Are Contributions To Simple IRA Tax Deductible?

Each eligible employee may contribute to a pay decrease, and the company must make one of the following contributions:

Can contributions made under a SIMPLE IRA plan be made to any type of IRA?

A SIMPLE IRA contribution can only be made to a SIMPLE IRA, not to any other type of IRA.

What is a salary reduction contribution?

A salary reduction contribution is money that an employee chooses to put into his or her SIMPLE IRA instead of being paid in cash. Employers must allow employees to choose to have salary reduction contributions made at a level determined by the employee, expressed as a percentage of annual compensation or a particular dollar amount. Except to comply with the yearly limit on salary reduction contributions, an employer may not impose any restrictions on the amount of salary reduction payments made by an employee.

How much may an employee defer under a SIMPLE IRA plan?

In 2020 and 2021, an employee can defer up to $13,500 ($13,000 in 2018; $12,500 in 2016–2018, subject to cost-of-living adjustments in subsequent years). Employees over the age of 50 can contribute up to $3,000 in catch-up contributions between 2016 and 2021. (subject to cost-of-living adjustments for later years). SIMPLE IRA salary reduction contributions are “elective deferrals” that contribute toward an employee’s overall annual limit on elective deferrals to this and other plans that allow elective deferrals.

How much must I contribute for my employees participating in our SIMPLE IRA plan?

  • match each employee’s salary reduction contribution dollar for dollar up to 3% of their annual compensation (not limited by the annual compensation cap), or
  • make non-elective contributions of 2% of the employee’s pay up to a maximum of $290,000 in 2021 ($285,000 in 2020), subject to cost-of-living increases in subsequent years. You must provide nonelective contributions for all eligible employees, whether or not they make salary reduction contributions, if you want to do so.

Can I reduce the 3-percent matching contribution?

You can choose to reduce your 3-percent matching contributions for a calendar year if you meet the following criteria:

  • The limit isn’t reduced for more than 2 years out of the 5-year period ending with (and including) the election’s effective year; and
  • You tell employees of the decreased ceiling in a reasonable amount of time before the 60-day election period, during which they might agree to a wage reduction.

Any year prior to the first year in which you (or a predecessor employer) maintained a SIMPLE IRA plan will be viewed as a year in which the limit was 3 percent. If you opt to make nonelective contributions for a year, that year will be handled as if the cap had been raised to 3%.

Can I suspend, reduce or increase the amount of matching contributions to our SIMPLE IRA plan in the middle of the year?

You can’t stop or change your employer matching contributions in the middle of the year. You must make the contributions that you agreed to make in the SIMPLE IRA plan notice to your employees.

May I make nonelective contributions instead of matching contributions?

You can make nonelective contributions equivalent to 2% of each eligible employee’s compensation for the whole calendar year instead of matching contributions under a SIMPLE IRA plan. Regardless of whether the employee chooses to make salary reduction contributions for the calendar year, you must make the nonelective payments for each eligible employee. You can, but aren’t obligated to, limit nonelective contributions to eligible employees with a yearly salary of at least $5,000 (or a smaller amount determined by the company).

For a year, you may substitute the 2% non-elective contribution for the matching contribution if:

  • You inform eligible employees that instead of a matching payment, a 2% non-elective contribution would be provided; and
  • This notice is given to employees in a reasonable amount of time before the 60-day election period, during which they can agree to a pay cut.

Do compensation limits apply when calculating the 2-percent nonelective contribution?

Compensation taken into account for the 2-percent nonelective contribution must be limited to $290,000 in 2021 ($285,000 in 2020), subject to cost-of-living increases in succeeding years.

Do I have to contribute for a participant who isn’t employed on the last day of the year?

You certainly do. There can’t be a last-day-of-the-year employment requirement in a SIMPLE IRA plan. Any SIMPLE IRA contribution must be shared by the employee if they are otherwise eligible. This includes employees who pass away or quit their jobs before the contribution is made.

If an employee starts or stops salary reduction contributions in the middle of the year, can I make my 3% match based only on the compensation earned during the period they actually contributed?

No, regardless of when the employee starts or ends paying during the year, you must base your SIMPLE IRA plan employer matching contribution on the employee’s complete calendar-year compensation. The maximum matching contribution for the whole calendar year is always 3% of the employee’s compensation. Matching contributions can be provided on a per-pay-period basis or by the employer’s tax-filing deadline (including extensions).

For example, Bob earns $50,000 per year and begins contributing to his employer’s SIMPLE IRA plan on September 1. Until December 31, he gives $1,536. Bob’s company is required to match Bob’s contributions up to 3% of his annual pay, or $1,500 (3 percent of $50,000). It makes no difference that Bob only participated to the plan for the last four months of the year.

John, for example, makes $60,000 every year. From January 1 to September 30, he made a $12,000 salary reduction contribution to his employer’s SIMPLE IRA plan. Even though John stopped contributing to the plan on September 30, his employer is required to match his contribution up to 3% of his whole calendar-year compensation, or $1,800 (3 percent of $60,000).

For instance, Joe’s annual salary is $70,000, and he donated 1% of his pay, or $700, to his employer’s SIMPLE IRA plan. Because the employer is only allowed to match the amount Joe actually pays during the year up to a maximum of 3% of his calendar-year compensation, Joe’s employer must make a matching payment of $700.

Can I contribute to a SIMPLE IRA of a participant over age 72?

Yes, you really must. Employees who are 70 1/2 years old or older can contribute to their SIMPLE IRAs through salary deferral. Employers must continue to make matching or nonelective contributions to their employees’ SIMPLE IRAs once they reach the age of 72 (70 1/2 if they achieved that age before January 1, 2020), and they must also begin taking required minimum distributions from the account.

Employees may not be denied access to a SIMPLE IRA plan purely because of their age.

What happens if I don’t make the matching or non-elective contribution to the SIMPLE IRA plan?

To qualify for tax benefits, a SIMPLE IRA plan must follow specific guidelines. If you don’t follow these guidelines, for example, by not paying due contributions, you and the other members may lose out on tax benefits. Certain SIMPLE IRA plan flaws can be fixed. Review our SIMPLE IRA Plan Fix-It Guide and Correcting Plan Errors for more details.

When must I deposit the salary reduction contributions?

According to IRS requirements (IRC section 408(p)(5)(A)(i), you must deposit employees’ salary reduction contributions to their SIMPLE IRAs within 30 days of the end of the month in which the amounts would otherwise have been receivable to the employees in cash. The final day for submitting salary reduction contributions for a calendar year is 30 days after the end of the year, or January 30th, for self-employed persons without common-law workers.

It’s possible that the Department of Labor’s rule for depositing salary reduction payments will be more stringent. There is a seven-day safe harbor regulation in place.

When must I make the matching and nonelective contributions?

You must make matching and nonelective contributions to the financial institution that administers the SIMPLE IRA by the due date for filing your business’s income tax return, including extensions, for the taxable year that includes the last day of the calendar year in which the contributions were made. Regardless of when you file your tax return, if you extend it, you have until the end of the extension period to deposit contributions. If you did not deposit the contribution on time, you must amend your tax return and pay all applicable tax, interest, and penalties.

How much of the contributions made to employees’ SIMPLE IRAs may I deduct on my business’s tax return?

On your tax return, you can deduct all contributions paid to your workers’ SIMPLE IRAs.

Can employees deduct the salary reduction contributions they make to the SIMPLE IRA plan on their Form 1040?

Participants in a SIMPLE IRA plan cannot deduct their contributions from their income on their Form 1040. The “Wages, tips, and other compensation” line on Form W-2, Wage and Tax Statement, does not contain employee salary reduction payments to a SIMPLE IRA.

Where do I report SIMPLE IRA contributions on 1040?

On Part II – line 15 of Form 1040 Schedule 1, report both your salary reduction contributions and employer contributions (non-elective or matching) for yourself.

This is distinct from reporting non-elective or matching employer contributions for your common-law employees as a business expense on your Schedule C.

What are the tax benefits of a SIMPLE IRA?

  • It’s relatively simple to set up and use. A SIMPLE IRA is simple to set up and operate for employers. Small businesses can offer retirement benefits since the reporting requirements and other criteria are less onerous than with a 401(k).
  • Contributions made before taxes. Contributing to a SIMPLE IRA as an employee lowers your taxable income, resulting in a tax advantage today. Your balance grows tax-deferred over time, and withdrawals are taxed at your marginal income tax rate when you retire.
  • Employer matching contributions do not vest. Employer contributions to your SIMPLE IRA are instantly available to you. Other employer-sponsored retirement plans may not usually provide for quick vesting.
  • Employers can earn a tax credit equal to 50% of beginning costs, up to $500 per year, for three years when they set up a SIMPLE IRA. This is in addition to the various tax advantages businesses get from contributing to employee retirement plans.

How do I file a SIMPLE IRA on my taxes?

Simple W-2 Reporting Requirements for IRAs A SIMPLE IRA can be set up by most small firms with 100 or fewer employees. Form 1040, Schedule 1, Line 28 is where employees submit their contributions for the year.

Which IRA contributions are not tax deductible?

Other retirement plans, such as a deductible IRA or a Roth IRA, may not be available to high incomes. “Income phase-outs, tax filing status, and whether you are covered by a corporate retirement plan impact your eligibility to deduct IRA contributions,” says Brian Fry, a certified financial adviser and founder of Safe Landing Financial in Austin, Texas. For example, if a married couple files jointly and earns $208,000 or over in a year, they are ineligible to contribute to a Roth IRA. Those making $140,000 or over as a single taxpayer will also be unable to contribute to a Roth IRA. You may not be able to deduct your contributions to a traditional IRA if you have a 401(k) at work and your salary exceeds $76,000, or $125,000 for couples if both spouses have a 401(k). Nondeductible IRA contributions are available to those who do not qualify for a regular or Roth IRA.

Is SIMPLE IRA taxable?

In general, any money you remove from your SIMPLE IRA is subject to income tax. Unless you are at least 591/2 years old or qualify for another exception, you may have to pay an additional tax of 10% or 25% on the amount you withdraw.

Additional Taxes

If you are under the age of 591/2 when you withdraw money from your SIMPLE IRA, you must pay an additional 10% tax on the taxable amount unless you qualify for another exception. This tax can be increased to 25% in exceptional instances.

If you make the withdrawal within two years after starting participating in your employer’s SIMPLE IRA plan, the amount of additional tax you must pay increases from 10% to 25%.

Exceptions to Additional Taxes

If you’re 591/2 years old or older, you won’t have to pay any additional taxes on the money you remove from your SIMPLE IRA. You also won’t have to pay any more taxes if you:

  • Medical expenses that exceed 10% of your adjusted gross income are unreimbursed (7.5 percent if your spouse is age 65 or older),

Can I contribute to an IRA and a SIMPLE IRA?

Although you can contribute to both a regular and a Roth IRA as well as a Simple IRA in the same year, the amount you can contribute varies depending on your age, the type of IRA you have, and IRS regulations.

What are the disadvantages of a SIMPLE IRA?

  • Employee restrictions. SIMPLE IRAs are only available to businesses with less than 100 employees. If you want to expand your firm beyond this point, you’ll need to switch to a different retirement plan later.
  • Limits on total annual contributions SIMPLE IRA contributions are deducted from the $17,500 yearly IRS maximum for qualifying plans. Your overall retirement contributions may be limited if you contribute to a 401(k) through another company.
  • Contribution limitations are lower than in a 401(k) (k). A SIMPLE IRA has significantly larger contribution limits than a standard IRA, but significantly lower limitations than a 401(k) plan.
  • Employer contributions are required. Even if your business has a difficult year, you must pay specific contributions to employee accounts every year.
  • There will be no loans or Roth contributions. All contributions are made before taxes, and withdrawals are taxed, and funds cannot be borrowed for other purposes until retirement age.

Do SIMPLE IRA contributions reduce AGI?

If you contribute to a traditional IRA, the money you put in reduces your adjusted gross income (AGI) for that tax year dollar for dollar, as long as you stay within the yearly contribution limitations (see below).

What is the max contribution for a SIMPLE IRA?

In 2022, an employee’s salary contribution to a SIMPLE IRA cannot be more than $14,000 ($13,500 in 2020 and 2021; $13,000 in 2019 and $12,500 in 2015–2018).

If an employee participates in any other employer plan during the year and has elective salary reductions under those plans, the total amount of salary reduction contributions an employee can make to all the plans he or she participates in in 2022 ($19,500 in 2020 and 2021 ($19,000 in 2019) is limited to $20,500. There are multiple plans to be seen.

Is a SIMPLE IRA a defined contribution plan?

The IRS code sets limits on the maximum amount that can be contributed each year in Defined Contribution plans. SIMPLE IRA, SEP-IRA, Individual 401(k)/Profit Sharing, Regular 401(k), or Safe Harbor 401(k)/Profit Sharing are all examples of defined contribution plans.

Who can make a fully deductible contribution to a traditional IRA?

Who can contribute to a traditional IRA that is completely deductible? Individuals who do not have access to an employer-sponsored retirement plan can deduct the whole amount of their IRA contributions, regardless of their income level.

Why invest in a traditional IRA if not deductible?

Aside from knowing that you’ll have money when you retire, one advantage of contributing to a retirement plan is that those contributions can be deducted from your current income for tax purposes.

A contribution to a traditional IRA, on the other hand, may not be tax-deductible if either you or your spouse is enrolled in an employer-sponsored retirement plan.

While some IRA contributions aren’t tax deductible, there are plenty of other reasons to put money into an IRA.