SIMPLE IRA: Self Employed Contributions and Limits

By MBO Partners | April 7, 2022

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Key Points

Self-employed professionals like the flexibility, autonomy, and creativity that an independent job provides, but the challenge and uncertainty of retirement planning is a common concern.

If you have the benefit of built-in retirement alternatives, there are a lot of possibilities accessible, but this path can be more challenging to explore on your own.

In this article, we'll look at the retirement choices for independent contractors and teach you what you need to know to have a financially secure future.

Self-employed professionals enjoy the flexibility, control, and creativity an independent career offers, but the challenge and uncertainty of planning for retirement is a common concern. At a traditional job, you have the benefit of built-in retirement options, but this field can be more difficult to navigate on your own.

Fortunately, there are a number of solutions 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 less 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 create and maintain with basic annual paperwork and small annual maintenance fees. Contributions are set aside on a pre-tax basis, and employers can deduct any matching contributions as a business expense. Contribution limits are middle of the road, making this option ideal for solo-business owners who have a moderate income.

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 2022 is $$20,500. 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. 

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