SEP IRA

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To establish a SIMPLE IRA, a business must follow SIMPLE IRA regulations and rules. This section of SEP IRA & SIMPLE IRA website is dedicated to SIMPLE IRA regulations, compliance SIMPLE IRA Rules and guidelines. SIMPLE IRA Rules can be complicated so you should become familiar with all the SIMPLE IRA regulations before you start contributing to your SIMPLE IRA. There are also different rules governing SIMPLE IRA limit or SIMPLE IRA Contribution Limits within SIMPLE IRA Plans.

Since there are many layers of SIMPLE IRA Compliance, not many people understand how SIMPLE IRA Plans work so not many businesses establish SIMPLE IRA Plans. SIMPLE IRA Compliance and Simple Ira Rules are a little more complex than SEP IRA Rules and other IRA rules. However, Simple Ira Rules can work to the Simple Ira Plan owners in many cases.

How to establish a Simple Ira Plan? What are the steps required to establish a Simple Ira Plan?

Before we discuss how to establish a Simple Ira Plan to meet SIMPLE IRA Compliance, let’s make sure that we know that all SIMPLE IRA Plans must be maintained on a calendar year basis regardless of whether the employer uses a different tax year (i.e. fiscal year). Additionally, an employer cannot establish a Simple Ira Plan if the employer maintains any other type of retirement plan for the business.

The following steps are required to set up a Simple Ira Plan.

Step 1: Complete the required SIMPLE IRA documents.

Employer Agreement: To establish a Simple Ira Plan, the employer completes and signs the Employer Agreement and the required notices to employees, which are found in the SIMPLE Employer IRA Agreement. The completed booklet should be kept in the business’ files and is not required to be sent back to Financial Institution.

Notice to Employees : The employer completes “Name of Employer” and “Address of Employer”. This section provides the specific rules the employer chooses from the Employer Agreement (i.e., Eligibility Requirements, mid-year change dates for deferral elections, employer contributions, etc.) to employees.

SIMPLE IRA Contribution Limits

Just like any other types of IRA, there are SIMPLE IRA Contribution Limits. The SIMPLE IRA Contribution Limits govern how much the SIMPLE IRA plan owner can contribute to the SIMPLE IRA Account and are not penalized by the IRS.

What are the SIMPLE IRA Contribution Limits? How much can a self-employed individual contribute to his or her own SIMPLE IRA?

SIMPLE IRA Plan contribution limits for a self-employed individual are expressed as a percentage of the individual’s “net earnings from self-employment” [not over 100% and not exceeding $10,000 for 2006 plus $2,500 if 50 years old or over (catch up SIMPLE IRA Contribution Limits).

For a SIMPLE IRA Plan, “net earnings from self-employment” is found on Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the Simple Ira Plan for the individual and employees.

Example: The employer’s net earnings from self-employment are $40,000 and the employer chooses to contribute 10% of his earnings to his SIMPLE IRA. The employer elects to make matching Simple Ira Contributions of up to 100% of each employee’s deferral but not more than 3% of each employee’s compensation. The total SIMPLE IRA contribution the employer can make for himself is $5,200, which is calculated as follows.

SIMPLE IRA contribution calculation

Salary reduction contribution ($40,000 x .10)	$4,000
Employer matching contribution ($40,000 x .03)	$1,200
Total SEP IRA contributions	$5,200