SIMPLE IRA Contribution Rules

• SIMPLE IRAs are tax-deferred accounts.TAX TIME image by brelsbil from Fotolia.com
  
  SIMPLE stands for savings incentive match plan for employees, which is a type of individual retirement account (IRA) that can be created by employers who have less than 100 employees. SIMPLE IRAs may be preferred by small companies over 401k plans because the SIMPLE IRA does not cost as much to maintain but still allow the employers to make retirement contributions on the employee's behalf.
  
  

Function

• SIMPLE IRAs accept contributions from employees through payroll deductions. This means that the employer takes the money out of the employee's paycheck and deposits it directly into the employee's SIMPLE IRA plan. This income does not get reported on the employee's W-2 form as income at the end of the year. For example, if an employee elected to have a total of $4,000 withheld for SIMPLE IRA contributions and had a total of $44,000 of income, the W-2 form would only show $40,000 of compensation subject to income taxes.
  
  

Employee Contributions

• The IRS limits how much money can be contributed to a SIMPLE IRA each year. The limit adjusts annually depending on inflation. For 2010, the contribution limit equals $11,500. For people 50 and older, the limit increases to $14,000. However, the employee contribution cannot exceed the employee's earned income.
  
  

Employer Contributions

• Employers may elect one of two options for making contributions to employee plans and must use the same method for all employees. The first option requires employers to match all employee contributions up to three percent of the employee's salary for the year up to the annual limit. For 2010, income over $245,000 does not count. For example, if an employee earned $100,000, the employer would have to match the first $3,000 of that employee's contributions. The second option companies can choose allows employers to contribute two percent of the employee's salary, up to the annual limit. For example, if an employee had $100,000 of income, the employer would have to contribute $2,000 regardless of how much the employee contributed.