SIMPLE IRA Contribution Limits

Just like any other types of IRA, there are SIMPLE IRA contribution limits. The SIMPLE IRA contribution limits govern how much the SIMPLE IRA plan owner can contribute to the SIMPLE IRA account and are not penalized by the IRS.

What are the SIMPLE IRA Contribution Limits? How much can a self-employed individual contribute to his or her own SIMPLE IRA?

SIMPLE IRA Plan contribution limits for a self-employed individual are expressed as a percentage of the individual's "net earnings from self-employment" [not over 100% and not exceeding $10,000 for 2006 plus $2,500 if 50 years old or over (catch up SIMPLE IRA contribution limits). 

For a SIMPLE IRA Plan, "net earnings from self-employment" is found on Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE IRA Plan for the individual and employees.

Example: The employer's net earnings from self-employment are $40,000 and the employer chooses to contribute 10% of his earnings to his SIMPLE IRA. The employer elects to make matching SIMPLE IRA contributions of up to 100% of each employee's deferral but not more than 3% of each employee's compensation. The total SIMPLE IRA contribution the employer can make for himself is $5,200, which is calculated as follows.

SIMPLE IRA contribution calculation

Salary reduction contribution ($40,000 x .10)	$4,000
Employer matching contribution ($40,000 x .03)	$1,200
Total SEP IRA contributions	$5,200

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