Simple IRA Contribution Restrictions
The SIMPLE IRA is designed by the Internal Revenue Service to provide small businesses with a cost-effective retirement plan for employees. SIMPLE stands for Savings Incentive Match Plan for Employees and defines one of the benefits of contributing---your employer may match your contribution and add to your retirement savings. If your employer provides a SIMPLE IRA, most of the restrictions have been met; the only other restrictions are contribution limits.
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Employer Contributions
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Your employer must meet SIMPLE IRA restrictions prior to your participation. As of April 2011, an employer is eligible to provide a SIMPLE IRA plan if it meets the "100-employee limitation" which the IRS defines as "no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year." Once your employer establishes a SIMPLE IRA, it must choose one of the following two contribution options: nonelective employer contribution of 2 percent of each employee's compensation whether or not the employee participates, or a matching contribution of up to 3 percent of each employee's contribution. This employer contribution option may be changed annually.
Employee Contributions
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SIMPLE IRA employee contributions are referred to as "salary reduction contributions" because they are deducted from an employee's compensation pre-tax. An employee may elect to contribute a percentage of his compensation or a specific dollar amount per pay period, provided his total contribution for a calendar year does not exceed the given year's IRS maximum employee contribution. For the 2010 and 2011 tax years, an employee may contribute up to $11,500 to his SIMPLE IRA, but this limit does not include "catch-up contributions."
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Catch-Up Contributions
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In addition to salary reduction contributions, the IRS also allows employees who are 50 years old or more to make "catch-up contributions" toward their SIMPLE IRA each calendar year. For the 2010 and 2011 tax years, the catch-up contribution limit is $2,500 for a SIMPLE IRA.
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If your employer offers a SIMPLE IRA with a matching contribution, there are two key benefits to your participation. First, there is a tax benefit. Because your salary reduction contributions are deducted from your salary pre-tax, your total taxable income is reduced while your contributions are reserved in your SIMPLE IRA account. Second, your employer will contribute to your SIMPLE IRA over and above your own contribution. Consult your employer for its matching contribution percentage---it must be at least 1 percent and no more than 3 percent. Elect to contribute at least your employer's matching percentage to gain the maximum benefit of your SIMPLE IRA contribution.
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References
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