SIMPLE IRA Contribution Limits

The SIMPLE IRA is a retirement savings plan designed for small businesses. It allows employees to contribute pre-tax money and defer taxation on their investments until they are withdrawn in retirement. It also offers employers the option to match employee contributions on a dollar-for-dollar basis up to 3 percent of an employee’s compensation. However, employees must have at least $5,000 in compensation for the past two calendar years to participate. Moreover, employees who receive a retirement benefit from a union are not eligible for the SIMPLE IRA.

The maximum contribution for a SIMPLE IRA in 2024 is $15,500 for individuals under 50 and $19,000 for those over 50. This is lower than the limits for a traditional or Roth IRA. However, the limit is still higher than a SEP IRA, which is another popular choice for self-employed people.

In addition, an employer can choose to match employee contributions to a SIMPLE IRA on a non-elective or elective basis. The former option is the most common, requiring an employer to match every employee’s contributions up to 3% of their compensation. The latter is a simpler option, allowing an employer to reduce its match to as little as 1% of the participant’s compensation in two out of five years. Whether you are an employee who is considering opening a SIMPLE IRA or a business owner looking to offer the retirement savings option to your employees, 

SIMPLE IRA Rollover Rules

There are a few rules to keep in mind when it comes to rollovers. Here are the SIMPLE IRA rollover rules:

Two-year rule: If you rollover funds from a SIMPLE IRA to another retirement account, such as a Traditional IRA or a 401(k), within two years of initially participating in the SIMPLE IRA plan, you may be subject to penalties. The penalty for an early withdrawal within the two-year period is typically 25% of the amount rolled over.

Once you have participated in a SIMPLE IRA plan for at least two years, you can roll over the funds to another eligible retirement account without penalties.

Direct rollovers: It is generally recommended to perform a direct rollover, also known as a trustee-to-trustee transfer, when moving funds from one retirement account to another. This involves the funds being transferred directly from the financial institution holding the SIMPLE IRA to the new retirement account without you ever having direct access to the funds. This method helps avoid any tax withholding or potential penalties.

Indirect rollovers: If you choose to do an indirect rollover, you’ll receive a distribution check made payable to you. In this case, you have 60 days to deposit the funds into another eligible retirement account to avoid taxes and penalties. However, keep in mind that the financial institution may withhold 20% of the distribution amount for taxes, which you’ll need

How to Set up a SIMPLE IRA?

To set up a SIMPLE IRA, you must have at least 100 eligible employees and file IRS Form 5304 or Form 5305-SIMPLE. Both forms require that you notify your employees of the plan’s features and provide them with an election period. The election period is typically 60 days and must be before January 1 of each year. You must also notify your employees that they can change their contribution amounts during this period.

You must also select a provider to handle the administration of your SIMPLE IRAs. This provider is known as the trustee. Common trustees include banks, investment firms, and mutual funds. The trustee will be responsible for collecting employee contributions, investing them, providing employees with annual statements, and filing required documents with the IRS.