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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 75540  
Subject: SIMPLE IRA Help Date: 1/17/1998 5:43 PM
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Hi there! Glad ya stopped by... You wouldn't be here if you didn't have some clue what a SIMPLE was, so hopefully you might be willing to help me out. My wife has her own S-Corp and is currently maxing out the funding of an SEP-IRA. An SEP is funded entirely by the corporations money, but is entirely in my wife's name.

Due to keeping her salary at a reasonable level (to save a little on FICA) it would behoove us to start up a SIMPLE IRA because of the higher contribution allowed. I understand the basics of the SIMPLE, i.e. each individual employee (she's the only one) is allowed to defer up to $6000 of their salary into the plan. The company then has the option of dollar-matching between 1 and 3% of the participant's salary or of contributing a flat 2%.

I plan on being the "investment advisor" of this plan (i.e. self-directed, through me, the loving husband). I've received some information from a couple of online discount brokerages that I'm interested in, but I have some questions about the information that they are requiring from me, and the actual physical setting up of the accounts. They make it sound like I will need 2 accounts, one for the company and one for the participant. Is this really how it works, or am I misunderstanding something about it?

I am also looking for tips on how to track the SIMPLE payouts from my wife's deferred salary in Quicken '98. Before this message gets outrageously long, I think I'll just end it here and see if it generates any interest. If so, I will elaborate on my other questions then.

The standard disclaimer applies, i.e. I'm fairly new to TMF and have tried to keep up with most of what goes on, but as with everyone else, my time is limited so I've probably missed some important discussions on SIMPLES. If so, and you know where I can find them, please feel free to point me to any online resources.

Thanks a million, you fools! I'm gonna be rich someday, how about you?

Draggon
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Author: Tiggertoo One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1351 of 75540
Subject: Re: SIMPLE IRA Help Date: 1/17/1998 7:24 PM
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Ron, I read your bio, and know that you are from Indianapolis, I'm from Greenwood.

Regarding the Simple you discussed. Schwab has a lot of information on the Simple, If you want, you can contact Katherine Eardly, and she will be happy to get the information for you.

I have about 1/2 my total portfolio at Schwab, and she has been very helpful in all aspects. Let her know that Jim Wilson referred you.

I have been sending most of my clients to Schwab because of the service, and the very low costs.

LOL.

TTFN...Tiggertoo

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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: 1355 of 75540
Subject: Re: SIMPLE IRA Help Date: 1/18/1998 1:30 AM
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Jim,

<<Ron, I read your bio, and know that you are from Indianapolis, I'm from Greenwood.>>

Just proves again that it's a darned small world we live in, huh? :-) I graduated from Greenwood High School in 1984. Live just a mile north of GW now...

<<Regarding the Simple you discussed. Schwab has a lot of information on the Simple, If you want,>>
<<I have been sending most of my clients to Schwab because of the service, and the very low costs.>>

I was very interested in what Schwab had to offer, but was disappointed in their transaction prices. I'm looking to buy individual stocks and their trading fee of $29.95 is just too far out of the ballpark to swallow. The wife's current SEP is with Schwab and I have no complaints, although it only contains 2 mutual funds. We were recommended to them through our FP's at the Windsor Group.

I may try to milk Schwab for some information, though... Thanks for replying!

Da Draggon

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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: 1357 of 75540
Subject: Re: SIMPLE IRA Help Date: 1/18/1998 11:08 AM
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Greetings, Draggon, and welcome.

<<Due to keeping her salary at a reasonable level (to save a little on FICA) it would behoove us to start up a SIMPLE IRA because of the higher contribution allowed. I understand the basics of the SIMPLE, i.e. each individual employee (she's the only one) is allowed to defer up to $6000 of their salary into the plan. The company then has the option of dollar-matching between 1 and 3% of the participant's salary or of contributing a flat 2%.

I plan on being the "investment advisor" of this plan (i.e. self-directed, through me, the loving husband). I've received some information from a couple of online discount brokerages that I'm interested in, but I have some questions about the information that they are requiring from me, and the actual physical setting up of the accounts. They make it sound like I will need 2 accounts, one for the company and one for the participant. Is this really how it works, or am I misunderstanding something about it?>>

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.

Under the SIMPLE, the employer maintains the master plan within which employees have an account. The employer may stipulate a Designated Financial Institution to maintain employee accounts for the purposes of receiving contributions. The employee may not move that money until the employee has participated in the plan for two years. In that sense, you may have "two accounts" with the broker. In reality, though, there's only your wife's because she is the only employee.

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 at http://www.irs.ustreas.gov/prod/forms_pubs/index.html .

Regards…..Pixy



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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: 1370 of 75540
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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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1375 of 75540
Subject: Re: SIMPLE IRA Help Date: 1/19/1998 9:09 AM
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Draggon,

<<... 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.>>

It is a tradeoff. Increase her salary, defer the increase in a SEP, and still your total tax burden increases because of FICA. If your immediate goal is to reduce that tax burden, then the SIMPLE is probably better for you.

<<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?>>

The SEP is nothing more than an IRA. As long as no further contributions from the company are made or accrue to the account, the firm may establish a SIMPLE in its place. Earnings within the SEP are not part of the "benefit accrual" equation in determining SIMPLE eligibility.

Regards......Pixy



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