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Simple IRA Contribution Limits

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If you are a savvy saver over age 50 who takes advantage of these increased contribution limits, you can put away $33,000 into tax-advantaged retirement accounts in 2020. If your employer allows after-tax contributions or if you’re self-employed, that amount increases to $57,000. What’s more, you have numerous account options to choose from — traditional, SEP, SIMPLE, 401(k), Roth IRA — or combine to maximize your retirement savings. First, you’ll need to decide whether a tax-deferred plan like a SIMPLE IRA, a tax-free plan like a Roth IRA or a combination of accounts will position you better for retirement.

How Much Can You Contribute to Your Simple IRA?

A SIMPLE IRA, or savings incentive match plan for employees, is a type of traditional retirement account set up by self-employed individuals or small business owners for their employees. Unlike Traditional IRAs, employers and employees can both make contributions to SIMPLE IRA accounts.

Employer contributions can either match up to 3% of the employee’s contributions or be nonelective, meaning that the employer decides what they will contribute to an employee’s savings plan regardless of how much the employee contributes. Nonelective matches typically have a lower limit of around 2%.

 In 2020, the maximum contribution limit for SIMPLE IRAs increased $500 from 2019.

  • Workers under 50 can contribute up to $13,500 in 2020.
  • Workers over 50 can contribute an additional $3,000 catch-up contribution, for a total of $16,500 in 2020.
  • Married spouses can both contribute up to the maximum based on their age and deduct it from taxes.
Filing Status2020 Simple IRAMAGI LimitationsDeduction
Single or Head of Household$65,000 or lessFull up to your contribution limit
 More than $65,000 and less than $75,000Partial
 $75,000 or moreNone
Married filing jointlyLess than $104,000Full up to your contribution limit
 More than $104,000 and less than $124,000Partial
 $124,000 or moreNone
Married filing jointly(Spouse is covered by a workforce retirement plan)Less than $196,000Full up to your contribution limit
 More than $196,000 and less than $206,000Partial
 $206,000 or moreNone
Married filing separately(you or your spouse is covered by a workplace retirement plan)Less than $10,000Partial
 $10,000 or moreNone

SIMPLE IRA Contribution Exceptions 

  1. You can’t contribute more than the contribution limits. ($13,500 annually and $16,500 if you’re over 50)
  2. You can’t contribute more than you earn. Your taxable compensation for the year is also your IRA contribution limit. 

Should You Contribute to a SIMPLE IRA or Traditional IRA? 

SIMPLE IRAs and Traditional IRAs are both tax-deferred retirement plans. You contribute pretax money, allowing for tax-deferred growth, then pay taxes years later when you withdraw, ideally at a lower tax rate than you are currently paying. Both plans can help you develop a robust retirement portfolio, so which one is right for you? It depends on whether your employer offers a traditional workplace retirement plan.

Traditional IRAs

Traditional IRAs are set up by individuals and only account owners can make contributions. Traditional IRAs can be used in combination with or to supplement an employer-sponsored 401(k) or SIMPLE IRA account. Traditional IRA contributions are lower than Simple IRA contributions, $6,000 per year in 2020 ($7,000 per year if you are over 50).

In 2020, traditional IRA contributions are fully tax-deductible for singles and couples without workplace retirement plans. However, if one spouse is covered by a workplace retirement plan, joint filers must earn $196,000 or less to claim the full tax deduction. Additionally, if you take money out before reaching age 59 ½, you will be subject to a 10% penalty.

SIMPLE IRAs

SIMPLE IRAs are an employer-provided retirement account designed for employees without a traditional 401(k). Both employers and employees can make contributions to SIMPLE IRA accounts. In 2020, SIMPLE IRA contributions increased $500 from 2019 to $13,500 annually ($16,500 if you are over 50). Employee contributions to SIMPLE IRAs are not tax-deductible and if you withdraw money within 2 years of an employer making the first deposit, the penalty rises from 10% to 25%. 

What if You Want to Contribute Past the Limit? 

If you’ve maxed out your annual contributions to 1 account, consider operating multiple retirement accounts at the same time or looking at IRA options trading to increase your retirement savings. 

Commonly combined retirement accounts: 

401(k)

A 401(k) is an employer-sponsored retirement savings plan that allows employees to save and invest some of their paycheck before taxes are taken out. Taxes aren’t paid until you withdraw your money, so in addition to your retirement savings you will have lower taxable income. To qualify for a 401(k) you must be over 21 and have worked at a company for at least 1 year.

In 2020, the 401(k) contribution limits rose $500 to $19,500 annually ($26,000 if you are over age 50). However, if you withdraw your funds before age 59 ½ you will pay a penalty and you have to make scheduled withdrawals starting at age 70 ½.

Traditional IRA

Traditional IRAs (see “Should You Contribute to a SIMPLE IRA or Traditional IRA?” above) are commonly used to supplement 401(k) or SIMPLE IRA accounts. A Traditional IRA can be beneficial if you are mid or late career and you think that the tax rate you are paying now is higher than what you’ll pay in retirement. 

Roth IRA

A Roth IRA is a great way to supplement a 401(k) or start a retirement savings fund if you’re in the earlier stages of your career. While Roth IRAs operate similarly to Traditional IRAs, a Roth IRA is not tax deductible. You pay taxes when making contributions, not when you withdraw. This means that your portfolio gains can be withdrawn tax-free when you retire.

Roth IRA 2020 contribution limits are the same as traditional IRAs ($6,000 per year under 50, $7,000 for over 50). However, a Roth IRA doesn’t have the same age or withdrawal requirements as Traditional IRAs. As long as you have owned a Roth account for more than 5 years and are 59 ½ or older at the time of withdrawal, you can start using your money tax-free.

Roth IRAs do have income limits based on your marital status and adjusted gross income (AGI). In 2020, you are only eligible for a Roth IRA if your adjusted gross income (AGI) is below $139,000 annually ($169,000 if married and filing jointly).

Filing Status2020 Roth AGI Limits
Single$124,000–$139,000
Head of Household$124,000–$139,000
Married Filing Jointly$196,000–$206,000

Limits

  • Employer-sponsored retirement plans such as SIMPLE IRAs and 401(k)s are cumulative; in 2020, you cannot contribute more than the annual limit of $19,500 between the 2.
  • Roth IRAs and Traditional IRAs are also cumulative and in 2020 you cannot contribute more than $6,000 between your IRAs.

 How to Find a SIMPLE IRA that Works for You

  1. Decide whether you want to open up a traditional IRA or a Roth IRA. This will depend on whether a tax-deferred plan (traditional) or tax-free plan (Roth) is a better fit for your retirement goals.
  2. See if your income qualifies. You cannot open a Roth IRA if your income is above $139,000 annually ($206,000 if you’re married filing jointly).
  3. Choose a provider. Compare accounts, account minimums, fees and types of accounts/advisors to see which fits your investment style and goals best.
  4. Open your online account. Each provider will have specific steps but you will need to provide your full legal name, address, SSN and banking information to open your account.
  5. Schedule contributions. Decide what you want to invest in and set up a schedule to maximize the maximum legal amount you can contribute. 

Plan to Maximize 

Whether you’re under 50 and beginning to look toward retirement, or over 50 and planning to maximize your savings during the later years of your career, the 2020 contribution increases to retirement savings plans can benefit you. Meeting with a financial advisor may not only help you define your retirement goals but also strategize how to plan for retirement and take advantage of the 2020 contribution increases.  

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