A Guide to Simplified Retirement Plans, SEP-IRAs and Simple
IRAs
Designed for small businesses and self-employed
individuals
A comfortable retirement is considered the reward for a lifetime of hard
work. But when you're running a small business, you may be too busy with
today's demands to "go shopping" for a retirement plan. You know all the
reasons why you should have one. But you wonder where you'll ever find
the time to sort through all the different types available. And if you
did decide on one, where would you find the time to take care of all the
details?
Luckily, there are alternatives to high-cost, high-maintenance retirement
plans. SEP-IRAs and SIMPLE-IRAs have been designed specifically with America's
small businesses and self-employed individuals in mind. They're easy -
and affordable - to establish and to maintain.
Remember, the sooner you start a plan, the more time you and your employees
have to build toward a comfortable retirement - and the better the chance
that it will indeed be rewarding.
SEP-IRAs and SIMPLE-IRAs share many attractive features. Both plans are:
. Designed to meet the needs of small businesses and self-employed individuals.
. Easy to establish and easy to administer - thanks to a minimum of paperwork.
. IRA-based -contributions go into Individual Retirement Accounts (IRAs)
for each active participant in the plan.
. Offer tax advantages including tax-deferred growth potential.
They're also distinct from each other in a number of ways. Among the
differences: how much may be contributed each year, the allowable number
of employees, who is required to contribute, who is allowed to contribute,
and employer matches for employee contributions.
The following discussion will help you decide which plan is better suited
to your business. The chart on the next page lets you do an easy feature-for-feature
comparison of SEP-IRAs and SIMPLE-IRAs. Once you've made your plan choice,
you can choose from a wide range of non-FDIC insured investments to help
you and your employees make your retirement nest eggs grow.
Employers of all types - sole proprietorships, partnerships, corporations
including Subchapter "S" corporations, independent contractors - are eligible
to establish a SEP-IRA. Likewise, self-employed individuals - whether
they work full time or earn income from part-time consulting - are eligible.
Employees who can participate Any employee who meets all of these criteria
is eligible:
. Is age 21 or older
. Has worked for your organization for any length of time in three of
the past five years (as of 2000)
. Has earned at least $450 in the current year (the employer may make
this less restrictive)
Employers may make contributions equaling as much as 15% of an employee's
compensations up to $24,000 each year - to each eligible employee's account.
Flexibility of amount - You have the flexibility to change the
contribution level from year to year, contributing from zero to the maximum.
Equal percentages for all - Employer contributions are not required
each year. However, in each year that they are made, there must be an
equal percentage for all eligible employee accounts.
Employees are not permitted to make contributions to their SEP-IRA.
Tax deductibility - For employers, any contributions made to their
employees' and their own accounts are considered tax-deductible business
expenses for federal tax purposes.
Tax-deferral - All contributions and any growth of the SEP-IRA
are tax-deferred; that is, not subject to current taxation. Taxes will
not be due until the account holder begins to withdraw money from it.
No annual plan report needs to be filed with the IRS. An annual statement
must be provided to participants to inform them of the amount contributed
to their IRA.
Employers who can establish a SIMPLE-IRA Employers of all types - sole
proprieterships, partnerships, corporations (including Subchapter "S"
corporations), independent contractor - are eligible to establish a SIMPLE-IRA
if they meet these two requirements:
. They had no more than 100 eligible employees in the preceding year.
. They do not currently have any other active qualified (that is, employer-sponsored)
retirement plan.
Tax-exempt organizations and governmental entities that meet these criteria
are also eligible.
Any employee who meets these two criteria is eligible:
. Received $5,000 or more in compensation in each of two prior years.
. Is expected to earn $5,000 in the current year. Employers may make these
criteria less restrictive.
Employer contributions are flexible and can be adjusted annually to suit
a company's situation. Employers can choose the level of contribution
they will make to employees' accounts from these three options:
3% match - Employer matches what the participant contributes to his or
her own account - dollar for dollar - up to 3% of the employee's compensation.
1% match - Available in any two years out of a 5-year period, this reduced
match works in the same manner as the 3% match.
2% non-elective - Whether or not an eligible employee makes any contribution
to his or her own account, the employer contributes an amount equaling
2% of compensation to each employee's account.
The maximum compensation level on which these contributions are calculated
is $160,000, resulting in an employer-contribution cap of $3,200 per employee.
Employee contributuions are optional. Eligible employees, including the
employer, may contribute a maximum of $6,000 or 100% of their compensation
- whichever is less - each year.
Tax-deductibility: Any contributions that employers make to their employees'
and their own accounts are considered tax-deductible business expenses
for federal tax purposes.
Pre-tax dollars - Employee contributions are deducted from their
pay before current income taxes are calculated and withheld. Because current
income is reduced, an employee's current tax bill may also be reduced.
Tax deferral - All contributions and any growth of the SIMPLE-IRA
are tax deferred - that is, not subject to current taxation. Taxes will
not be due until the account holder begins to withdraw money from it.
By Mary Lou Griffith. Reprinted with permission from PNC
Bank's Serious About Small Business. (www.pncbank.com/entrepreneur)
|
