How to Contribute to a Simple IRA

A SIMPLE (savings incentive match plans for employees) IRA is an employer-provided retirement account, much like a traditional 401(k). Funds are added to the account as a pretax deduction, and both employers and employees contribute to the SIMPLE IRA. Sometimes these funds are matched, while other times there is a set percentage that the company contributes.

Difficulty: Easy

Instructions

1. Determine if you must contribute to a SIMPLE IRA. Since the plan is employer-provided, contributions are made both by employees (individuals) and employers. An employer must choose to make a nonelective contribution of 2 percent of the employee's salary or match an employee's contribution dollar for dollar, up to 3 percent of his annual salary.

2. Choose a type of contribution. An employee may choose to have her contributions made by way of salary reduction, in which the money is taken directly out of her paycheck and contributed to the SIMPLE IRA. The contribution can be expressed as a particular dollar amount per pay cycle or as a percentage of each paycheck.

3. Investigate the annual limit of salary reduction contribution and plan your pay reduction accordingly. The IRS imposes a annual maximum limit on how much money can be deposited on an employee's behalf. The amount is around $10,000 and includes funds contributed both by employee and employer.

4. Think about making catch-up contributions. After the age of 50 years old, an employee can make additional contributions to the SIMPLE IRA that are not counted toward the annual limit. The amount of the additional money can't exceed the set catch-up contribution limit, though, and it can't exceed the employee's elective deferrals.

5. Keep track of your SIMPLE IRA. Your employer must provide you with an annual statement telling you how much money has been put into your account. Each year you also have the option of increasing, decreasing or stopping your contribution to the fund.

Tips & Warnings

• Contributions to your SIMPLE IRA account aren't subject to tax withholding, but they are considered for Social Security and Medicare taxes, so you can expect some reduction in funds over time due to these deductions.
• Always take into account what type of contribution your employer is making to maximize your benefits. If the company is matching your contributions dollar for dollar, you may want to consider contributing up to 3 percent of your salary, since that will significantly increase your yearly contribution. Keep in mind, though, that the limit is still $10,000 a year under the age of 50.