Financial Planning

SIMPLE IRA Contribution Limits for 2021

The maximum amount workers at small businesses can contribute to a SIMPLE IRA for 2021 remained the same as the prior year.

A SIMPLE IRA is a retirement plan designed for small businesses with 100 or fewer employees. It's a cheaper (and easier) plan for an employer to set up when compared to a traditional 401(k). However, the amount a worker can save in a SIMPLE IRA is less than a 401(k).

2021 SIMPLE IRA Contribution Limits

For 2021, the annual contribution limit for SIMPLE IRAs is $13,500, the same amount as the year before. Workers age 50 or older can make additional catch-up contributions of $3,000, for a total of $16,500.

By comparison, workers younger than 50 can salt away as much as $19,500 in a traditional 401(k) for 2021, plus another $6,500 if they're 50-plus.

Employee contributions to a SIMPLE IRA are made on a pretax basis, which lowers taxable income. The invested money grows tax-sheltered until you withdraw it, at which time the distributions will be taxed as ordinary income.

If you pull money out before age 59 1/2, you face a 10% early-withdrawal penalty on top of taxes. The withdrawal penalty increases to 25% for SIMPLE IRAs if money is pulled out within two years of signing up for the plan.

Unlike some other retirement plans, a SIMPLE IRA doesn't offer a Roth option, which would allow workers to invest after-tax dollars in the plan and not to be taxed on withdrawals later in retirement.

Employer Contributions to SIMPLE IRAs

Good news for workers participating in a SIMPLE IRA: Employers must make some form of a contribution to employees' accounts. An employer can choose to either make a dollar-for-dollar match of up to 3% of a worker's pay or contribute a flat 2% of compensation, whether the employee contributes or not.

Most employers choose the dollar-for-dollar match of up to 3%, says Ronald Oldano, a certified financial planner and private wealth adviser in Florida. However, if an employer has a bad year financially, there's some wiggle room to lower the employer match to 1% or 2% for two years of a rolling five-year period.

For example, a company just starting a SIMPLE IRA can elect to match 1% or 2% of each employee's salary for the first two calendar years of the plan, but then must ramp up its match to 3% for the next three years. Once that five-year period is over, the employer can again lower its matching contribution.

If your employer is like most and matches dollar-for-dollar up to 3% of pay, make sure you're contributing at least enough to qualify for the full match.

Also, remember to pick your investments wisely. SIMPLE IRAs can hold a basket of investments, from stocks and bonds to mutual funds and exchange-traded funds. The best investment is one that fits your long-term goals at the right price.

How SIMPLE IRA Savers Can Build a Bigger Nest Egg

If you're already stashing away the maximum contribution allowed in your SIMPLE IRA—$13,500 for employees younger than 50 or $16,500 for 50-plus workers—but want to save even more for retirement, consider opening a separate traditional IRA or Roth IRA, suggests Clark Randall, a certified financial planner and founder of Financial Enlightenment, in Dallas.

For 2021, individuals younger than 50 can contribute up to $6,000 to a traditional IRA or Roth IRA. Retirement savers age 50 and up can make an additional $1,000 catch-up contribution. Roth IRAs have income limits. The maximum amount you can contribute to a Roth IRA for 2021 begins to phase out once modified adjusted gross income hits $125,000 for singles ($198,000 if married filing jointly). There's no tax deduction for Roth IRA contributions.

Contributions to a traditional IRA for 2021 are tax-deductible, though this benefit will phase out if you also contribute to a 401(k) plan at work and reach a certain income threshold. The tax deduction phases out for single filers who have a modified gross income between $66,000 and $76,000.

If an IRA contributor is covered by a work retirement plan, joint filers must earn $105,000 or less to claim the full tax deduction. The deduction is fully phased out once you make $125,000 or more. If an IRA contributor is not covered by a retirement plan at work, then the deduction is phased out between $198,000 and $208,000 for joint filers.

Most Popular

Thinking of Buying an RV or Motor Home? Think Again!
personal finance

Thinking of Buying an RV or Motor Home? Think Again!

A Lemon Law attorney has some insights on the downsides of RV ownership you should think about before putting your money down and hitting the road.
May 16, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 17, 2021
Refunds for $10,200 Unemployment Tax Break to Begin This Week
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Week

The IRS will start issuing automatic refunds in mid-May to people eligible for the unemployment benefit tax exemption.
May 14, 2021

Recommended

Today is the Last Day to Fund Your IRA and Cut Your Taxes
Tax Breaks

Today is the Last Day to Fund Your IRA and Cut Your Taxes

Although you need to act quickly, you still have a few hours to make a 2020 IRA contribution and lower your tax bill.
May 17, 2021
Contributing to Your HSA Today Could Lower Your Tax Bill
Tax Breaks

Contributing to Your HSA Today Could Lower Your Tax Bill

If you haven't already contributed the full amount to your HSA for 2020, you have a few more hours to do so and potentially reduce your tax bill at th…
May 17, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 13, 2021
13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
May 11, 2021