Can You Deduct Out-of-Pocket Contributions to a SIMPLE IRA?
Image: Bigstock
When the tax season hits, many people scramble for last-minute deductions and retirement contributions are often high on that list. After all, they help you save for the future and also shrink your tax bill. But what happens if you try to contribute directly to a SIMPLE IRA from your bank account? Here's the short answer: you can't. And if you already have, you'll need to fix it.
Let’s unpack why out-of-pocket contributions to a SIMPLE IRA don’t qualify as deductible and what your options are instead.
SIMPLE IRA Rules Don't Allow Personal Deposits
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement account typically offered by small businesses. They are easy to set up and don’t involve a lot of paperwork, making them a good fit for companies with 100 or fewer employees.
However, unlike a traditional or Roth IRA, you can’t just write a check or transfer money directly into a SIMPLE IRA from your personal funds. The only contributions allowed are Employer contributions (either matching up to 3% of your salary or a flat 2% regardless of your contribution) and Employee salary deferrals made through payroll deductions.
This structure keeps things simple for small businesses but limits your flexibility to add extra personal funds on your own. If you attempt to make a deposit into your SIMPLE IRA outside of payroll, it isn’t valid under IRS rules.
Made an Out-of-Pocket Contribution by Mistake?
It’s a common mistake but easily fixable. If you've accidentally deposited money directly into your SIMPLE IRA, you’ll need to contact the account custodian (typically the financial institution where the IRA is held). They can process it as a “return of contribution” rather than a regular withdrawal, which helps you avoid additional taxes and penalties.
Once the improper contribution is removed, you can then put that money into a different type of retirement account where personal contributions are allowed and potentially tax-deductible.
What Kind of IRA Can You Contribute to Directly?
If you’re looking to make tax-deductible contributions from your personal funds, a Traditional IRA is often the better fit. Contributions to a Traditional IRA may be deductible on your tax return, depending on your income and whether you (or your spouse) are covered by a retirement plan at work.
The maximum annual contribution limit for IRAs in 2025 is $7,000 ($8,000 if you’re 50 or older). Just make sure you’re within the income limits for deductions if you're also participating in a workplace plan.
Alternatively, you could open a Roth IRA. Roth contributions are funded with after-tax dollars and offer no immediate tax deduction but allow your money to grow tax-free.
Other Options for Larger Contributions
If you're self-employed or run a small business, plans like Solo 401(k)s and SEP IRAs allow much higher contribution limits than Traditional or Roth IRAs. A Solo 401(k) lets you contribute both salary deferrals and employer profit-sharing amounts, while SEP IRAs allow employer contributions based on a percentage of your net business income. Both can help you maximize retirement savings based on your self-employment earnings.
Final Thoughts
It’s great that you want to boost your retirement savings and lower your taxes, but make sure you're using the right kind of account and following IRS rules. If your employer offers a SIMPLE IRA, participate through payroll. If you want to contribute additional personal funds, open a Traditional or Roth IRA separately. And if you’ve already made an out-of-pocket deposit into a SIMPLE IRA, contact the account custodian right away to fix it before tax issues arise.
Understanding how each type of IRA works and what’s allowed can help you stay on the right side of the IRS while building a secure financial future.