How Much Should I Put in a Simple IRA?

Savings incentive match plans for employees individual retirement accounts — or SIMPLE IRAs — offer smaller businesses a way to help their employees save for retirement. SIMPLE IRA contributions are taken directly from your paycheck and aren't included in your taxable income and grow tax-free as long as they remain in the account. However, you will pay taxes on your withdrawals from the account in retirement.

Contribution Limits

The Internal Revenue Service limits the maximum contributions each year to the smaller of the annual contribution limit or your salary from the job. Income from other sources doesn't increase your maximum contribution. For 2013, the maximum you can put in if you're 50 or older is $14,500. If you're still until 50, the limit is only $12,000. For example, say you're 55 in 2013 and earn $11,000 from the company sponsoring the SIMPLE IRA. Even if you have other income, you can't exceed $11,000 in SIMPLE IRA contributions.

Maximizing Employer Matching

Employers must make matching contributions to your SIMPLE IRA each year. However, they have the option of either matching your contributions, up to 3 percent of your salary, or simply contributing 2 percent of your salary no matter how much you contribute. If your employer bases the match on your contributions, not contributing at least 3 percent of your salary is essentially turning down free money. For example, if you're paid $50,000 and you defer at least $1,500, your employer will add $1,500. If you deferred only $1,000, your employer would match only the $1,000 you put in.

Other Retirement Plans

SIMPLE IRAs count as a defined contribution plan, the same category as 401(k) and 403(b) plans, so your contributions to the SIMPLE IRA also count against the total contribution limits as well. For example, in 2013 you can't contribute more than $23,000 to defined contribution plans if you're 50 or older. The limit is $17,500 if you're under 50. For example, say you work two jobs and one company offers a 401(k) and the other offers a SIMPLE IRA. If you're over 50 and max out your SIMPLE IRA with a $14,500 contribution, you can't put more than $8,500 in your 401(k) plan.

Early Withdrawal Penalties

As tempting as the employer match is, don't contribute money that you anticipate needing before you turn 59 1/2 years old. If you take money out of your SIMPLE IRA before age 59 1/2, you'll owe an extra 10 percent tax penalty. SIMPLE IRAs also increase the early withdrawal penalty to 25 percent instead of 10 percent if you take a distribution within two years of starting your SIMPLE IRA. These penalties are on top of — not instead of — the income taxes you own on all distributions.

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