3709 / How are SIMPLE IRA plan contributions taxed?

There are four permissible types of contributions to a SIMPLE IRA plan:

(1)   Salary reduction contributions

(2)   Catch-up contributions

(3)   Matching contributions

(4)   Nonelective contributions.¹

Salary reduction and catch-up contributions are made by the employee, and the employer is responsible for making either a matching or nonelective contribution.

Catch-up contributions are additional elective deferrals for individuals age 50 or over, which are not subject to the general contribution ceiling of $16,500 in 2025 ( Q 3706, Q 3761). All SIMPLE IRA contributions are excludable from the employee’s income, provided they meet certain design requirements set forth in the IRC.² Moreover, certain lower income taxpayers may be eligible to claim the saver’s credit for salary reduction contributions to a SIMPLE IRA ( Q 3648).

Contributions to a SIMPLE IRA are not subject to income tax withholding, but salary reduction contributions are included in wages for purposes of the Social Security and federal unemployment taxes (i.e., FICA and FUTA). Consequently, salary deferrals are subject to FICA and FUTA withholding. It appears that “salary deferrals,” for this purpose, would include catch-up contributions.³ By contrast, matching contributions and nonelective contributions made by the employer are excluded from wages for purposes of Social Security tax and federal unemployment tax; they are not subject to FICA or FUTA withholding.⁴

Employer contributions to a SIMPLE IRA generally are deductible by the employer.⁵ Matching and nonelective contributions can be made after the close of the tax year to which they are attributable, provided they are made before the due date for filing the employer’s federal income tax return for the taxable year (including extensions).⁶ Contributions to a SIMPLE IRA are not subject to the annual dollar limit for traditional or Roth IRAs.⁷ Nondeductible contributions are subject to a 10 percent penalty.⁸

SIMPLE IRA accounts themselves are not subject to tax. The taxation of distributions from a SIMPLE IRA is the same as under a traditional IRA; thus, contributions generally are not taxable until withdrawn.⁹ The early distribution penalty ( Q 3677) is increased to 25 percent during the first two years of participation in a SIMPLE IRA; after the two-year period has elapsed, the penalty is 10 percent.¹⁰

A SIMPLE IRA may not be designated as a Roth IRA.¹¹