SIMPLE and Roth IRA Maximum Contribution: The Importance of Contribution Limits

Being aware of current contribution limits for an IRA account is one of the most important aspects of financial planning and retirement savings. If you have an IRA account, you need to know exactly how much you are allowed to contribute each year. It is always recommended that the maximum allowed amount be contributed. This will allow you to maximize your retirement savings. There are no requirements stating it is mandatory to make maximum contributions, but this is the best way to make the best of the retirement savings plan.

Melody has decided to open an IRA and make contributions. For her to take advantage of all IRA benefits, she should contribute as much as possible. Keep in mind that these limits will change each year. For 2009, the contribution limit for a traditional or Roth IRA is $5,000 for individuals under the age of 50. Melody is 43 years old, so she would only be allowed to contribute that amount each year. If she were over the age of 50, she would then be allowed an additional $1,000 each year. However, since she does not meet that age requirement, she is limited to $5,000. If Melody opened a SEP IRA, the limits are totally different. This particular type of IRA has limits that are based on the amount of annual income. With this IRA, the amount cannot exceed 25% of annual pay. It also cannot be more than $49,000. For example, if Melody opted for a SEP IRA and she made $100,000 each year; she would be allowed to contribute $25,000 to the IRA.

Understanding SIMPLE IRAs

A SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is a retirement plan available through an employer. This plan must be set up by the employer. It is similar to a 401(k), but this type of IRA has simpler rules than other company-offered retirement plans. Like the 401(k), the SIMPLE IRA is funded with pretax money. This means that if Melody were to open a SIMPLE IRA account, her contributions would be made before taxes. She should be aware that the table of SIMPLE IRA contribution limits is lower than those of a 401(k) plan. If the company that employs Melody offers a 401(k), she may be able to save more for retirement than if she contributed to the SIMPLE IRA. In addition, the employee, Melody, cannot make regular contributions to this type of account. Her employer would make the contribution. These amounts may be a match, up to a certain percentage, of her contribution, or a non-elective contribution, which means the employer must make a set contribution regardless of how much she has contributed.

Table of SIMPLE IRA Contribution Limits

As mentioned, the maximum annual contribution limits are different for each type of IRA account. If Melody owns a SIMPLE IRA, she must abide by the table of SIMPLE IRA contribution limits. This is completely different that the table for a traditional or Roth IRA. In 2009, the contribution limit to a SIMPLE IRA is $11,500. This means that Melody would be allowed to contribute up to this amount each year. Since she is under the age of 50, she is limited to this amount. If she were over 50, the amount would then be increased to $14,000.

Each year, the contribution limits will change. These changes are based on inflation and the increase in cost of living. Just because the limits can be increased, this does not mean they will be. It is not guaranteed that any contribution limit will be raised from one year to the next. This is why it is important to be aware of any changes that have been made to the table of SIMPLE IRA contribution limits. The table does usually change each year, so before Melody makes any contributions at the beginning of the year, she should make sure she knows what the limits are for that year.