SIMPLE IRA: Self-Employed Contributions and Limits

Self-employed professionals enjoy the flexibility, control, and creativity that an independent career offers, but planning for retirement can be a challenge. Unlike traditional jobs with built-in retirement options, navigating this field as an independent contractor can be more complex and uncertain.

Fortunately, there are a number of retirement savings options available. The right one for you will depend on a number of factors including your personal goals and income level, which you can discuss with a financial advisor. In this series, we’ll explore the retirement options available to independent contractors and provide you with what you need to know for a financially secure future.

SIMPLE IRA: The Details

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) is a retirement plan for small businesses that have fewer than 100 employees. However, you can also have a SIMPLE IRA if you are a business of one.

With a SIMPLE IRA, your investments grow on a tax-deferred basis. An employee or self-employed individual is eligible to participate so long as they’ve earned $5,000 in the past two years and plan on earning at least $5,000 in the current year.

Advantages

SIMPLE IRAs are easy to establish and maintain, requiring annual paperwork and small annual maintenance fees. Contributions are made on a pre-tax basis, and employers can deduct any matching contributions as a business expense. Contribution limits are moderate, making this option ideal for solo-business owners with a middle-income range.

Disadvantages

SIMPLE IRAs have lower contribution limits than are SEP IRAs, Solo 401(k)s, and defined benefit plans. They also require mandatory matching contributions. Employers can either elect a dollar-for-dollar matching contribution between 1% to 3% of an employee’s total pay or a 2% non-elective contribution, which is a fixed 2% contribution for each employee, regardless of how much the employee chooses to defer.

There are a few key rules to keep in mind with SIMPLE IRAs as well. For two years after your first contribution, you cannot transfer a SIMPLE IRA into another type of retirement plan. And while you can withdraw funds at any time, there is a penalty if you are under the age of 59 ½.

Contribution Limits

The maximum contribution for 2024 is $16,000. Employers are responsible for depositing employee contributions and must contribute matching or non-elective contributions by the federal income tax return due date.

SIMPLE IRA Examples

Example 1: Employee of a small business

Linda, age 28, earns $37,000 and chooses to defer 5% of her salary: $1,850. Linda’s employer chooses to make a 3% matching contribution for all employees, contributing $1,110 to Linda’s SIMPLE IRA. Linda’s total contribution to her SIMPLE IRA is $2,960.

Example 2: Self-employed business owner with no employees

Juan, age 56, is a self-employed professional earning $76,000 per year. With a SIMPLE IRA plan, his maximum contribution for the year is $15,500 ($12,500 plus a $3,000 catch-up since he is older than 50).

To learn more about retirement options for independent professionals, contact MBO Partners today.

This content from MBO Partners does not constitute legal or financial advice.