2016 SIMPLE IRA Contribution Limits

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Small-business owners and self-employed individuals have a few different retirement saving alternatives to choose from for their businesses. SIMPLE IRAs, also known as Savings Incentive Match Plans for Employees, are a good alternative for small-business owners seeking many of the benefits of a 401(k) plan without some of the administrative hassles and expenses.

As the name implies, SIMPLE IRAs provide smaller employers with a simplified way to help them and their employees save more for retirement. Check out the information below to find out how much you can set aside in a SIMPLE IRA this tax year.

2016 SIMPLE IRA Contribution Limits

In 2016, the maximum amount employees can generally contribute to a SIMPLE IRA is $12,500. This amount is unchanged from 2015. Employees age 50 or older are eligible for a $3,000 catch-up contribution. As a result, the SIMPLE IRA contribution limit for 2016 is $15,500 for participants age 50 or older. As always, you should contact your employer to confirm whether or not you are eligible to make SIMPLE IRA contributions.

If you were in a participant in any other employer-sponsored retirement plans such as a 401(k) plan during the year, the total combined employee contribution amount is limited to $18,000 in 2016. 

How Does It Work?

SIMPLE IRAs are similar to other types of tax-advantaged retirement savings accounts for self-employed individuals and small businesses. Contributions are made using pre-tax dollars through convenient salary deferrals. SIMPLE IRAs also include an employer match which creates additional incentives for employee participation in their retirement plan at work.

How are they Different

SIMPLE IRAs have some key differences that set them apart for other types of self-employed and small business retirement plan options. Setting up a SIMPLE IRA is fairly straightforward and less burdensome for employers with no required annual financial reports. Employers considering establishing a SIMPLE IRA need to be aware of two important rules when establishing this type of retirement plan.

  • The small business must have 100 or fewer employees (who earned $5,000 or more during the previous year).
  • The small business cannot have another qualified retirement plan, such as a 401(k) plan.

Matching Contributions

Employers can choose either to match employee contributions for each participant or to make contributions based on a fixed percentage of each eligible employee’s salary. Generally speaking, employers must make matching contributions on employee salary deferrals up to 3% of employee compensation. Employers may also choose to offer a 1 percent match, but not for more than two years in a five year period. This requirement does not apply in the event an employer chooses to make non-elective contributions equal to 2% of the employee’s annual pay. Non-elective contributions must be made by the employer each year even if the employee does not elect to save money for retirement in the SIMPLE IRA. During the 2016 tax year, the salary limit for non-elective contributions remained the same at $265,000.

Required Deadlines for Employer Contributions

If you are a small business owner with a SIMPLE IRA plan, you are required to deposit salary reduction contributions for participating employees within 30 days after the end of the month they would have received the funds as cash. Employer matching contributions or non-elective contributions must be made by the due date of their federal income tax return (including extensions).

Action Steps

Whether you are a small business owner or an employee of a company that offers a SIMPLE IRA, it is important to understand how this type of retirement plan can help you prepare for retirement. It is a “best practice” financial planning step to review your planned contributions for 2016 to make sure you are on track to reach your retirement goals. If you don’t already have a SIMPLE IRA plan in place, you can learn more about this savings vehicle for retirement.

Additional Resources:

SIMPLE IRA Plans for Small Businesses (Source: Internal Revenue Service)