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SIMPLE Retirement Plan for Self-Employed Workers

by Ryan Guina

This article is part of a series on self-employed retirement plans, and was written by Robert D. Flach. Robert has been preparing business and individual tax returns for people in all walks of life since 1972. He writes the tax blogs THE WANDERING TAX PRO and the NJ TAX PRACTICE BLOG.

Article assumptions: Self-employed individuals have many types of retirement plans from which to choose. While these plans are available regardless of the type of business “entity” chosen, I will be discussing them from the point of view of the Schedule C filer. In such a situation the determination of the amount of the allowable contribution begins with the “net profit” reported on Line 31 of Schedule C or Line 3 of Schedule C-EZ.

All of the retirement plans that I will discuss are available to the one-man business with no employees, and I will limit my discussion to the contributions of the business owner. However these plans will require coverage of any qualifying W-2 employees of the business, and special rules will apply to contributions for employees.

SIMPLE Plan

Another simple self-employed retirement option is the SIMPLE plan. Here SIMPLE stands for “Savings Incentive Match Plan for Employees”. A SIMPLE plan is a “compensation” deferral plan, similar in concept to the basic employer-sponsored 401(k).

Plan establishment and contribution deadlines. A SIMPLE plan must be established by October 1st of the first tax year the plan is to be effective.  So if you do not already have one in place it is too late to be able to contribute to a SIMPLE for 2008. Once the plan is set up you have until the due date of the 1040, including extensions, to actually make the contribution. If you had established a SIMPLE in 2007 you have plenty of time to make a contribution for 2008.

Where to open a SIMPLE Plan. Small business retirement plans are found with many major brokerage houses, including Vanguard, Fidelity, Merrill Edge, TD Ameritrade, Charles Schwab Investments and more.

Contribution limits. Because it is a deferral of compensation a SIMPLE has lower contribution limits. The maximum contribution you can make to a SIMPLE for 2008 is $10,500, plus an additional $2,500 if the “employee” will be age 50 or older at the end of 2008. For 2009 the basic maximum jumps to $11,500, with the same additional $2,500 “catch-up” contribution allowed.

The amount of “employee” contribution allowed to be made to a SIMPLE is not limited to a percentage of the business profit. You can contribute as much as 100% of the net profit reported on Schedule C or C-EZ, up to the statutory dollar maximum. If the profit for 2008 is $10,000, the maximum contribution is $10,000. If it is $25,000, the maximum is either $10,500 or $13,000 depending on the individual’s age.

Employer match required. A SIMPLE plan also requires an employer match of 1% to 3%. So a self-employed “owner-employee” with $25,000 in net profit can set aside as much as $13,750.

Benefits of SIMPLE Plan

One of the benefits of a SIMPLE plan to the owner is that it allows a business with lower net profit to set aside a larger percentage of that profit for retirement. It is excellent for a sideline business where the owner has sufficient other sources of income (i.e. W-2 wages) to cover living expenses and does not need the business income. Here are some additional benefits to investing with a SIMPLE Plan:

Immediate vesting. As with a SEP IRA, SIMPLE contributions are made to a traditional IRA account, and participants are “100% vested” at the moment the contribution is made.

Traditional or Roth options. A taxpayer can contribute the maximum to both a SEP-IRA or a SIMPLE-IRA and a “regular” traditional or, if he/she qualifies, a ROTH IRA.

Minimal costs. In the case of both the SEP-IRA and the SIMPLE-IRA the costs to establish the plan are minimal, if any.  And there is no required annual paperwork – no filing of a return or report with the government.

Here is more information about Self-Employed Retirement Plans.


Published or updated January 6, 2014.
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{ 9 comments… read them below or add one }

1 Broke MBA

Nice post. Is a Simple IRA something entirely different? I work for a segment of a for profit company being spun off into a non-profit. I believe I was told my 401(k) would be replaced with a simple IRA. I have yet to do any research on this plan but would appreciate any links or info that you may have already discussed elsewhere.

Thanks!

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2 Jeff Rose

@Broke MBA

Simple IRA’s and Simple 401k’s are similar, with a few key differences. I will not bore with the differences (most people have a Simple IRA with their employer).

The big difference with the Simple vs. the 401k are the contribution limits as are noted above in the post. You will not be able to invest as much in the Simple Plan and the match will be maxed out at 3% of your salary. I guess not a big deal if you weren’t maxing out your 401k to begin with.

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3 Jeff Rose

@Ryan

Nice Post. I have one similar in the works and will be sure to reference your post.

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4 Broke MBA

Thanks for the help! I was not maxing out my 401(k), but was contributing enough to receive the 4% match. I was investing another 7% into a personal Roth IRA. That’s too bad, but not the end of the world I guess. I’ll only be contributing 3% (for the match) in the SIMPLE IRA when the time comes, and I’ll have to up the % into my Roth.

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5 Doctor S

My company’s program is real good and I just put in only to what they match, 4% from me, 4% match, and an extra 10% just for participating! Do not pass GO! Do not collect $200!

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6 Ron

I have my own business and no employees. I do not pay myself on a W-2. Can I still set up the SEP-IRA for my small business?

I do work for another firm and am on their W-2. Please suggest.

Thanks,

Ron

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7 Ryan

Ron: Based on my understanding, you should be eligible to open a SEP IRA for your business, even though you also work for an another employer.

Here is an article with more information about the SEP IRA: Self-Employed Retirement Plans: SEP IRA

Keep in mind there may be some stipulations regarding how much one person can contribute across their personal retirement plans and a self-employed retirement plan. For instance, I have a solo-401k and a 401k from my day job. I can only defer $15,500 of pre-tax income between both accounts (not counting the profit sharing with my solo-401k).

I don’t believe there is a similar rule with the SEP IRA, but I encourage you to look into it. You may also wish to consult a lawyer or tax attorney for more information (I am not a tax pro and this is only general information).

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8 Ron

Thanks Ryan.. So I need not be on my own payroll to use SEP IRA?

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9 Ryan

Ron: I’m not 100% sure how that works. I have a solo 401k and can just pay myself out of my profits. I recommend speaking with a CPA or tax attorney for clear guidance.

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