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Simple IRA contribution limits can vary to a degree from year to year, so it's important to check up on the sum you have debited from your paycheck. If the Human Resources department where you work is up to date with IRS regulations they could tell you your maximum contribution, but in the end you are the one who will need to know at tax time. It is not always the case that the company you work for will agree to advising you on your simple IRA contribution limits in any significant way. They will make sure to tell you what they, the company, will match when you first open the account. Most jobs these days come with one retirement savings plan option. Simple IRA's are a straightforward approach to investing in your the future and a great tool for retirement.  

What Is a Simple IRA?

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Unabbreviated, a Simple IRA is a Savings Incentive Match Plan for Employees, an Individual Retirement Account. A Simple IRA is a type of traditional IRA retirement savings account, but with only some of the same account limitations and regulations. Similar to any employer funded retirement account the idea is that you can contribute to a savings plan in collaboration with your employer. They are required to contribute a percentage of your salary  to match your contribution. As a rule of thumb, the typical percent contribution is between one and six percent, with three being standard.

If you are opening a retirement account like a Simple IRA for the first time, when retirement seems like a small dot in the horizon, electing to contribute an amount less than three percent might be a more reasonable option. Keep in mind that it is always recommended that you save more now, though the choice is always subjective and you can change the amount periodically. If you have immediate expenses, you don't want to take the risk of getting taxed for an early withdrawal either.

Types of IRA’s That Are NOT a Simple IRA

These types of retirement saving's plans are NOT what we are talking about in this article:

  • A traditional IRA
  • A SEP IRA 
  • A Roth IRA

While all of these provide the same basic features, the Simple IRA is one with limited flexibility in how you can contribute funds. This isn't much of a rock in the road if you take into account the fact that you can choose to increase or decrease your contribution amount during the year and potentially contribute several thousand dollars each year. As long as you are working for that employer then the money will be saved automatically to the account each paycheck. A time-tested way to build up savings.

Signing Up for an Account

This will happen when you first join the company. You should know that if you care to, you can delay opening a Simple IRA for some time. You can request this from your employer. The investing company your employer is in partnership with may ask you questions about your investing aggressiveness, marital status, current financial situation, etc. Take some time to consider your investing goals and be prepared for some personal queries. For an account to be considered active for the tax year, it must be established by October 1st. Once you open an account and make a contribution your employer must commence acting on its duties to contribute as well.

How to Contribute to a Simple IRA

Employers must make contributions that are either matching contributions or nonelective contributions. Simple IRA contribution limits are comparatively high. Though there are limits on Simple IRAs, it is not always true that you will need to watch these limits right away. There are a lot of requirements set on the company you work for when it comes to Simple IRA contributions.

Percent Matching

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Employers are generally required to contribute 3 percent of your salary towards your retirement account. So if you contribute 3 percent and the company contributes 3 percent, that's a matching contribution. This fulfills the matching contribution requirement and is the standard approach when saving with Simple IRAs. Employers cannot make contributions equal to more than three percent of your salary. This type of contribution, the recurring deposit, is most often recommended.

Simple IRAs Are Small Business Friendly

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There is a clause on the books that does allow for the employer to reduce their contribution to no less than 1 percent, but that clause has restrictions intended to ensure accountability. You must be notified if the place you work at chooses to make changes to their contribution 60 days before the change takes place, and they cannot continue with the reduced amount for more than two years out of a five year period. These requirements make sure smaller businesses have flexibility on the off years and that employees, such as yourself, are not left high and dry. As you will see, there are simple IRA contribution limits which restrict how much you and your employer can contribute to your Simple IRA, a precaution to guard against money funneling and to protect the worker. There are fewer administrative obstacles and start-up costs related to Simple IRAs.

Nonelective Contributions

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The other less common contribution option is nonelective contributions. This is the case where the employer wants to contribute periodically or in one sum to the Simple IRA without a recurring payment. Law requires that even if you do not contribute to the retirement savings account that year, the employer will contribute 2 percent of your salary. If, hypothetically, your employer gives you a 60-day notice and stops matching your contributions, and the employer decides to wait until the end of the year to make a nonelective contribution, even if you aren't employed there anymore, they still will have to contribute 2 percent of what you earned that year.

For employers taking this route, not only do they have to contribute 2 percent, but they have to contribute 2 percent whether or not you contributed to your Simple IRA savings account every paycheck (if you make more than $270,000, the employer is required to contribute no more than 2 percent of that).

Simple IRA Contribution Limits

For the year 2018 and the preceding few years, the IRS has set the maximum simple IRA contribution limit to $12,500 if you are under 50 years of age and $15,500 for those older. Contributions must be made from your salary or by the employer. Simple IRA contribution limits factor in employee contributions and do not put a limit on employer contributions besides the ones described already above. It's only after your 50th birthdate that lump sums can be added to the account- up to 3,000 dollars in addition to the base limit. The IRS calls these type of contributions into a Simple IRA retirement account "elective deferrals." In essence, it is money you are putting aside for later use.

Simple IRA contribution limits are high enough that more than likely you will not have to worry about reaching the maximum allowed when you go to file your taxes. Money saved away in a Simple IRA doesn't yet count as earned wages as related to filing taxes. Ask your Human Resources department if the money that is deferred is taxed and they will say no, it's pre-tax dollars. Those taxes have been deferred!

Considering this IRS contribution limit, let's compare briefly a Simple IRA to other types of accounts. Traditional and Roth (contributions are taxed before being added to a retirement plan) accounts have yearly limits of $5,500 for those under 50. Roth accounts also see an increase in their limits when you reach 50, but the increase is not as drastic. At the fifty mark, the yearly contribution limit of a Roth account is $6,500. That's still barely half of the simple IRA contribution limit. Therefore unless you have several retirement accounts to contribute to, you'll likely find it easier to save earlier with a Simple IRA account.

Let's say that you make a $50,000 salary and want to contribute 6 percent. That ends up being $3,000 per year that goes directly to your retirement account deducted from your pay throughout the year. Your employer can only contribute $1,500 or 3 percent to match yours. That's a considerable amount going towards your retirement.

Simple IRA Contribution Limits - Conclusion

You already know that saving is important so why not take full opportunity of making your saving's work for you as well. Saving money in a Simple IRA within the contribution limits and at or above your employer's contribution will be a money-saving opportunity not available in many accounts. It likely that after signing up for the account the percent you chose will be a number in the background, so go bold. The savings will grow with time. The Simple IRA is a steady stable place to keep that wad of cash that might otherwise get stuck in a sock and washed in the washer.

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