A SIMPLE IRA has smaller contribution limits than a 401k, but provides a simpler and cheaper option for employers to offer a retirement plan for their employees. If your company sponsors a SIMPLE IRA, here’s how much you can contribute as an employee and employer for 2022 and 2023.
SIMPLE IRA contribution limits
Employees can make contributions to their own accounts as pre-tax elective deferrals, which get deducted from their taxable income, and also receive mandatory contributions from their employer.
Limits for employees
- The SIMPLE IRA contribution limit for 2022 is $14,000 or $17,000 if 50 years of age or older.
- The SIMPLE IRA contribution limit for 2023 is $15,500 or $19,000 if 50 years of age or older.
In comparison, a 401k has a contribution limit of $20,500 for 2022 ($27,000 if age 50+), and $22,500 for 2023 ($30,000 if age 50+).
What if I have a 401k and SIMPLE IRA?
If you have any other employer-sponsored retirement plan, the maximum aggregate limit is $20,500 in 2022 – $27,000 if you’re at least 50 years of age. You can contribute to both accounts at the same time, but total contributions to both accounts must not exceed the aggregate limit.
Limits for employers
Employers can choose one of two options to contribute:
- Make non-elective contributions equal to 2% of an employee’s compensation based on a maximum salary of $305,000 in 2022 and $330,000 in 2023.
- Make matching contributions up to 3% of an employee’s compensation, not limited by any compensation limits.
Employer contributions are all tax deductible, and are immediately 100% vested for employees.
Employer contributions are mandatory
Employer contributions are mandatory with a SIMPLE IRA. Even if a business has a down year, they’re required to make contributions into every eligible employee’s accounts. While an employer cannot skip contributions, like they could with a SEP IRA, they could choose to reduce the match percentage temporarily.
If an employer choose to make matching contributions, they’re allowed to reduce the match down from 3%, as long as it remains at least 1%. The match can only be reduced for no more than two out of the last five years.
Are contributions tax deductible?
Yes, a SIMPLE IRA only allows pre-tax contributions. There is no Roth option. All contributions for both employees and employers are made with pre-tax dollars and get deducted from their taxable income for the year.