Table of SIMPLE IRA Contribution Limits

SIMPLE IRA

The purpose of an IRA or an individual retirement account is to provide for retirement. Most people are aware of the employer sponsored 401(k) retirement plan. The SIMPLE IRA plan is meant for small employers who do not sponsor any other retirement plan. Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is established by employers managing a workforce of 100 employees or less. A SIMPLE IRA has lower contribution limits and less administrative requirements as compared to other retirement plans. It places the onus of providing for the employee's retirement on the employer, since the employer must contribute irrespective of whether the employee contributes. Setting up a SIMPLE IRA is easy and hassle free because filling out a couple of forms is all it takes. Although a SIMPLE IRA plan is meant for small business undertakings, with the number of employees not exceeding 100, a small company, that is in the growth phase, may establish a SIMPLE IRA plan provided within a span of 2 years the company reduces the sustainable workforce to 100 or less. This individual retirement account (IRA) can also be established by self employed people.

Contributions to a SIMPLE IRA

Employee Contribution: The SIMPLE IRA plan allows the employees to contribute a portion of their pretax salary. The employee may also choose not to contribute to the retirement plan. The employee's pretax salary contributions are known as salary deferrals or salary reduction contributions. The employee owns 100 percent of all contributions that are made to the SIMPLE IRA.

Employer Contribution: As mentioned earlier, the employer must contribute regardless of whether the employee contributes. Inflexible employer contributions allow no room for discrimination. The employer receives a tax deduction for the contributions made to the plan. The employer can contribute in following manner:

Non-Elective Contribution: When the contribution made by the employer is independent of the employee's contribution, it is known as a non-elective contribution. Under this scheme, the employer contributes 2 percent of the employee's salary regardless of whether the employee contributes.

Matching Contribution: When the employer bases his or her contributions on the employee's deferral contributions, it is referred to as a matching contribution. In this case, the employer is expected to contribute a dollar for every dollar contributed by the employee not exceeding 3 percent of the employee's salary.

Table of SIMPLE IRA Contribution Limits for Employees

The following table gives us an idea about the SIMPLE IRA contribution limits, for employees, over the years. For the year 2009, the maximum allowable contribution, for employees less than 50 years of age, is $11,500. An additional contribution is allowed for employees of ages 50 and over. This is known as the catch-up contribution. The catch-up contribution limit for 2009 is $2500.

Tax Year	Contribution Limit	Catch-up Contribution Limit
2005	$10,000	$2,000
2006	$10,000	$2,500
2007	$10,500	$2,500
2008	$10,500	$2,500
2009	$11,500	$2,500

Employer contributions are made in accordance with the aforementioned rules with one notable exception. The employer can choose to reduce matching contributions from 3% to a minimum of 1% for 2 out of 5 years. Hence, the table has been given for a 5 year period.

Since the purpose of SIMPLE IRA is to provide for the employee's retirement, withdrawals, before the age of 59 ½ but after 2 years of participating in the plan, and are subject to a 10 percent additional tax. While withdrawals made within 2 years of participation are subject to a 25 percent additional tax. Again, loans from the SIMPLE IRA are not permitted.