SEP IRA

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If you have multiple IRA acccounts, you can make multiple IRA contributions. For example if you are a SEP IRA, a SIMPLE IRA, a Keogh plan, and a 401k, how can you make multiple IRA contributions? The examples below illustrate how you can make multiple IRA contributions.

What is the Contribution limit to Salary Deferral (Employee Funded) Retirement Plans?

For 2006 an individual under 50 years old may defer a maximum of $15,000 in total to all salary deferral plans (such as 401k retirement plan, 403b retirement plan, Section 457, and SARSEP IRA plans) offered by the individual’s employers.

The limit for all SIMPLE IRA Plans for 2006 is $10,000. So, if you are deferring $10,000 into a SIMPLE IRA at job 1 during 2005, you can defer only $4,000 into a 401k at job 2. But if the retirement plan at job 2 is also a SIMPLE IRA plan, then you cannot defer anything into that second retirement plan, because you have reached the $10,000 limit for all of his/her SIMPLE IRA Plans.

It is your responsibility to ensure that you do not defer more than the IRA Contribution limits whether it be a SIMPLE IRA Contribution limit, a SEP IRA Contribution limit, a Keogh plan Contribution limit or other retirement plan Contribution limits. For SIMPLE IRA, it is $10,000 in 2006. For 401k it is $15,000 in 2006.

Salary deferrals are generally made from compensation paid during a calendar year.

Catch-up Contributions: There is a catch-up provision for participants age 50 or older at any time during the tax year that allows them to contribute

The SIMPLE IRA Contribution Limits are more complicated than the Contribution limits for SEP IRA, traditional IRA or Roth IRA. Below is information on how much an employer or employee can contribute to a SIMPLE IRA Account. Each SIMPLE IRA plan can be different based on how the employer set it up.

What are the SIMPLE IRA Contribution Limits?

The amount of Contribution to a SIMPLE IRA plan allowed by the IRS depends on the type of Contribution made to the SIMPLE IRA.

Salary reduction SIMPLE IRA Contributions limit

The employer can make a Contribution to the SIMPLE IRA of an employee for up to $10,500 for the tax year 2008 and 11,500 in the tax year 2009. Additional elective deferrals can be contributed to a SIMPLE IRA plan if:

• the employee is 50 by the end of the tax year, and
• no other elective deferrals can be made for the employee to the plan for the year

Then the most additional elective deferrals can add to the SIMPLE IRA Contribution is the lesser of:

• $2,500 (2008 and 2009) or
• the employee compensation for the year reduced by the other elective deferrals for the year

Matching employer Simple Ira Contributions limit

Some employers will make matching contributions to the SIMPLE IRA to the amount of salary reduction or Contribution by the employee. The cap on the matching Contribution to Simple Ira Plan is 3% of the employee’s total compensation for the year.

Nonelective employer contributions limit to Simple Ira Plan

If the employer chooses to make nonelective contributions to Simple Ira Plan, the contributions must be 2% of the employee’s compensation for the year. For 2007, only $225,000 of the employee’s compensation can be taken into account to calculate the Contribution limit for the Simple Ira Plan.

If you are the employer setting up a SIMPLE IRA plan, you must know all the SIMPLE IRA Rules. If you are an employee participating in the employer’s SIMPLE IRA plan, you should also know the SIMPLE IRA Rules. SIMPLE IRA Rules are thought of as more complicated than SEP IRA Rules because SEP IRA Rules are very similar to traditional IRA rules whereas SIMPLE IRA Rules are considered more of a 401k type of retirement plan.

Understanding SIMPLE IRA Rules

A SIMPLE IRA Plan is a tax favored retirement plan for small employers and self employed business owners. When an employer wants to offer some type of retirement plan or benefits for his or her employees and a 401k plan is too large and complicated, a SIMPLE IRA plan may be just the solution.

Rules of SIMPLE IRA Contributions

There are many ways an employer can set up his or her Simple Ira Plan for the employees. Contributions for the Simple Ira Plan can be in the form of:

• salary deduction contributions

Employees can choose to have their salary deducted and contributed in the Simple Ira Plan for retirement. Salary reduction contributions are often referred to as “elective deferrals”.

• matching contributions

Unless the employer chooses to make nonelective contributions to the Simple Ira Plan, the employer must make contributions which are equal to the salary reduction contributions the employees choose. Each employee can choose different percentages of salary reduction and SIMPLE IRA Contribution amounts.

• nonelective contributions

Nonelective contributions to SIMPLE IRA Plans are sometimes preferred to matching contributions. Nonelective contributions to SIMPLE IRA Plans can result in less money out of the employer’s pocket.

What are the Simple Ira Rules on taxable distributions?

Generally, distributions or withdrawals from a Simple Ira Account are fully taxable as ordinary income. Any early withdrawal amounts or early distributions will be subject to tax as well as penalties the same way other types of IRA accounts are subject to.