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Tuesday, March 5, 2024

SIMPLE IRA Basics for Self-Employment Income in 2024

The Savings Incentive Match Plan for Employees (SIMPLE) IRA offers a straight-forward way for self-employed individuals and small business owners to save for retirement. As 2024 IRS contribution limits have now been announced, here is what you need to know about opening or utilizing a SIMPLE IRA this year.

2024 SIMPLE IRA Contribution Limits

For 2024, you can contribute up to $16,000 to a SIMPLE IRA if you are under age 50. Those 50 and over can make an extra $3,500 “catch-up” contribution for a total of $19,500.

As the employer, you also have two contribution options:

  1. Matching contributions – Match employee (yourself) deferrals 100% up to 3% of compensation
  2. Nonelective contributions – Contribute 2% of compensation for each eligible employee, regardless of whether they defer money themselves

The amount of your pay that can be used to calculate employer matching or nonelective contributions is capped at $345,000 in 2024.

Benefits of SIMPLE IRAs

Some reasons why the SIMPLE IRA remains an attractive choice for self-employed retirement savings in 2024 include:

  • Higher deferral limits than traditional and Roth IRAs
  • Tax-deductible contributions to reduce your taxable income
  • Tax-deferred growth on investment earnings
  • Employer contribution abilities to supersize retirement savings
  • Easy to set up and use compared to solo 401(k)s

Rules and Penalties to Know

If you withdraw SIMPLE IRA funds before age 59 1⁄2, you’ll face:

  • 10% early withdrawal penalty
  • Possibly an extra 25% penalty if within the first 2 years of opening the SIMPLE IRA

Additionally, you must wait 2 years after initially contributing before converting to another retirement account or face taxes and penalties.

Frequently Asked Questions – FAQs

How much can I contribute to a SIMPLE IRA in 2024?

The limit is $16,000 if you’re under 50 and $19,500 if you’re 50 or older.

What are the two employer contribution options for SIMPLE IRA?

Employers can choose between matching contributions (up to 3%) or nonelective contributions (2% of compensation).

Are SIMPLE IRA contributions tax-deductible?

Yes, contributions are tax-deductible, reducing taxable income.

What penalties apply for early SIMPLE IRA withdrawals?

Early withdrawals before 59 1⁄2 incur a 10% penalty, possibly 25% within the first 2 years.

Can I convert my SIMPLE IRA to another retirement account?

Yes, after 2 years, you can convert, facing taxes and penalties if done earlier.

How can I maximize my SIMPLE IRA contributions in 2024?

Contribute early in the year and seek guidance from a qualified tax professional.

Next Steps

Carefully weigh whether a SIMPLE or Solo 401(k) makes more sense based on your income, future plans, and personal situation.

Be sure to thoroughly vet potential SIMPLE IRA providers on fees, investment options, distribution rules, and ease of use before opening an account.

Maximizing contributions early in 2024 can help put your retirement savings on strong footing. Reach out to a qualified tax professional for guidance if needed.

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