Many employers offer their employees retirement plans as a workplace benefit. The type of plan offered by the employer is their choice. Employers have the option of choosing from several alternatives.
401(k) Plans and Limits
401(k)s allow employees and employers to make pre-tax contributions to the employee’s retirement plan. There is a limit to the amount of money you and your employer can contribute to your plan each year. Limits are adjusted annually.
SIMPLE IRAs for Employees
Savings Incentive Match Plans for Employees individual retirement account plans, or SIMPLE IRAs, also allow employers and their employees to make pre-tax contributions that don’t exceed the annual limit. The difference is that only companies with 100 or fewer employees can offer these plans.
Can You Contribute to a 401(k) and SIMPLE IRA in One Year?
Can you contribute to both an SIMPLE IRA and a 401(k)? According to the IRS, it may be possible for you to contribute to both plans in a single year, but you cannot exceed joint contribution limits. In addition, it's rare to do so since employers don’t have the option of offering more than one plan to employees, with the exception of employees who are covered under a collective bargaining agreement.
There are certain circumstances where an employee may contribute to two employer-sponsored plans in one year. They include:
- Employee changes jobs during the year
- Employer replaces one plan with another during the year
- Employee works for more than one unrelated employer during the year
- Employees who contribute to more than one plan during a year are not allowed to exceed the IRS contribution limits for 401(k) plans
Contribution Limits for a 401(k)
For 2022, according to the IRS, the contribution limit is $20,500, but you have to keep in mind that employers can place their own limits on how much employees invest in an employer-run 401(k) plan. Employees who are 50 years of age or older can contribute an additional $6,500 catch-up amount, bringing their limit to $27,000.
In 2022, the combined employee/employer contribution limit increased from $58,000 to $61,000 for employees under 50. For employees 50 or older, the combined contribution limit increased from $64,500 to $67,500.
Total contributions can’t exceed 100 percent of the employee’s annual earnings. In 2022, highly paid employees can only count the first $305,000 of their income when calculating maximum contributions.
Contribution Limits for a SIMPLE IRA
The 2022 maximum contribution an employee can make to a SIMPLE IRA is limited to $14,000. Employees who are 50 or older in the 2022 calendar year can enjoy a catch-up contribution of $3,000. In some cases, you can have two SIMPLE IRAs. Employers can make up to 3 percent of their employees’ contributions or 2 percent of their employees’ compensation up to $305,000.
Employees belonging to both a 401(k) and a SIMPLE IRA in the same calendar year can contribute a maximum of $20,500 (or $27,000 for employees 50 years of age or older). If you contributed the maximum amount allowed into your SIMPLE IRA ($14,000 for those under 50 for 2022), the most you can contribute to your 401(k) in the same calendar year will be $6,500.
That number increases by $3,000 for employees 50 or older, but not all employers allow catch-up contributions. You can get around this by contributing the maximum 401(k) amount of $20,500 for the year and since your employer does not allow catch-up contributions, you can contribute another $6,500 to your SIMPLE IRA to bring your overall total contribution for the year to $27,000.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.