How to Save Money on Your Taxes by Making the Most of Your SIMPLE IRA

Planning for retirement is one of the most important financial steps you can take, and a SIMPLE IRA (Savings Incentive Match Plan for Employees) is a powerful tool that can help you save for the future while reducing your current tax burden. If you work for an employer that offers a SIMPLE IRA plan, you’re in a great position to take advantage of several tax breaks that can lower your taxable income and potentially even qualify you for additional credits.

In this article, we’ll explain how SIMPLE IRAs work, how they can help you save money on your taxes, and what steps you can take to maximize the benefits. Whether you’re new to saving for retirement or looking to make the most of your existing SIMPLE IRA, these tips will help you keep more money in your pocket while securing your financial future.

As someone who has helped many clients take full advantage of their SIMPLE IRA benefits, I can tell you that understanding the rules and strategies around these plans can make a huge difference in your long-term savings and tax savings.

What Is a SIMPLE IRA and How Does It Work?

A SIMPLE IRA is a type of employer-sponsored retirement plan designed to help employees save for retirement with pre-tax contributions. It’s often referred to as a “super-IRA” because it allows you to save more than the traditional IRA contribution limits, while still offering the same tax-deferred growth.

With a SIMPLE IRA, your employer deducts your contributions from your paycheck before taxes are taken out, which reduces your taxable income. This means that you’re paying less in taxes now, and the money in your SIMPLE IRA grows tax-deferred until you withdraw it in retirement.

Key Benefits of a SIMPLE IRA:

- You can contribute up to $12,500 annually (for 2018), which is more than the standard $5,500 contribution limit for traditional IRAs.

- If you’re age 50 or older, you can make an additional catch-up contribution of $3,000, bringing your total annual contribution limit to $15,500.

- Your employer may also contribute to your account, either by matching 100% of your contributions up to 3% of your earnings or by contributing 2% of your salary, regardless of whether you participate or not.

These generous contribution limits and the potential for employer matching make SIMPLE IRAs an excellent option for individuals who want to save aggressively for retirement while lowering their current tax bill.

A Real-Life Example: How One Client Used SIMPLE IRA Contributions to Lower Their Taxes

Meet Sarah, a fictional business consultant working for a small marketing firm that offers a SIMPLE IRA plan. When Sarah first started contributing to her SIMPLE IRA, she was unaware of the full tax benefits the plan offered. After working with a financial advisor, she learned that by contributing the maximum allowed each year, she could reduce her taxable income significantly.

Sarah was earning $60,000 annually and decided to contribute $10,000 to her SIMPLE IRA. This brought her taxable income down to $50,000, helping her save thousands of dollars in taxes. In addition, her employer matched her contributions, which added another $1,800 to her retirement savings. By maximizing her SIMPLE IRA contributions and taking advantage of the employer match, Sarah saw immediate tax savings and built a solid foundation for her retirement.

Maximize Tax Savings with SIMPLE IRA Contributions

The primary tax benefit of contributing to a SIMPLE IRA is that your contributions are deducted from your taxable income. This means you’re reducing your taxable income while building your retirement savings.?

For example, if you earn $50,000 per year and contribute $5,000 to your SIMPLE IRA, you’ll only pay taxes on $45,000 of income. This reduction in taxable income can result in significant tax savings, especially if it drops you into a lower tax bracket.

In addition to reducing your taxable income, your investments within the SIMPLE IRA grow tax-deferred. This means you won’t pay taxes on any gains, interest, or dividends in the account until you start withdrawing money in retirement, at which point your tax rate may be lower.

Saver’s Credit: An Extra Tax Break for SIMPLE IRA Contributions

If you meet certain income limits, contributing to a SIMPLE IRA could also qualify you for the Saver’s Credit, a tax credit specifically designed to encourage low- and moderate-income individuals to save for retirement.

The Saver’s Credit is a nonrefundable credit worth up to $1,000 (or $2,000 if you’re married filing jointly), and it’s calculated as a percentage of your IRA or retirement plan contributions, including contributions to your SIMPLE IRA. The percentage you qualify for depends on your income and filing status.

Employer Contributions: Boost Your Retirement Savings

One of the standout features of a SIMPLE IRA is the potential for employer contributions, which can help you grow your retirement savings faster. Your employer has two options for contributing to your SIMPLE IRA:

1. Matching Contributions: Your employer can match 100% of your contributions up to 3% of your earnings. For example, if you earn $50,000 per year and contribute $1,500 to your SIMPLE IRA, your employer will match that $1,500, effectively doubling your contribution.

2. Nonelective Contributions: Alternatively, your employer may choose to contribute 2% of your salary to your SIMPLE IRA, regardless of whether you contribute or not. So, if you earn $50,000, your employer will contribute $1,000 to your account even if you don’t contribute anything yourself.

If you work for an employer that offers matching contributions, it’s essential to contribute enough to take full advantage of the match. This is essentially free money that helps you reach your retirement goals faster while lowering your current taxable income.

Tip:??

If you participate in both a SIMPLE IRA and another retirement plan, such as a 401(k) or 403(b), the total deferral limit across all plans is $18,500 (for 2018). In most cases, it’s best to contribute to the plan offering the largest employer match before contributing to the other plan.

Catch-Up Contributions for Workers Age 50 and Older

If you’re age 50 or older, you can take advantage of catch-up contributions, which allow you to contribute an additional $3,500 to your SIMPLE IRA each year.

Catch-up contributions are a great way to boost your retirement savings in the years leading up to retirement, and they provide even more opportunities to lower your taxable income. If you’re behind on saving for retirement, these extra contributions can help you get back on track while still enjoying the immediate tax benefits.

Tips for Maximizing Your SIMPLE IRA Benefits

Now that you understand how SIMPLE IRAs work and the tax benefits they offer, here are a few tips to help you get the most out of your plan:

1. Max Out Your Contributions??

To get the full tax benefit, aim to contribute the maximum amount allowed to your SIMPLE IRA each year. This not only reduces your taxable income but also sets you up for a more comfortable retirement.

2. Take Advantage of Employer Contributions??

If your employer offers matching contributions, make sure to contribute enough to receive the full match. This is essentially free money that boosts your retirement savings.

3. Claim the Saver’s Credit??

If you qualify based on your income, don’t forget to claim the Saver’s Credit when you file your taxes. This additional tax credit can provide significant savings, especially if you’re contributing to a SIMPLE IRA for the first time.

4. Plan for Catch-Up Contributions??

If you’re 50 or older, take advantage of the catch-up contribution option to maximize your savings and lower your tax bill even further.

Next Steps: How to Make the Most of Your SIMPLE IRA

If you’re ready to start saving more for retirement while reducing your current tax burden, here’s what you should do next:

- Contribute as much as you can to your SIMPLE IRA each year, up to the maximum allowed limit.

- Track your contributions and make sure you’re taking full advantage of any employer matching contributions.

- Check if you qualify for the Saver’s Credit and be sure to claim it on your tax return if you do.

- Plan for catch-up contributions if you’re 50 or older and want to increase your retirement savings.

If you would like some help with your tax situation, you can set up a call with me here:? https://calendly.com/pedenaccounting/30min

Navigating the complexities of taxes can be a daunting task for small business owners. Check out my tax guide designed to demystify the tax process and provide actionable insights to help entrepreneurs manage their tax obligations effectively: https://businesstax.pedenaccountingservices.com/