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How are Simple IRA Contribution Limits Determined?

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  • Written By: P.M. Willers
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 01 December 2016
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A Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) is a retirement plan that allows both employers and employees to contribute funds. Contributions that can be made to a SIMPLE IRA include salary reduction contributions made by employees and matching contributions made by employers. Employer contributions to a SIMPLE IRA can also include non-elective employer contributions. There is a contribution limit for each type of contribution under the SIMPLE IRA plan.

SIMPLE IRA employee contribution limits are normally set on an annual or bi-annual basis by the government that controls and monitors taxes and tax payments. In the United States, SIMPLE IRA contribution limits are set by the Internal Revenue Service (IRS). For 2010 and 2011, the SIMPLE IRA salary reduction contribution limit is $11,500 US Dollars (USD). The SIMPLE IRA employee contribution limit for employees contributing to more than one plan is $16,500 USD.

After the age of 50, those who hold a SIMPLE IRA can make additional contributions known as catch-up contributions. The maximum catch-up contribution for 2010 and 2011 is $2,500 USD. Salary reductions and catch-up contributions are the only types of employee contributions can be made to a SIMPLE IRA.

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SIMPLE IRA contribution limits for employer contributions are slightly more complex. These limits depend on whether the employer is making a dollar-for-dollar matching contribution, a lower contribution, or a non-elective contribution. If the employer is making a dollar-for-dollar contribution, he is allowed to contribute an amount matching the employee’s salary reducing contribution, but only up to 3% of the employee's compensation.

If the employer chooses to make contributions to an employee's retirement plan at a lower percentage, he must make a contribution of at least 1%. In addition, employers can do this for no more than two out of every five years. If an employer chooses to make contributions at a lower percentage, they must notify the employee in due time. Employers should be sure to investigate all regulations regarding this matter prior to making a decision as to properly follow all rules regarding retirement plan contributions and SIMPLE IRA contribution limits.

Non-elective employer contributions can be made by employers as well. Non-elective contributions to a Simple IRA can be made at 2% of the employee's compensation. For 2010 and 2011, contributions can be made to an employee's SIMPLE IRA up to the first $245,000 USD of the employee's salary or compensation.

An employee can contact his employer or the company's human resource department for information on current SIMPLE IRA contributions. For additional information regarding SIMPLE IRA plans and SIMPLE IRA contribution limits, the employer or retirement account holder should be contacted. There is also information about these plans on government tax, retirement, and finance websites.

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