What are simple IRA Contributions When it Comes to Taxes?

A simple IRA is a retirement savings plan that offers self-employed individuals a simple way to make retirement savings.

This retirement plan combines the basic features of IRA and 401(k).

Some rules determine whether these simple IRA contributions limits in 2023 and whether they are deductible from the annual tax return.

The employees enrolled in an employer’s IRA plan have their contributions exempted from the gross income for federal withholding. Claiming a tax deduction on the tax return could lead to a double amount deduction.

How simple IRAs Work

A simple IRA offers businesses different ways to save for retirement. Employees who want to enroll in the plan should have made $5,000 in the past two years. The employee can make contributions as cash or as salary deductions. The IRS requires employers to contribute to their employees’ simple IRA by making 2% of the salary and a dollar-for-dollar up to 3% of the salary. The employer should contribute whether the employee contributes by themselves.

Are simple IRA Contributions Claimable on the Tax Return?

Contributing to a simple IRA means you put pre-tax money into your retirement account. The employer does not withhold any amount for federal income tax. Therefore, you do not need to report the IRA contributions on your tax return. However, there are different rules that apply to different businesses. A sole proprietor can make the deduction contributions and relevant contributions to the simple IRA on Form 1040.

IRA Contribution Limits for 2023

You can opt to contribute simultaneously: a traditional IRA and Roth IRA based on eligibility. The simple IRA contribution limit in 2023 is $6500($7500) for individuals aged 50 and above.

You should make IRA contributions on an after-tax basis. However, the eligibility to contribute to a Roth IRA depends on your income level.

If you file taxes as a single individual, your Modified Adjusted Gross Income should be $153,000 for 2023. For individuals who are married and are filing jointly, the Modified Adjusted Gross Income should be under $ 228,000 for the tax year 2023. This implies that the higher your income is, the lower the deductible amount. With a higher income, the amount finally phases out.

Exceptions to simple  IRA Contribution Limits in 2023

●     You cannot contribute more than you earn. Individuals with an annual taxable compensation of $4,000 have that as the contribution limit.

●     When you are a non-working spouse and have a spousal IRA if you intend to make the maximum contribution to your IRA, and you are under 50, the working spouse should earn enough to cover the annual maximum amount for the two of you.

Summary