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Simple IRA Contribution Limits

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan for self-employed individuals with less than 100 employees and no other employer retirement plans. Similar to traditional IRAs, SIMPLE IRAs allow you to contribute a portion of your income to your retirement account without paying income tax on your contributions until you withdraw them (presumably when you retire). However, unlike a traditional IRA, the contribution and deduction limit for a SIMPLE IRA is higher, generally $12,500 (in 2018), plus an additional employer contribution. Further, compared to other profit sharing retirement plans, SIMPLE IRAs do not have onerous reporting, administrative or compliance requirements, but you still have the benefit of being able to make comparatively high contributions.


REAL ESTATE AGENT

Lombardi is a 45-year-old sole proprietor real estate agent who has been in business for four years. During the year he earned $95,000 of commission income from his sole proprietorship and reported $87,373 ($95,000 x 92.35%) on line 4 of his Schedule SE. Lombardi chose to make the maximum elective deferral of $12,500 plus an employer match of 3% of his compensation, or $2,621 ($87,373 x 3%) into his SIMPLE IRA. When he prepares his taxes, he would deduct $15,121 (elective deferral plus employer match) on line 28 of his Form 1040.

ENTREPRENEUR

Fern is the founder of a small advertising firm with one employee. Fern originally established an SIMPLE IRA so she could defer her own taxable income. Fern's employee is now entering his third year of employment with Fern, has earned between $40,000 and $48,000 during his first two years and is on track to make $50,000 this year. Regardless of whether or not Fern wants to provide him with retirement benefits, since he meets the SIMPLE IRA eligibility requirements outlined by the IRS, Fern must allow her employee to participate in the plan and begin to make matching or nonelective employer contributions to his SIMPLE IRA.

PROFESSIONAL SERVICES

Jordy is a self-employed research scientist with one employee. During the year Jordy reported self-employment income on line 4 of her Schedule SE of $75,000 and made an elective deferral to her SIMPLE IRA of 5% of her income. Her employee, Tim, earned $55,000 but did not contribute anything to his SIMPLE IRA during the year. When Jordy set up her SIMPLE IRA, she chose to make a non-elective employer contribution of 2% of employee wages. When Jordy prepares her taxes, she could deduct the $3,750 ($75,000 x 5%) elective deferral she made for herself and her 2% non-elective employer contribution of $1,500 ($75,000 x 2%) on line 28 of her Form 1040. She would also deduct the 2% non-elective employer contribution of $1,100 ($55,000 x 2%) she made for Tim on line 19 of her Schedule C.

CLEANER

Robert is sole proprietor and long time owner/operator of a cleaning business. Robert had a great year and ended up contributing $10,000 (combined elective deferral and employer match) to his SIMPLE IRA. Since Robert requested an extension his taxes weren't due until October 15 of the following year. For Robert to be able to deduct his $10,000 of retirement contributions on his tax return, he simply needs to deposit the funds into his SIMPLE IRA before the due date of his return; and with his extension, this means he can hold onto his money until October 15 in the year his return his due (because of the filing extension) and still be able to take advantage of a large tax deduction.

AUTHOR / SPEAKER

Hans is a professional speaker with one employee who helps him draft and edit his presentations. Hans has a SIMPLE IRA established for his business and his employee has participated in the plan for the past three years. In April Hans made a $1,500 employer matching contribution for his long-time employee. In July of the same year his long-term employee quit to pursue her own career as a professional speaker. Unfortunately for Hans, since contributions to SIMPLE IRA's are 100% vested, he was not able to "claw back" any portion of his current or prior-year contributions even though his employee quit (some other retirement plans, like 401(k)'s, allow employer contributions to vest (become the employes) over an extended period of time).

ABOUT SIMPLE IRA CONTRIBUTION LIMITS

  • If you have self-employment income, less than 100 employees, and your business has no other retirement plans you are eligible to establish a SIMPLE IRA. You and your employees (if applicable) can make an elective deferral of up to $12,500 (in 2018), plus an additional employer match of up to 3% of wages OR 2% of first $275,000 of wages (per employee) for all eligble employees. Additionally, if you are 50 or older at the end of the year you can defer an additional $3,000 of your compensation into your SIMPLE IRA.
  • If you are a sole proprietor, you would be considered an employee when calculating your SIMPLE IRA elective deferral and employer match. Note that sole proprietors / self employed individuals should use the amount reported on line 4 of their Schedule SE as their total compensation when calculating their contributions.
  • To establish a SIMPLE IRA, simply complete Form 5304-SIMPLE (your employee selects financial institution for deposits) or Form 5305-SIMPLE (you designate a financial institution for deposits) to outline the details of your plan and meet employer notification and recordkeeping requirements. When you complete the relevant form simply keep it for your records. You do not need to file the form with the IRS.
  • Keep in mind that if you have an SIMPLE IRA, any of your employees who have earned at least $5,000 in compensation from you during any two years before the current calendar year and expect to receive at least $5,000 of compensation during the current calendar year will be eligible to participate in your plan. Further, any employer contributions you make to a SIMPLE IRA will be considered 100% vested on the contribution date (similar to SEPs), meaning the money you contribute to your employees' plans belongs to them regardless of their tenure.
  • If you have a SIMPLE IRA, contributions you make for yourself are deductible on line 28 of your Form 1040. Contributions you make for employees are deductible on line 19 of your Schedule C.
  • There are many details surrounding SIMPLE IRA's that we have not included on this page. Different guidance may apply to you depending on your specific situation. Further, SIMPLE IRA's are just one of many investment vehicles you could choose to take advantage of. You should consult with your tax advisor and financial planner to determine how this deduction could apply to you specifically.

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