What Is the Maximum SIMPLE IRA Contribution?

A Savings Incentive Match Plan for Employees Individual Retirement Account, known as a SIMPLE IRA, serves as a retirement savings vehicle. This type of plan is primarily designed for small businesses, typically those with 100 or fewer employees, offering a streamlined administration process compared to more complex retirement plans. It allows both employees and employers to contribute towards retirement savings.

Understanding Employee Contribution Limits

For the year 2024, employees participating in a SIMPLE IRA plan can contribute a maximum of $16,000 from their salary. Employees who are age 50 or older by the end of the calendar year are eligible to make additional contributions. This provision allows for a “catch-up contribution.” The catch-up contribution for eligible employees aged 50 and over is an additional $3,500 in 2024. This brings the total potential employee contribution for individuals in this age group to $19,500 for the year. These limits apply to the employee’s own contributions and are separate from any employer contributions.

Employer Contribution Requirements

Employer contributions are a mandatory component of a SIMPLE IRA plan. Employers have two primary methods for fulfilling their contribution obligations to employee accounts. One option involves making matching contributions to employee deferrals. Under this method, employers typically match employee contributions dollar-for-dollar up to 3% of the employee’s compensation. An employer can reduce this match to as low as 1% in two out of any five years.

Alternatively, employers can choose to make non-elective contributions for each eligible employee. This option requires the employer to contribute 2% of each eligible employee’s compensation, regardless of whether the employee chooses to defer any salary themselves. For 2024, the maximum compensation that can be considered for this 2% calculation is $345,000. These employer contributions are generally tax-deductible for the business and are immediately 100% vested for employees.

Key Contribution Rules

Contribution limits for SIMPLE IRAs are subject to periodic adjustments by the Internal Revenue Service (IRS). Employees typically make their contributions through regular payroll deductions. Employer contributions generally have a deadline of the business’s tax filing deadline, including any extensions.

All contributions made to a SIMPLE IRA are generally on a pre-tax basis. This means that the amounts contributed reduce an individual’s current taxable income, providing an immediate tax benefit. Taxes on these contributions and their earnings are deferred until withdrawal in retirement.

A specific rule for SIMPLE IRAs involves a two-year period for rollovers. Funds from a SIMPLE IRA cannot be rolled over to a non-SIMPLE IRA, such as a traditional IRA or a 401(k), without potential penalties during the first two years of participation. If such a rollover occurs within this two-year window, the amount moved may be subject to a 25% early distribution penalty, instead of the standard 10% penalty for early withdrawals from other IRAs if the individual is under age 59½. However, rollovers between two SIMPLE IRAs are permitted without incurring this penalty.