Roth contributions tends to pay off when you expect to be in a higher tax bracket in retirement, or when you want the flexibility of tax-free withdrawals later. If you’re in a high bracket now and expect lower income after you stop working, traditional pre-tax contributions may still make more sense.
Splitting deferrals between Roth and traditional, if your plan allows it, gives you both a current-year deduction and a pool of tax-free money for later. Whatever you choose, remember that employer Roth contributions create taxable income without withholding, so plan for that separately from your paycheck math.