Out of all the types of retirement plans available to small business owners, the SIMPLE plan is the easiest to setup and least expensive to manage.
They are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend time and high administration fees associated with more complex retirement plans.
SIMPLE plans really shine for self-employed business owners, here's why...
Self-employed business owners contribute both as employee and employer, with both contributions made from self-employment earnings.
SIMPLEs calculate contributions in two steps:
1. Employee out of salary contribution—The limit on this "elective deferral" is $10,500 in 2008, after which it can rise further with the cost of living.
Catch up. Owner-employees age 50 or over can make a further $2,500 deductible "catch up" contribution as employee in 2008.
2. Employer "matching" contribution—The employer match equals 3% of employee's earnings.
Maximum combined contribution of $21,000 for 2008.
Example: An owner-employee age 50 or over in 2008 with self-employment earnings of $40,000 could contribute and deduct $10,500 as employee plus a further $2,500 employee catch up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $14,200.
The SIMPLE plan is good for the home-based business and can be ideal for the moonlighter — the full-time employee, or the homemaker, with modest income from a sideline self-employment business.
With living expenses covered by your day job (or your spouse's job), you could be free to put all your sideline earnings, up to the ceiling, into SIMPLE retirement investments.
A Truly Simple Plan
The SIMPLE plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules — in investment options, spousal rights, creditors' rights — don't have a lot new to learn.
Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.
What's Not So Good About SIMPLEs
Other plans can do better than SIMPLE once self-employment earnings become significant.
Example: If you are under 50 with $50,000 of self-employment earnings in 2008, you could contribute $10,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $12,000. A Keogh 401(k) plan would allow a $25,500 contribution.
With $100,000 of earnings, it would be a total of $13,500 with a SIMPLE and $35,500 with a 401(k).
Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and will in practice have fewer investment options than if you were your own trustee, as you could be in a Keogh.
It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with SEPs. Generally, to make a SIMPLE plan effective for a year it must be set up by October 1st of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.
There's this problem if the SIMPLE is for a sideline business and you're in a 401(k) in another business or as an employee: The total amount you can put into the SIMPLE and the 401(k) combined can't be more than $15,500 (2008 amount)--$20,500 if catch up contributions are made to the 401(k) by one age 50 or over.
So someone under age 50 who puts $8,000 in her 401(k) can't put more than $7,500 in her SIMPLE, in 2008. The same limit applies if you have a SIMPLE while also contributing as an employee to a "403(b) annuity" (typically for government employees and teachers in public and private schools).
They are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend time and high administration fees associated with more complex retirement plans.
SIMPLE plans really shine for self-employed business owners, here's why...
Self-employed business owners contribute both as employee and employer, with both contributions made from self-employment earnings.
SIMPLEs calculate contributions in two steps:
1. Employee out of salary contribution—The limit on this "elective deferral" is $10,500 in 2008, after which it can rise further with the cost of living.
Catch up. Owner-employees age 50 or over can make a further $2,500 deductible "catch up" contribution as employee in 2008.
2. Employer "matching" contribution—The employer match equals 3% of employee's earnings.
Maximum combined contribution of $21,000 for 2008.
Example: An owner-employee age 50 or over in 2008 with self-employment earnings of $40,000 could contribute and deduct $10,500 as employee plus a further $2,500 employee catch up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $14,200.
The SIMPLE plan is good for the home-based business and can be ideal for the moonlighter — the full-time employee, or the homemaker, with modest income from a sideline self-employment business.
With living expenses covered by your day job (or your spouse's job), you could be free to put all your sideline earnings, up to the ceiling, into SIMPLE retirement investments.
A Truly Simple Plan
The SIMPLE plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules — in investment options, spousal rights, creditors' rights — don't have a lot new to learn.
Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.
What's Not So Good About SIMPLEs
Other plans can do better than SIMPLE once self-employment earnings become significant.
Example: If you are under 50 with $50,000 of self-employment earnings in 2008, you could contribute $10,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $12,000. A Keogh 401(k) plan would allow a $25,500 contribution.
With $100,000 of earnings, it would be a total of $13,500 with a SIMPLE and $35,500 with a 401(k).
Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and will in practice have fewer investment options than if you were your own trustee, as you could be in a Keogh.
It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with SEPs. Generally, to make a SIMPLE plan effective for a year it must be set up by October 1st of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.
There's this problem if the SIMPLE is for a sideline business and you're in a 401(k) in another business or as an employee: The total amount you can put into the SIMPLE and the 401(k) combined can't be more than $15,500 (2008 amount)--$20,500 if catch up contributions are made to the 401(k) by one age 50 or over.
So someone under age 50 who puts $8,000 in her 401(k) can't put more than $7,500 in her SIMPLE, in 2008. The same limit applies if you have a SIMPLE while also contributing as an employee to a "403(b) annuity" (typically for government employees and teachers in public and private schools).
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