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Does anyone know how a small company with under10 full-time employess can determine whether a simple ira or
sep ira is the better choice? we are tyring to set up an employee pension plan --my husband is president &
I am treasurer --we would also participate in the plan.

this is the first time i submit a message--it's really
a question--is this allowed? than you for any guidance
you can offer cdube@cybertours.com
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admin0 -

Welcome aboard!

With 10 employees, your company may be well-served by either a SEP-IRA or a SIMPLE-IRA plan. In a nutshell, the SEP plan will require employer contributions to all employees; the SIMPLE may only require matching contributions to employees who participate by making payroll deductions to the plan.

I expect you will be meeting/speaking with some investment company rep... pose the question to him/her. You should consider all the obligations before selecting your retirement plan.

Good luck, PP
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It depends what your goals are. Here are the scenarios

SEP IRA, totally funded by the employer. Employer contributes a percentage of pay, cannot exceed 15%. Whatever the employer does for one employee it must do for the others.

SIMPLE IRA, allows for employee pre-tax contributions up to $6,000 per year. Employer must make a contribution using 1 of the 2 following formulas.
!. Employer gives all eligible employees 2% of pay
2. Employer matches employee contributions dollar for dollar but not in excess of 3% of pay, or $6,000 whichever is lower. Employer may at its own discretion reduce the match amount to dollar for dollar up to 1% of pay in any 2 years out of a 5 year period. (Why the IRS can never write a staright forward rule is a mystery) All contributions are 100% vested.

401k, Does not require any employer contributions. Employer contributions are totally discretionary. If made, the employer can decide any level they are comfortable with. Employees MAY be able to defer $10,500 or 25% of pay whichever is less. The maximum is only possible by the highly compensated employees (those makeing over $85,000 if the plan passed its non discrimination and top heavy testing)The 401k requires administration and reporting and this will cost around $1,200 per year. The SEP and SIMPLE will cost only $25 or less per employee, Its typically $10 per year. There is no reporting or testing requirements.

So, if you would like to make large employer contributions then a SEP may be the right choice, if you want to minimize employer contributions then a SIMPLE, and if you don't want to make any, then a 401k may be the right choice.
Hope this helps, if not, please follow up.

Bill
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Hi, hope I'm not intruding.......

The preceeding info is right on the money so I won't rehash that.

My business is also small, and before 1997 when SIMPLE IRAs became available all we felt we could do was fund our traditional IRAs. We had people who did not want to participate in a mandatory saving plan and some who wanted to save large amounts. So the SEP and 401k with equal treatment requirements, plus the administrative expenses pretty much kept us from doing a company plan. (We needed maximum flexibility because our cash flow is impossible to predict.)

When the SIMPLE became available, we jumped at it. The money is mostly salary reduction with the amount at the employees discretion, so those that want to save less can, and those that want to do more can also. The company has some leeway in how much to match up to the 3% of gross salary. (There are rules)

Another nice feature is that the trustee can be employee or employer chosen, but in either case the IRA account is in the employees name so they are fully vested immediately. Again there are withdrawal rules which discourage early withdrawal.

Anyway we found the SIMPLE IRA to be more flexible and a good answer for us as a small business.

Hope this helps.
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This is neat, you ask a question and receive several quality answers. I just wanted to add that under SIMPLE you have the choice of establishing a SIMPLE-IRA (very easy to set-up) and a SIMPLE 401k (little harder but can be worth it). Also you (employer) may have a contribution (matching) choice between % of employees pay or a % of your profits divided by number of participating emploees (I may have gotten this wrong, but it is worth checking into).

Starting a SEP or SIMPLE is a grat thing you are doing for your employees. Presently only 14% of small businesses or providing any type of retirement plan for their employees (matching or not). We need to have more employers like you.

Michael A
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First of all don't get pigeon holed into one plan because of your size. Ask yourself these questions:

1. how much do you want to put away for yourselves
2. is the plan design tax efficient (ie. for every dollar you pay yourselves you get 60% and the IRS gets 40%, a retirement plan where you get less than 60% of contributions is not efficient)
3. what, if anything, do you want to do for employees

Once you know the answers to these questions, seek the design that comes closest to what you want. There are more plans than SEPs and Simples.

Matt Tuttle
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There are more Plans than SEPS and SIMPLE's, Defined Benefit, Money Purchase, and Profit Sharing, as well as 401ks.
The SEP, SIMPLE, and 401k options will cover almost all small business owner's needs without the large administrative expenses associated with Dfined Benefits. The funding lvels sutiable for most small business owners, can be achieved via a 401k with PS, or a SEP in most cases for less cost than a paired MPP and PS.
MPP=Money Purchase Pension
PS= Profit Sharing


Bill
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You can do a DB for the same cost as the other plans, and it's the only way to break through the 30k contribution barrier.

Matt Tuttle
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I agree that you can break through the 30k barrier. DB Plans are historically more expensive. 401k Plans for small business can be had for $1,200 per year or less.Including all testing, Trustee services, & IRS filings. The Mutual Fund company I work for, actually charges a little less. (No asset based fees either, so stay away from the Insurance companies and their group annuity contracts!). DB Plans run in the neighborhood of $3,000. (Trustee, Actuaries,& Administration) However, if the business owner can break the 30k barrier, it is often worth the extra cost. Often times though, the business owner does not want to commit to the contributions for the other workers. The cry that is always heard is
--How much can I do for myself?
--How little can I do for my workers?
--& How much is it going to cost?
It all depends on what the business owner is looking to accomplish, and his/her own situation. Age, salary, etc. & how much they are willing to give to their employees. Only then can Plan design be considered.
SEPs and SIMPLEs often mke sense because the business owner wants no administration costs or reporting requirements and does not want to contribute alot to the employees. With SIMPLEs a business owner and a spouse on the payroll can put away $12,000 per year, plus employer matching. He then only has to make a 3% match to participating employees, and can adjust that down to 1% in 2 out of 5 years. They can also opt for a 2% contribution to all eligible employees.
401ks have adiminsitrative costs and reporting requirements and employer contributions are not required. Although they have a higher deferral limit ($10,500 vs $6,000 in the SIMPLE) The maximum deferral may not be achievable if the non highly compensated employees do not participate or contribute at low levels.
Paired Plans (Keough) are totally employer funded and require reporting and have higher admin costs than 401ks. (You are running 2 plans instead of 1, a money purchase pension and a profit sharing.)
Defined Benefit Plans potentially allow the largest contribution. You can defer up to $140,000,(2001). This is all employer funded, so you really only see funding at these levels for self employed older individuals who are taking in a high amount of income. For those that can afford it, this is definitely the way to go.

Bill
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We also jumped at the SIMPLE IRA plan but would like to get it in to no load funds. This is not possible with our broker. Where, how did you set up your plan? Because there is so little profit in the plan no one seems to want them!
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Our firm has used T. Rowe Price without any problems or incidents for three years come January. All employees have been pleased with their fund choices and overall performance.

I am the administrator for our office so I know what and how much each person puts into their accounts. For fun, I have tracked the different funds that everyone purchases and their performance each quarter. I make an Excel chart showing the different funds and their cumulative performance since we started the plan. I did this so that each employee could see what other funds people picked, and how all of the funds have performed since we began investing in our SIMPLE IRA. I do not let the employees know who is in what fund, but rather have a list of all funds currently invested in. It has kept the employees that were leary of investing interested, and those who are comfortable find a competitive spirit.

It has worked for us, and again we have had zero problems since we started the Plan.

Jenn
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