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Author: draggon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Re: SIMPLE IRA Help Date: 1/18/1998 5:29 PM
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<<I am trying to understand why you want a SIMPLE as opposed to the SEP. Granted, you cannot
maintain both. However, the SEP allows contributions of up to 15% of compensation or $30K,
whichever is less. A SIMPLE is limited to a maximum of $12K per year ($6K each from employee
and employer). Seems to me if the business continues to grow the SEP offers a better means of
deferring income.>>

You make a very good point here, Pixy. I hadn't foolishly thought about it as thoroughly as I should have (I'm sure you never see that sort of behavior on this board, eh?) I was simply going off of the suggestion from her accountant. I believe what he is trying to do is save us some money now on FICA by keeping her salary as low as possible and taking the rest of her income as profit distributions. At her current salary level, we can not contribute as much as we could with the SIMPLE plan. If we raise her salary to a point that allows us to contribute the same amount, then the FICA goes up accordingly... Either this sounds like a catch-22, or I'm missing something important. As far as the tax benefits of the 2 different plans are concerned, one shows up as a direct reduction of her salary (SIMPLE) and the other shows up as a direct deduction on her corporate return (SEP), thus decreasing her profits on our personal return accordingly.

So, I'm kind of at a loss... I can afford to put the maximum allowed into the SIMPLE ($6000 plus 3%), but I'm not sure that I can afford to raise her salary enough to outdo the SIMPLE considering we will be paying that much more in FICA... Crap... I feel like I'm missing something important. Do you have any feel for this? Her business is fairly stable from year to year, the only real possibility of significant increases in her profits would be to start hiring people to work for her, which she's not very interested in doing. In other words, she's got as much work as she can handle without hiring new hands.

<<I suggest you get and read IRS Publication 560, Retirement Plans for the Self-Employed, before
you make any hard and fast decisions. You can download it online http://www.irs.ustreas.gov/prod/forms_pubs/index.html>>

Thanks for the url, it is duly bookmarked. I read Pub 560 and noticed something that has me wondering if the wife even qualifies for the SIMPLE. My plan was to discontinue funding the SEP and set up the new SIMPLE. However Pub 560 says that "The SIMPLE plan must be the only retirement plan of the employer to which contributions are made, or benefits are accrued, for service in any year beginning with the year the SIMPLE plan becomes effective." If I'm interpreting this correctly, it appears that benefits will still be accruing in the "idle" SEP. Any thoughts on this?

Da Draggon
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