Retirement Accounts for the Self Employed (Part 3 of 5) – The Simple IRA

More Retirement Accounts for the Self Employed! Cmon.  I know its dry, I know.  But its like eating vegetables, its goooooooood for you.  He He.  The good news is if you are not self employed, you don’t need to bother reading.  If you are self employed – read on brothers and sisters!  Don’t you want to learn the best way to shelter your income?  If you have employees, don’t you want to help them save for retirement?  So let’s go.  Part 3 – The Simple IRA.  Part 4 of this series will describe the KEOGH and the last entry, Part 5, will discuss what options are appropriate for you according to the kind of business you have and your goals!

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Do I Qualify For A Simple IRA?

Employers are eligible to establish and maintain a SIMPLE plan only if the employer:

  1. No more than 100 employees (including self-employed individuals) who earned $5,000 or more in compensation during that year; and;

  2. No other qualified retirement plan, 403(b), or SEP at the same time.

Pre or Post Tax Contributions?

Simple IRAs are pre-tax contributions. 

Where Do I Set Up a Simple IRA?

The usual: Vanguard, Fidelity, ETrade, TRowe Price, etc.

How Much Can I Contribute Annually to a Simple IRA for myself?

Max contribution: up to $10,500 (2007) as an employee an an employee for a total of $21,000 (2007).  If you are 50 or over, you can contribute a total of $26,000 (2007) of PRE-TAX money.

Why Not Just Open a Traditional or Roth IRA?

Do both if your income makes you eligible for a ROTH IRA or Traditional IRA.

When Do I Set This Up?

Deadline to open an account is Oct 15th of the reported tax year.

What If I Already Participate In My (Other) Employers Plan?

Make sure you stay under the annual limits for total contributed to all employer sponsored plans!  So between your SIMPLE IRA and the other employer’s 401K your own contribution cannot exceed a total of $15,500 for 2007 or $20,500 if you are 50 or over. 

Do I Have to Put Away the Same Amount of Money Every Year?

No.

What If I Have Employees?

The SIMPLE IRA has a mandatory employer contribution requirement. This contribution requirement can generally be made as follows:

  1. The employer can make a dollar-for-dollar matching contribution on the first 3% of compensation that the individual elects to defer, or;
  2. The employer can make a nonelective contribution of 2% of each employee’s compensation for all eligible employees. You may choose to give the nonelective contributions only to eligible employees who make $5,000 or more in the year.
  3. Employees can contribute 100% of their annual compensation up to $10,500 ($13,000 if age 50+) for 2007.

 Anything Else?

There are such a thing as SIMPLE 401Ks but there is no benefit to this plan as you still have the lower SIMPLE limits $10,500 (2007) and more administration.

Next Stop!

In the next installment of this series (Part 4 of 5) I will describe another kind of retirement account for the self-employed – The KEOGH!  In the Part 5 I will sort out what plans make sense for your individual situation!

Other great blog entries and articles on Simple IRAs:

http://www.irs.gov/retirement/article/0,,id=111420,00.html

For the rest of this series:

https://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

https://daseducation.wordpress.com/2007/10/09/retirement-accounts-for-the-self-employed-part-2-of-5-the-solo-401k/

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8 Responses to “Retirement Accounts for the Self Employed (Part 3 of 5) – The Simple IRA”

  1. Retirement Accounts for The Self Employed (Part 5 of 5) - What Is The Best Plan For You? « Dollars & Sense Education Says:

    […] & Sense Education on Retirement Accounts for the Self Employed (Part 1 of 5) – The SEP IRAA Retirement Accounts for the Self Employed (Part 3 of 5) – The Simple IRA « Dollars & Sen… on Retirement Accounts for the Self Employed (Part 2 of 5) – The Solo 401KA […]

  2. Denise Says:

    If you have your own business and have a Simple IRA can you contribute $10,500 to your IRA as an Employer and another $10,500 as the individual?

  3. Nicole McInerney Says:

    Yes you can Denise!

  4. Bob Says:

    What’s the math behind your 2007 – $26,000 SIMPLE IRA contribution?
    Are you matching the employee catch-up provision ($2500) with an employer contribution of the same amount?
    For an employee to receive a $10,500 match, wouldn’t the salary of the employee have to be $350,000 (3% of salary)?

  5. Nicole McInerney Says:

    Yes Bob, that is correct. The $26,000 is for an employee being matched by his or her employer in their catch-up years.

    As for the second part, the employee would have to make $350,000 to get a $10,500 match. You are correct.

  6. Bob Says:

    Self-employed with no employees. Contributing maximum employee amount to SIMPLE (+ 3% employer match).

    Can I ALSO contribute to a SEP for self-employed?

    If so, is the total contribution between SIMPLE and SEP limited? Or, are each subject to their own limitations?

    Thanks!

  7. Nicole McInerney Says:

    Hi Bob-

    Unfortunately you can only contribute to one plan at a time! Each subject to their own limits:(

    I hope that helps!
    Nicole

  8. Mario Says:

    Nicole, great information. Thanks! A quick question: I work for a two-member LLC; have been asked to set up a SIMPLE IRA for the company, but I can’t tell how much the two owners can contribute… Neither one is an employee of the LLC (i.e., not on the payroll); also, they do not participate in any other retirement plans. What’s their maximum contribution? Can they also contribute as individuals AND as LLC?


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