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Author: KCofMaine One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75791  
Subject: Setting Up SIMPLE IRA Date: 9/29/1998 6:14 PM
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I am thinking, for 1999, of setting up a SIMPLE IRA. Any other self employed folks on this board have any experience with such?

I am a sole proprietor, and I am my only employee. I understand I can defer up to $6,000. Then I must match with something, say 2% of my annual income. I guess I just send a letter to my broker telling him how much is a salary deferal and how much is contributed by me. But, it seems to me, in my case, that it comes out of the same pocket. Can I just make a $6,000 contribution and say nothing more, or MUST I send a letter with the contribution stating how much of the total is a 2% match.

Also, I won't know my income until I do my tax return. I am not an S Corp and don't receive a salary per se. I won't know how much I earned in net income until the end of January. I understand there must be regular and timely deferrals. Since I am the only one, and my income is unknown until the end of the year, am I essentially shut out of this plan. Or, can I just make a lump sum deferral (with 2% match) at the end of the year??

Also, can I take my income amount from my Schedule SE instead of my Schedule C? My SE income is significantly higher than my C income.

Help...I've talked with the IRS on the phone and they don't seem to know much, and only can read publications on the phone...and are not able to answer these questions. I've ordered the publications to see if I can gain what the IRS people are not able to tell me. I thought, in the meantime I would submit my scenario to fellow Fools.

Thanks in advance for your help.

KCofMaine

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Author: DaBob One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5734 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 9/29/1998 7:59 PM
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Hi KC:

This is the first year of our SIMPLE IRA (previously we had a SEP). I love it. I really think Congress fixed the problems with SEP's, and kept us out of the expense of 401 k's. My only gripe is that I wish I could contribute more than 6K, but whatever.

My advice would be to visit a local Schwab office. They made setting up ours a super easy process. Plus I like the investment alternatives I have in my account, and while the fees are not as low as the deep discounters, they are reasonable.

They have a SIMPLE kit that explains all the ins and outs. I can't comment on the specifics of doing this as a SP because my company is a C corp and I didn't really pay attention to the SP aspects. But I would hope the Schwab packet would have the proper info.

Good luck to you. DaBob.

Disclaimer PS: No, I don't have any reason to promote Schwab over anyone else, it's just my experience.

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Author: KCofMaine One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5736 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 9/29/1998 9:28 PM
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Thanks, Dabob.

KCofMaine

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5751 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 9/30/1998 6:28 PM
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KcofMaine writes:

I am thinking, for 1999, of setting up a SIMPLE IRA. Any other self employed folks on this board have any experience with such?

I am a sole proprietor, and I am my only employee. I understand I can defer up to $6,000. Then I must match with something, say 2% of my annual income. I guess I just send a letter to my broker telling him how much is a salary deferal and how much is contributed by me. But, it seems to me, in my case, that it comes out of the same pocket. Can I just make a $6,000 contribution and say nothing more, or MUST I send a letter with the contribution stating how much of the total is a 2% match.

Also, I won't know my income until I do my tax return. I am not an S Corp and don't receive a salary per se. I won't know how much I earned in net income until the end of January. I understand there must be regular and timely deferrals. Since I am the only one, and my income is unknown until the end of the year, am I essentially shut out of this plan. Or, can I just make a lump sum deferral (with 2% match) at the end of the year??

Also, can I take my income amount from my Schedule SE instead of my Schedule C? My SE income is significantly higher than my C income.

Help...I've talked with the IRS on the phone and they don't seem to know much, and only can read publications on the phone...and are not able to answer these questions. I've ordered the publications to see if I can gain what the IRS people are not able to tell me. I thought, in the meantime I would submit my scenario to fellow Fools.


You as the employER may make a nonelective contribution of 2% of your compensation as the employEE as late as the due date for filing your return for the year. That contribution is made from the gross receipts of the business and is deducted to arrive at your net compensation for the year. As the employEE, you may contribute up to 100% of your net compensation (not to exceed $6K) as you pay yourself, and that amount must be deposited into the SIMPLE by you as the employER within 30 days after the month in which the deferral occurred. So, if you pay yourself during the year, the contribution you're making as the employEE must reach the SIMPLE within 30 days after the end of the month in which you were paid.

As to Schedule SE income versus Schedule C, that's for a tax guru to decide. All I know is your contribution as the employEE must come from your net compensation from self-employment. The employER's contribution comes out of gross receipts.

Regards….Pixy


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Author: shess Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5771 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 10/1/1998 7:26 PM
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TMFPixy wrote:
<<You as the employER may make a nonelective contribution of 2% of your compensation as the employEE as late as the due date for filing your return for the year. That contribution is made from the gross receipts of the business and is deducted to arrive at your net compensation for the year.>>

Gack!!! OK, though I use a SEP, I am interested in the SIMPLE as a backup just in case, since I have highly variable income. So I'm going to toss out some numbers, looking to maximize contributions, and lets see what people have to say about them... herein, I'll use SCOTT for me-as-employER, scott for me-as-employEE, and Jen for other-employee-of-SCOTT.

Let's say SCOTT _nets_ $50k this year. So, SCOTT can put %3 of $50k towards scott's SIMPLE, for a total of $1500. Since this comes out SCOTT's taxable net, the contribution itself reduces the earnings use to calculate the contribution, so now SCOTT only nets $48,500. To simplify, I'll just fold it in once and guesstimate things at %3 minus %3 of %3 for the effect on SCOTT's net, resulting in around $1455 that SCOTT can contribute to scott's SIMPLE, and gross income to scott of $48,545. On top of that, scott can contribute $6k of his own income. For a grand total of $7455 for the year.

For a SEP-IRA, SCOTT could have contributed %13.5 (%15 minus %15 of %15 since it's the employER contributing), for a total of $6750, and income to scott of $43,250.

Now, bump SCOTT's net up to $100k, and add an employee Jen who will be paid $50k. With SIMPLE IRAs, SCOTT can contribute the full $1500 (%.03*50000) to Jen's, leaving SCOTT a net of $49,500, of which SCOTT can contribute $1485 towards scott's SIMPLE. scott's income ends up as $47,015. Jen and scott can each contribute a further $6k of their income to their SIMPLE.

In the SEP-IRA case, SCOTT could have contributed $7500 (%.15*50000) to Jen's SEP, leaving SCOTT's net at $43,500. Thus, SCOTT can only contribute $5872.50 to scott's SEP, and scott's income ends up as $37627.50

Wow! Fun stuff! Assuming the numbers were run right, I'm surprised at how competitive the SIMPLE is with the SEP - it looks like about $55k of earnings is where the SEP starts to pull ahead, where I would have thought it would be around $40k. That $6k base is powerful. I'm also starting to see the point about not letting your wife (Jen, in this case :-) do pro bono work for your sole proprietorship.

Later,
scott


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5785 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 10/2/1998 6:37 PM
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Scott sez:

Wow! Fun stuff! Assuming the numbers were run right, I'm surprised at how competitive the SIMPLE is with the SEP - it looks like about $55k of earnings is where the SEP starts to pull ahead, where I would have thought it would be around $40k. That $6k base is powerful. I'm also starting to see the point about not letting your wife (Jen, in this case :-) do pro bono work for your sole proprietorship.

Good analysis. I haven't run the numbers myself, but that's the approach to take. Keep one thing in mind about the SIMPLE, though. Unlike the SEP where you can skip payments for years on end, you don't have that freedom in the SIMPLE. As the employER, you will have to contribute in unprofitable years as well whether you use a nonelective contribution or match. Plus there's a tad more paperwork involved. Despite that, it can still make for a good approach to tax deferral in many cases.

Regards….Pixy





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Author: KCofMaine One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5788 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 10/2/1998 6:43 PM
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Hey, Pixy,
KCofMaine here...

You wrote...
As the employER, you will have to contribute in unprofitable years as well whether you use a nonelective contribution or match.

It is my understanding from a couple of brokerages, and from the IRS, that IF one's business is a sole prop., and there are no employees except the owner, then there are no necessary employer contribtions needs..IF the 3% matching election is made by the employer & the employee (also the owner/employer...same person) doesn't defer any income in a lean year. Right or wrong?

KCofMaine

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Author: shess Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5790 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 10/2/1998 6:59 PM
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TMFPixy wrote:
As the employER, you will have to contribute in unprofitable years as well whether you use a nonelective contribution or match.

KCofMaine responded:
It is my understanding...that IF one's business is a sole prop., and there are no employees except the owner, then there are no necessary employer contribtions needs..IF the 3% matching election is made by the employer & the employee (also the owner/employer...same person) doesn't defer any income in a lean year.

That would make sense. It's a 3% _matching_ contribution, after all (as opposed to the 2% uniform contribution, which would have to happen every year). So, as a self-employed, you can certainly choose not to contribute any of the $6k, and thus 3% of zero is zero... Or, you could work backwards from what you _can_ afford to contribute in order to get the numbers right.

Later,
scott


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5793 of 75791
Subject: Re: Setting Up SIMPLE IRA Date: 10/2/1998 7:21 PM
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KcofMaine, somewhat concerned, wrote:

You wrote...
As the employER, you will have to contribute in unprofitable years as well whether you use a nonelective contribution or match.

It is my understanding from a couple of brokerages, and from the IRS, that IF one's business is a sole prop., and there are no employees except the owner, then there are no necessary employer contribtions needs..IF the 3% matching election is made by the employer & the employee (also the owner/employer...same person) doesn't defer any income in a lean year. Right or wrong?


Fear not. If you have other employees, what I said will apply. But if you can't pay yourself as the only employee, then as the employer no contribution will be due. The brokers are correct.

Regards….Pixy




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