Can I Contribute to My IRA Annuity If I Already Contribute to a SIMPLE IRA?

Contributing to both a SIMPLE IRA and a personal IRA maximizes your tax deductions.
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A SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account. If your employer offers a SIMPLE IRA as an employer retirement plan option, you might be concerned that your deferral counts as your IRA contribution for the year. Fortunately, it is a separate contribution limit, so you can contribute to both the SIMPLE plan through your employer and your personal IRA annuity.

SIMPLE IRA Elective Deferral Limits

A SIMPLE IRA is a defined contribution plan, so monies you put toward your SIMPLE IRA are technically "elective deferrals" because they are taken out of your salary before you are paid. This makes them subject to different limits than traditional or Roth IRA annuities. For example, in 2012, you can defer up to $11,500 or your total compensation for the year, whichever is smaller.

SIMPLE IRA Employer Match

As part of the conditions of setting up a SIMPLE IRA, your employer must either commit to matching your contributions up to 3 percent of your salary or making a contribution equal to 2 percent of every employee's salary, regardless of how much the employee contributes. Whichever method the employer chooses, it must use it for all of its employees. For example, the company could not choose to contribute 2 percent for some employees and use the 3 percent match for other employees.

IRA Annuity Contribution Limits

You can invest the money in your personal IRA, either a traditional IRA or a Roth IRA, in an annuity. These contribution limits are subject to a separate contribution limit, which is the lesser of your compensation, or $5,000 for 2012. When combined with the limits for SIMPLE IRAs, in 2012 you can put in a maximum of $16,500, plus any employer contributions, for the year, all of which are either deducted from your income taxes or not included in your taxable income.

Excess Contribution Penalties

If you contribute too much to either a SIMPLE IRA or a personal IRA, you have to pay a 6 percent penalty on the excess contribution. For example, if you contribute $8,000 extra to your traditional IRA in 2012, you owe a $480 penalty. In addition, the penalty continues every year that the excess is uncorrected. Continuing the example, if you do not contribute in 2013, you apply $5,000 of the excess contribution limit to your traditional IRA limit for that year. However, the remaining $3,000 of excess contributions continues to be treated as an excess contribution.

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