SECURE 2.0 opened SIMPLE IRA Roth contributions to small-business employees, letting you direct your salary deferrals into an after-tax Roth account instead of the traditional pre-tax bucket, and letting you designate your employer’s matching or nonelective contributions as Roth as well. You pay income tax on the money in the year it goes in, and qualified withdrawals in retirement come out entirely tax-free, growth included. The Roth feature is optional for the employer to adopt, and if adopted, each employee chooses how to treat their contributions.
What Can Go In as Roth
Two separate Roth elections exist under SECURE 2.0, and they don’t move together.
Section 601 covers your own salary deferrals. If your employer offers the feature, you can send some or all of your salary reduction contributions to a Roth SIMPLE IRA instead of the traditional account. The provision applies to contributions made after December 29, 2022.1Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2 You can split 100% Roth, 100% traditional, or any mix in between. Once a contribution is designated as Roth and deposited, you cannot switch it back.
Section 604 covers the employer’s contributions. You can separately elect to have your employer’s matching or nonelective contributions treated as Roth.1Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2 That choice is independent of what you do with your own deferrals. You could make traditional pre-tax deferrals and still designate the employer match as Roth, or the reverse.
The Tax Hit on Roth-Designated Employer Contributions
Designating employer contributions as Roth has an immediate cost that catches employees off guard. When you make that election, the employer contribution becomes taxable income to you in the year it’s contributed. Earn $50,000 with a $1,000 nonelective contribution designated as Roth, and that $1,000 gets added to your taxable wages for the year.
The upside is that the contribution and every dollar of future growth come out tax-free at retirement as a qualified distribution. Whether that trade is worth it depends on your current bracket. Employees closer to the top marginal rate often keep the employer contribution as traditional pre-tax; employees in lower brackets typically come out ahead paying the tax now.
Employee Roth salary deferrals work the same way in principle: the money stays in your gross income for the current year, so you’re taxed on it now in exchange for tax-free qualified withdrawals later.
2026 Contribution Limits
The standard SIMPLE IRA employee deferral limit for 2026 is $17,000. If you’re age 50 or older by year-end, the catch-up adds $4,000, for a total of $21,000.2Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
SECURE 2.0 also created a higher catch-up for ages 60 through 63. For 2026, that “super catch-up” is $5,250 instead of $4,000, pushing the maximum deferral to $22,250 for participants in that age band.2Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
These caps apply to Roth and traditional deferrals combined. You cannot layer a full Roth limit on top of a full traditional limit; the ceiling covers both together.
Section 117 of SECURE 2.0 raises the ceiling for SIMPLE IRAs at smaller employers. Plans maintained by employers with 25 or fewer employees automatically use limits equal to 110% of the standard amounts. Employers with 26 to 100 employees can opt into those higher limits, but only if they bump their mandatory contribution to a 4% match or a 3% nonelective contribution, and they must notify employees at least 60 days before the plan year starts.
How Roth Contributions Get Reported
Reporting is where employers most often trip up, because employee Roth deferrals and Roth-designated employer contributions go on entirely different forms.
Your Roth Salary Deferrals on the W-2
Employee Roth salary deferrals use Code S in Box 12 of Form W-2, the same code used for traditional SIMPLE IRA salary reductions.3Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) The important difference is Box 1. Because Roth deferrals are after-tax, they must be included in Boxes 1, 3, and 5.4Internal Revenue Service. SECURE 2.0 Act Impacts How Businesses Complete Forms W-2 Traditional SIMPLE IRA deferrals are excluded from Box 1 (though still included in Boxes 3 and 5 for payroll tax purposes). Payroll systems need to be configured to handle the split.
Whether Roth or traditional, employee salary reduction contributions remain subject to Social Security, Medicare, and FUTA taxes.5Internal Revenue Service. SIMPLE IRA Plan
Roth-Designated Employer Contributions on Form 1099-R
Employer matching and nonelective contributions designated as Roth do not appear on the W-2 at all. They go on Form 1099-R for the year they’re contributed to the Roth IRA. The IRS treats them like a traditional contribution that was immediately converted, so the amount goes in Boxes 1 and 2a of the 1099-R with the appropriate code in Box 7.6Internal Revenue Service. IRS Notice 2024-02 – Miscellaneous Changes Under the SECURE 2.0 Act of 2022 Traditional (non-Roth) employer matching and nonelective contributions are not subject to Social Security, Medicare, or FUTA taxes.5Internal Revenue Service. SIMPLE IRA Plan
The Two-Year Rule Still Bites
SIMPLE IRAs carry an unusually steep early-withdrawal penalty. If you take a distribution within your first two years of participation, the usual 10% additional tax jumps to 25%.7Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules The two-year clock starts the day your employer first deposits a contribution to your SIMPLE IRA. After two years, the standard 10% penalty for withdrawals before age 59½ applies to the taxable portion.
The penalty covers both traditional and Roth contributions. With Roth money you’ve already paid tax on your basis, so the penalty would fall on the earnings portion of a non-qualified distribution. During that first two-year window, though, the 25% rate makes tapping the account expensive.
Rollovers are also restricted during the two years. Assets can only move to another SIMPLE IRA. Any transfer to a different type of IRA or employer plan during that window is treated as a taxable distribution and triggers the 25% penalty. After two years, you can roll to a traditional IRA, a Roth IRA (with the untaxed portion included in income), or an employer plan.7Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
Qualified Distributions and the Five-Year Clock
To get tax-free treatment on the earnings in a Roth SIMPLE IRA, the distribution has to be qualified. That means two things: you’re at least 59½, disabled, or deceased; and the five-year holding period is satisfied.8Internal Revenue Service. Retirement Topics – Designated Roth Account
The five-year clock starts January 1 of the first year you make any Roth contribution. A Roth SIMPLE IRA is technically a Roth IRA, not a designated Roth account inside an employer plan, so the five-year period aggregates across all your Roth IRAs. If you opened a Roth IRA five or more years ago, a new Roth SIMPLE IRA inherits that existing clock. A Roth 401(k) runs its own separate five-year period.
Fail either requirement and your contributions (basis) still come out tax-free, but the earnings become taxable and may be hit with the 10% early-withdrawal penalty. If you’re still inside the SIMPLE IRA two-year window, the earnings portion faces the 25% penalty instead. Distributions are reported by the IRA custodian on Form 1099-R, and the custodian separates the taxable and non-taxable portions.9Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
What Employers Need to Do to Offer It
Adopting the Roth feature is not automatic. Employers have to amend the SIMPLE IRA plan document before the effective date of the Roth contributions. If you use a prototype document from a financial institution, confirm the institution has updated its paperwork for SECURE 2.0. The amendment should spell out whether the plan offers Roth treatment for employee deferrals, for employer contributions, or both.
The existing IRS model salary reduction agreement (Form 5304-SIMPLE) predates the Roth option, so an updated plan document or amendment needs a field where employees elect between Roth and traditional treatment.10Internal Revenue Service. Form 5304-SIMPLE The election still has to specify a percentage or dollar amount of pay to be withheld each pay period.
Employees must get notice of the plan’s provisions, including the Roth option, before the annual election period, which for existing SIMPLE IRA plans runs November 2 through December 31 each year.11U.S. Department of Labor. SIMPLE IRA Plans for Small Businesses The notice should explain the difference between traditional and Roth clearly enough for employees to make an informed choice, especially for the employer-contribution Roth election, where the immediate tax hit is easy to miss.