Can I Contribute to a SIMPLE IRA and a Traditional IRA?
Learn how contributing to both a SIMPLE IRA and a Traditional IRA works, including contribution limits, income requirements, and tax reporting considerations.
Saving for retirement often involves using multiple accounts to maximize tax advantages and investment growth. Many people wonder if they can contribute to both a SIMPLE IRA, typically offered by small businesses, and a Traditional IRA in the same year. While it is possible, specific rules and limits determine how much can be allocated to each account.
Participation in Multiple IRAs
Holding both a SIMPLE IRA and a Traditional IRA is allowed, but each serves a different role. A SIMPLE IRA is an employer-sponsored plan designed for small business employees, while a Traditional IRA is an individual account available to anyone with earned income. Since these accounts follow separate tax rules, contributing to both is possible, but understanding their interaction is necessary to avoid tax complications.
Employer contributions to a SIMPLE IRA do not count toward an employee’s personal contribution limit. Employers must either match employee contributions up to 3% of compensation or make a 2% non-elective contribution for all eligible employees, regardless of whether the employee contributes.
Tax deductibility is another key factor. If an individual participates in a SIMPLE IRA, their ability to deduct Traditional IRA contributions depends on income. The IRS sets annual income thresholds that determine whether contributions are fully, partially, or not deductible. For 2024, the deduction begins to phase out at $77,000 for single filers and $123,000 for married couples filing jointly if one spouse is covered by a workplace retirement plan.
Annual Combined Contributions
Contributing to both a SIMPLE IRA and a Traditional IRA is subject to separate IRS limits. For 2024, SIMPLE IRA participants can contribute up to $16,000, with those aged 50 and older eligible for an additional $3,500 catch-up contribution, bringing their total to $19,500. These limits apply only to employee deferrals and do not include employer contributions.
A Traditional IRA has its own cap. In 2024, individuals can contribute up to $7,000, with an additional $1,000 catch-up contribution for those 50 and older, making the total $8,000. Contributions to a Traditional IRA are independent of employer plans, provided the individual has enough earned income to support them.
SIMPLE IRA contributions do not reduce the amount that can be contributed to a Traditional IRA. However, tax deductibility of Traditional IRA contributions may be affected by income and participation in an employer-sponsored plan.
Exceeding contribution limits can result in penalties. If total contributions surpass IRS limits, the excess must be withdrawn by the tax filing deadline, including any earnings, to avoid a 6% excise tax. This penalty applies each year the excess remains in the account.
Earned Income Requirements
To contribute to a Traditional IRA, an individual must have earned income, which the IRS defines as wages, salaries, tips, bonuses, or self-employment earnings. Passive income sources such as rental income, dividends, interest, or Social Security benefits do not qualify.
For self-employed individuals, earned income includes net earnings after deducting business expenses and half of self-employment taxes. If a business operates at a loss, it may reduce or eliminate the ability to contribute to an IRA for that year.
Spouses who do not work outside the home can contribute to a Traditional IRA through a spousal IRA, provided the working spouse has enough earned income to cover both contributions. The spousal IRA follows the same contribution limits as an individual Traditional IRA.
Reporting Both Plans
When contributing to both a SIMPLE IRA and a Traditional IRA, proper tax reporting ensures compliance with IRS regulations. SIMPLE IRA contributions made through payroll deductions appear on an individual’s W-2 form in Box 12 with code “S,” indicating pre-tax elective deferrals. These contributions lower taxable wages, reducing adjusted gross income (AGI). Employer contributions, whether matching or non-elective, are not included as taxable income.
Traditional IRA contributions must be reported on Form 1040, Schedule 1, with deductible amounts entered on line 20. The IRS verifies eligibility for deductions based on income and workplace retirement plan participation. If contributions exceed deductible limits, the excess must be reported on Form 5329 to calculate any penalties.