A SIMPLE IRA is an excellent tool for small business owners to help their employees save up for retirement. This type of retirement account combines features of both the traditional IRA and the 401(k). Like both of these plans, the SIMPLE IRA is subject to annual contribution limits. In 2023, employees can contribute up to $15,500 to a SIMPLE IRA account, unless they are 50 or older, in which case they can contribute an extra $3,500. For 2022, these figures were lower at $14,000 and $3,000, respectively.
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SIMPLE IRA Basics
SIMPLE IRA is an acronym for savings incentive match plan for employees individual retirement accounts. A SIMPLE IRA is a type of traditional IRA that is designed for small businesses with 100 or fewer employees. To be eligible for a SIMPLE IRA, an employee must have received at least $5,000 in compensation in the previous two calendar years and expect to receive at least that much in the present calendar year.
As an employee with a SIMPLE IRA, you can contribute pre-tax dollars to your plan through “elective deferrals,” either in cash or as a salary reduction contribution. The latter can be a specified dollar amount or a percentage of your salary. While the IRS does not require employees to contribute, it prohibits employees from opting out of receiving non-elective contributions from their employers.
The IRS requires that your employer makes a contribution on your behalf. This can be either a dollar-for-dollar match of up to 3% of your salary or a flat 2% of pay. Employers must contribute regardless of whether the employee elects to.
An employers’ matching contributions are tax deductible as a business expense. Compared to many other workplace retirement plans, SIMPLE IRAs are cheaper for employers to set up and easy to administer.
What Are the SIMPLE IRA Contribution Limits?
SIMPLE IRAs have higher contribution limits than both traditional and Roth IRAs. As with other plans, the IRS limits contributions to a SIMPLE IRA. These limits are subject to change year to year.
Employee SIMPLE IRA Contribution Limits for 2023
An employee cannot contribute more than $15,500 in 2023 ($14,000 in 2022) to a SIMPLE IRA. Employees age 50 or over can contribute an extra $3,500 as a catch-up contribution in 2023 ($3,000 in 2022). If you participate in any other employer plan during the year, the total cumulative amount of elective deferrals you can contribute to all plans is $22,500 and 2023.
Employer SIMPLE IRA Contribution Limits for 2023
Employer contributions can be a match of the amount the employee contributes, up to 3% of the employee’s salary. An employer may choose to lower the matching limit to below 3%. However, an employer cannot lower the threshold below 1%, and she cannot keep the lowered limit in place for more than two out of five years. Your employer must give you reasonable notice ahead of the 60-day election period if she intends to change a match amount.
Another option is for the employer to make non-elective contributions of 2% of the employee’s salary. This means that the employer is required to contribute regardless of what the employee does. The IRS takes into account an employee’s salary for 2023 of up to $330,000, meaning there is effectively an employer contribution limit of $6,600. For 2022, these figures were $305,000 and $6,100, respectively.
Why Are There IRA Contribution Limits?
You may be wondering why there are contribution limits in the first place. Because IRAs are tax-advantaged accounts, contribution limits were introduced to prevent the very wealthy from benefiting more than the average American. By instituting contribution limits, the IRS intends to ensure that the tax benefits serve as incentives for the average worker, not as a tax shelter for the wealthy.
What Are the Contribution Deadlines for a SIMPLE IRA?
For new SIMPLE IRA accounts to be effective for that tax year, you must establish the account by Oct. 1. Employers must deposit employees’ elective contributions within 30 days of the end of the month that they withhold them. They must make matching or non-elective contributions by the tax return filing deadline (including extensions) to receive their deduction.
A SIMPLE IRA is a retirement savings account option worth considering if you’re the owner or employee of a small business. The IRS requires employers to make a contribution on their employee’s behalf, and employees may elect to make contributions.
Retirement Planning Tips
- Finding a financial advisor who can help you plan for retirement doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When you’re starting to plan for retirement, you should consider the tax laws of the state you live in. Some have retirement tax laws that are very friendly for retirees, but others don’t. Knowing what the laws apply to your state, or to a state you hope to move to, is key to getting ahead on retirement planning.
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