How Much Should I Contribute To My SIMPLE IRA?

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Whether you’re decades from retirement or nearing the end of your career, investing for the future is usually a good idea. How much cash would you require for retirement, then?

For each year you plan to be out of work, experts typically advise setting aside around 75 percent of your pre-retirement income. Your efforts may be backed up by tax-advantaged retirement plans, which would enable your money to increase in value.

Nowadays, employer-sponsored plans are very common at large corporations; however, if you work for a small company, your benefits package might include a SIMPLE IRA instead. Let’s examine how they operate and how to contribute as much as possible.

What are SIMPLE IRAs, and how do they operate?

A retirement plan for small enterprises with less than 100 employees is called a SIMPLE IRA (Savings Incentive Match Plan for Employee’s Individual Retirement Accounts).

SIMPLE IRAs are identical to conventional IRAs as well as simpler to establish than 401(k)s. However, employee contribution limitations for SIMPLE IRAs are less than for 401(k)a.

Because a SIMPLE IRA plan is simpler to set up and manage than a 401(k), small businesses may offer it to employees in place of a 401(k). While there may be superior retirement plan choices for the self-employed, you are still permitted to contribute to a SIMPLE IRA if you work for yourself.

They are advantageous to workers as well. The pre-tax money you provide is immediately deducted from your normal income, lowering your taxable income in the procedure. Additionally, you don’t pay taxes on the profits you generate in your account each year as your money grows tax-free.

The only taxes you’ll have to pay on any retirement withdrawals are income taxes. If you withdraw funds before age 59 ½, you’ll typically pay an extra 10 percent penalty, as with other retirement plans with similar structures.

However, you should be aware that there are a few exceptions. If you withdraw money from a SIMPLE IRA within two years after signing up for one, the percentage rises to a hefty 25%.

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How much can you contribute?

SIMPLE IRAs provide advantages in terms of contributions. First off, your company has to contribute to your account.

One of two options is available to do this: they can either match a portion of your contributions or immediately deposit the equivalent of a certain proportion of your pay into your account.

It is essentially free money either way. The fact that your money was invested right away means that you own the remaining amount free of charge.

For those under 50, the 2022 and 2023 employee contribution limitations for a SIMPLE IRA are $14,000 and $15,500, respectively. People who are 50 years of age or older can contribute an additional $3,000 in 2022 as well as $3,500 in 2023.Employers must make mandated contributions, which can be made in one of two ways:

  • Up to 3 percent of the employee’s salary may be contributed in matching funds, with no upper limit based on yearly salary.
  • Based on a top salary of $305,000 in 2022, make non-elective contributions equal 2 percent of the employee’s pay.

It is also worth mentioning that even a simple IRA calculator can be used to assist you in choosing the optimal retirement strategy.

What are the requirements for a SIMPLE IRA?

Contact your HR department to verify if a SIMPLE IRA is included in your benefits package, as it must be what your employer provides. If it is and you want to move further, you might need to clear some eligibility hurdles.

For instance, to qualify for a SIMPLE IRA, several businesses demand that you have earned at least $5,000 in each of the two years preceding the current calendar year.

Additionally, you might be required to make that much money during the enrollment year. Workers whose union has secured retirement benefits on their behalf may potentially be excluded by an employer.

It truly relies on the company’s internal rules because the IRS does permit companies to establish less stringent eligibility conditions.

Rules for SIMPLE IRAs

Many of the investing, payout, as well as rollover requirements that apply to other retirement plan types also apply to SIMPLE IRAs. The fact that employer contributions to SIMPLE IRAs are required may be its biggest disadvantage.

Employees could like the company match, but they might not be as pleased with the lower contribution limits compared to 401(k)s, as well as the absence of a Roth option.

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It is also worth mentioning that what distinguishes SIMPLE IRAs from various other employer-sponsored retirement plans is the obligatory employer contribution.

• Traditional IRA vs. SIMPLE IRA

Simple IRAs, as well as traditional IRAs, are somewhat comparable. Contributions are tax-deferred, which means that the amount you save up to your contribution limit lowers your taxable income for the year. Investment growth is also tax-deferred until you begin taking distributions in retirement.

• 401(k) vs. SIMPLE IRA

SIMPLE IRAs resemble 401(k) plans in certain ways: Employees who qualify choose how much (if any) of each paycheck they want to put toward the account, and the funds are automatically transferred to the employee’s personal investing account.

When should I make IRA contributions?

Better if done sooner. Your most valuable resource when investing is time. Thus, the longer your savings can develop, the earlier you should start saving.

If you invest $10,000 and achieve an average market return of 7% over 40 years, your money will be worth $19,000 after ten years, $54,000 after 25 years, as well as $149,000 after 40 years.

Remember that the market could produce higher returns or even losses at times. But as you can see, growth is significantly impacted by time in the market over extended periods. Again, don’t stress if you haven’t begun retirement savings. Starting is never too late.

What happens to my SIMPLE IRA if I leave the company?

Depending on when you started using the plan, the answer may vary. Your amount can only be transferred into another SIMPLE IRA if it has been less than two years. If not, it is regarded as a distribution, and you must pay taxes on it in addition to the significant penalties we previously discussed.

The SIMPLE IRA can be rolled over tax-free into another IRA (other than a Roth IRA) or even an employer-sponsored retirement plan once the two-year window has passed. A 401 is also included (k).


There you have it; a SIMPLE IRA is a great option for you to choose right now if you are starting to plan your retirement. There are a lot of benefits linked with it, and now, by reading this article, I hope you can fully understand how much you have to contribute to it.

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About the Author: John Watson