Can I Contribute to My IRA Annuity If I Already Contribute to a SIMPLE IRA?
An IRA, or Individual Retirement Account, is a tax shelter that allows you to defer taxes on your income and investment earnings. Two types of IRAs are an annuity IRA and a SIMPLE IRA. There's no limit to the number of IRAs you may hold. However, you should understand how contribution rules work if you're contributing to more than one.
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Types
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An annuity IRA is an IRA that invests in an annuity. If you work for a government agency or the public school system, these IRAs are referred to as "tax-sheltered annuities." A SIMPLE IRA is a simplified IRA plan. These IRAs accept contributions from both employers and employees.
Process
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When contributing to an annuity IRA and a SIMPLE IRA, the contributions are based on what type of IRA it is. For example, SIMPLE IRAs accept pretax contributions. If the annuity IRA is a traditional IRA plan or a tax-sheltered annuity, then contributions are also pretax. However, if the IRA annuity is a Roth IRA, then you make after-tax contributions. Regardless of the type of IRA, however, you may contribute to both your annuity IRA and a SIMPLE IRA. Because the SIMPLE IRA is considered a special type of qualified retirement plan, you may make the maximum contribution to your SIMPLE IRA, as well as make the maximum contribution to your traditional or Roth IRA annuity.
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Benefits
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The benefit of being able to contribute to both your SIMPLE and IRA annuity is that the only limits on the contributions are the limits imposed by each individual plan. This means that you get more tax-deferred retirement contributions by using a combination of the SIMPLE IRA and the IRA annuity than you would if you used one or the other.
Misconceptions
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A common misconception is that, for contribution limits, all IRAs are considered to be one IRA. This is only true of traditional and Roth IRAs. When contributing to a traditional and a Roth IRA at the same time, you must treat the IRA accounts as the same account for the purposes of making contributions. In other words, you don't get a separate contribution limit for each IRA account. Instead, the maximum contribution limit set for IRAs is for all of your traditional and Roth IRA accounts put together.
Expert Insight
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When contributing to both a SIMPLE IRA and an IRA annuity, consider using a Roth IRA for the annuity. This gives you the advantage of tax-free withdrawals during retirement. Even though you must pay tax on the contributions to the Roth IRA annuity, you're getting a tax deduction on the contributions to your SIMPLE IRA, in addition to an employer match.
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