SEP IRA

Posts Tagged ‘SIMPLE IRA’

For a business owner, he or she often hears of SEP IRA or SIMPLE IRA, rather than traditional IRA or Roth IRA. SEP IRA and SIMPLE IRA Plans are special retirement plans for business owners. There are many differences between SEP IRA vs SIMPLE IRA, however. SEP IRA vs SIMPLE IRA are totally different retirement plans and should not even be mentioned in the same sentence. SEP IRA stands for Simplified Employee Pension. 

What are the differences between SEP IRA vs SIMPLE IRA?

SEP IRA is similar to the traditional IRA. SEP IRA is a retirement plan for a business owner or a self employed individual whereas a SIMPLE IRA is intended for the benefits of the employees and is set up by the employer, similar to how a 401k works. 

Who sets up SEP IRA vs who set up SIMPLE IRA?

While the SEP IRA plan is set up by the business owner himself or herself for his or her own benefit, the SIMPLE IRA plan is set up by an employer for the benefits of employees who are qualified under the SIMPLE IRA Plan Rules. 

Deduction limit for Sep Ira Vs SIMPLE IRA

Among the most important difference between a Sep Ira and a SIMPLE IRA is the maximum deduction limit for contributions to Sep Ira vs contributions to SIMPLE IRA. While contributions to SIMPLE IRA Plans are maxed out at $10,500, the Contribution limit for Sep Ira is at: 

• 25% of an eligible employee’s compensation, or

Compensation limit for 2007 for Sep Ira or the maximum amount of an employee’s compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions is $225,000, same as SIMPLE IRA.

What is a SIMPLE IRA?

SIMPLE IRA stands for Savings Incentive Match Plans for Employees (SIMPLE). A SIMPLE IRA is sometimes called a SIMPLE Plan, SIMPLE program, or SIMPLE retirement plan or even salary reduction agreement. 

Definition of SIMPLE IRA

The IRS defines a SIMPLE IRA plan as a tax favored retirement plan that certain small employers including self employed individuals can SEP up for the benefit of their employees. 

A SIMPLE retirement plan is a written agreement or a salary deduction agreement between an employee and an employer that allows eligible employee or self employed business owner to choose to: 

• reduce his or her salary or compensation each pay period by a certain percentage, and

What is the definition of eligible employees for SIMPLE IRA purposes?

Only eligible employees can contribute and participate in the SIMPLE IRA plan set up by the small business employer. Employees that are eligible to participate in the SIMPLE IRA plan must be allowed to participate. In general, employees are eligible if they: 

• received at least $5,000 in compensation from the employer in the past 2 years prior to the current tax year

What is a SIMPLE IRA for self employed people?

Usually self employed people open SEP IRAs instead of SIMPLE IRAs. However, if a self employed individual wants to open a SIMPLE IRA, he or she can if he or she received earned income. For the purpose of Simple Ira Eligibility, a self employed person is considered an employee. 

What is compensation for SIMPLE IRA?

To qualify to participate in a Simple Ira Plan, the employee must have certain level of compensation where compensation includes: 

• wages, tips and other pay from the employer that are subject to income tax withholding

Salary Reduction Agreement: The employer completes part of the form. Each employee receives a copy, and completes the remaining portion of the form, and returns it to the employer. Eligible employees use this form to advise the employer of their rate of elective deferrals or to stop their elective deferrals.

SIMPLE IRA Plan Summary: The employer completes part of the form only. This form provides general information regarding SIMPLE IRA Plans to employees.

Step 2: The employer provides copies to employees at the start of each election period. For existing SIMPLE IRA Plans, the election period is the 60-day period immediately preceding January 1 of the calendar year (November 2 to December 31 of the preceding calendar year).

Example: XYZ Company establishes a SIMPLE IRA plan, effective October 1, 2004. The employer notifies employees regarding the 2004 plan year by providing copies of Appendices A, B and C to employees on or before October 1, 2004. The employer must then notify employees on or before November 2, 2004 for the 2005 plan year and by every November 2 thereafter.

Step 3: An employee (including the business owner if he or she is also an employee) who wants to participate in the plan must complete the Salary Reduction Agreement and return it to the employer. Additionally, the employee must complete a SIMPLE IRA Adoption Agreement, which is found in the SIMPLE IRA Employee IRA Agreement.

Note: Under most SIMPLE IRA document, an employee may elect to establish a SIMPLE IRA Account at another firm that will accept the account. The employer must send monthly salary deferral checks to each financial institution where his or her employees have established their SIMPLE IRA accounts.

Step 4: Each month the employer will send the Financial Institution one check for all of the employees’ salary deferrals for the month. The employer should include a Participant Account Contribution Sheet, specifying the participant allocation of the check.