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Tax Limits For the SIMPLE IRAs
Tax Limits For the SIMPLE IRAs
With rising costs, uncertainty around job security and high interest rates, there’s no better time than now to start investing in your retirement. If you pay self-employment taxes, it’s important to consider where your income will come from after retirement. You’ll be able to sleep easier at night knowing that your future finances are secure and you have a plan.
Investing in a SIMPLE IRA is a smart way to start saving for retirement. It will give you more freedom and control over your lifestyle, and you'll be prepared for whatever the future throws at you.
There are SIMPLE IRA rules and SIMPLE IRA limits one must follow to comply with the set regulations. We’ll cover everything you need to know about SIMPLE IRAs, so you can be fully prepared for whatever’s ahead.
Key Takeaways
- A SIMPLE IRA allows you to set aside tax-deferred cash for your retirement
- The SIMPLE IRA max contribution limit for 2024 is $16,000
- Taking money out of your SIMPLE IRA before your 59½ birthday could lead to 10% or 25% additional tax
Table of contents
What is a SIMPLE IRA and how does a SIMPLE IRA work?
As the name implies, a SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is an easy-to-manage and affordable retirement plan. It lets you put money away that’s tax deferred, which helps secure your future. So it is quite similar to a conventional IRA.
You're eligible to establish a SIMPLE IRA if you have 100 employees or less and earn more than $5,000 in a year. Some small businesses may offer this retirement plan option since it’s easier to set up and regulate. It might be helpful to use a SIMPLE IRA calculator to help calculate how much you’ll actually accumulate once you retire. As SIMPLE IRA contributions are not tax-deductible, you can use a 1099 tax calculator to find other expenses you can write off.
If you’re self-employed, you can open a SIMPLE IRA, but other retirement plans might be a better fit.
SIMPLE IRA rules
The employer contribution requirement sets SIMPLE IRAs apart from other investment plans. Although it’s good news that your employer is contributing, it also means lower contribution limits.
A SIMPLE IRA is set up more like a 401(k), but it’s easier and simpler to manage. There’s no need for federal reporting requirements, and any federal institution can help you set one up.
Conventional IRAs
This sort of plan can be set up without an employer, whose main purpose is to open outside of the workplace. You can make tax-deferred contributions and withdraw them in retirement. But the contribution limits are lower than a SIMPLE IRA.
401(k)
A 401(k) is offered to all employers, regardless of the size of your business. They offer more flexibility, but this comes with added administrative costs. There are different plan options, like a varied vesting schedule or automatic enrollment.
SIMPLE IRA contribution limits
There’s a max contribution for SIMPLE IRA limit, so you can only contribute up to that amount for the year.
The SIMPLE IRA contribution limit for 2024 is $16,000 . If you’re 50 or older, you can make an additional $3,500 for a total of $23,000. The SIMPLE IRA contribution limit for 2024 are the same whether you’re a W-2 worker or self-employed.
The SIMPLE IRA contribution limits for 2023 was $15,500 and $17,000 if you were 50 or older.
When it comes to other SIMPLE IRA rules, one thing to keep in mind is that if you contribute to another employer plan, the maximum contribution limit is $23,000 in 2024. So if you contribute to a Roth IRA and a SIMPLE IRA, the maximum combined contribution for both accounts is $23,000.
But if you’re 50 or older, your maximum combined contribution is $31,000.
How to open a SIMPLE IRA?
Opening up a SIMPLE IRA is fairly simple and straightforward, and you can open it online. The business owner will need to fill out additional forms to set up the plan.
Withdrawals and transfers
Putting money into your SIMPLE IRA account is much easier than taking it out. You’ll need to pay income taxes on the money you withdraw, and if it’s taken out before you’re 59½, there’s a 10% or 25% additional tax.
The tax is 10% if you withdraw before you’re 59½, and it jumps to 25% if you withdraw it within two years of when you first participated in the plan.
You don’t have to pay additional taxes if:
- You’re disabled
- The withdrawal is in the form of an annuity
- You’re the beneficiary of a deceased SIMPLE IRA holder
- The withdrawal is due to an IRS levy
- The transfer needs to be made after December 18, 2015
- It can’t accept rollover contributions from other accounts
- Only for transfers after two years
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