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I've got to be missing something. This seems too good to be true.

I am thinking of setting up a SIMPLE IRA for myself to contribute some 1099 income to for this year. The contribution limit on a simple IRA is $10,000.

Now, I understand that I can then roll that SIMPLE over into a Roth IRA? Effectively making an end run around the Roth contribution limit and contributing $14,000 to the Roth this year!? Is this right? There must be a catch somewhere. Does anyone know what it is?

Incidently, if I get my employer (small company) to start it's own SIMPLE, I can contribute to it and roll that over and expand my contribution limit to $19,000 this year?

It really doesn't seem like the Feds would let me get away with this. What am I missing?

TRW
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You cannot convert to a Roth if your Modified AGI is over $100K. So if you can't contribute, you can't rollover.

Of course, that's currently scheduled to go away in 2010 as part of the most recent tax bill, but we'll see if it actually happens. I wouldn't make any plans based on it.
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It's just like the Roth 401(k) except that it's a little bit more hassle.

Don't forget that:
- you pay self-employment tax on 1099 income, as well as the regular taxes on wages
- the employer must make a contribution to a SIMPLE IRA if the employee does
- the total across all SIMPLE IRAs is limited to $10k
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I am thinking of setting up a SIMPLE IRA for myself to contribute some 1099 income to for this year. The contribution limit on a simple IRA is $10,000.

Now, I understand that I can then roll that SIMPLE over into a Roth IRA? Effectively making an end run around the Roth contribution limit and contributing $14,000 to the Roth this year!? Is this right? There must be a catch somewhere. Does anyone know what it is?


Minor catch: Because this will be a conversion rather than a contribution you're subject to the lower conversion MAGI limit ($100,000 and no Married, filing separately).

Major catch: You cannot do this during the first 2 years of your participation in this employer's (yourself in this case) plan. See Chapter 3 of Pub 590.

Incidently, if I get my employer (small company) to start it's own SIMPLE, I can contribute to it and roll that over and expand my contribution limit to $19,000 this year?

How did you come up with $19,000? The SIMPLE limit is $10,000 ($12,500 if you're 50) for 2006. The overall salary deferall limit is $15,000 ($20,000 over 50).

Phil
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Thank you all for the advice and caveats. That 2 year limit Phil mentioned is the catch I was looking for. I think I am still going to do it though.

Yes, it is like the Roth 401(k) except for one major difference: I can do this. No financial services company that I have called will pick up my company for a 401(k) because we are too small. This plan is largely in response so that I can stay competetive with people who are able to do the 401(k).

I am well below the 100k MAGI mark and don't expect to get up there any time soon.

The rep I talked to at Vanguard said I could contribute $10000 to my SIMPLE and $5000 to my employer's, up to the total defered limit of $15000. Was he wrong on this? Anyway, that is how I arrived at the numbers I did:

My simple: 10k
Employer's SIMPLE: 5k
Regular Roth IRA: 4k
Total: 19k

Thanks again.

TRW
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No financial services company that I have called will pick up my company for a 401(k) because we are too small.

You want a "solo-401(k)" (also called "Solo-k"/"mini-k"/"single-k").

http://www.401khelpcenter.com/cw/cw_solo(k).html
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The rep I talked to at Vanguard said I could contribute $10000 to my SIMPLE and $5000 to my employer's, up to the total defered limit of $15000. Was he wrong on this? Anyway, that is how I arrived at the numbers I did:

My simple: 10k
Employer's SIMPLE: 5k
Regular Roth IRA: 4k
Total: 19k


While one should never rely on a mutual fund customer service rep for tax advice, this one was correct. The reason I questioned the $19,000 figure was that I didn't realize you were including a Roth contribution in that number.

Phil
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My simple: 10k
Employer's SIMPLE: 5k
Regular Roth IRA: 4k
Total: 19k

While one should never rely on a mutual fund customer service rep for tax advice, this one was correct. The reason I questioned the $19,000 figure was that I didn't realize you were including a Roth contribution in that number.

However, the total salary deferral amount across all Simples is $10,000. Only if the salary deferral of one of the plans was not a SEP would you be able to use the $15,000 deferral limit among all plans.

Also neglected was the matching employer contribution allowed for each Simple of 3% os salary.
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However, the total salary deferral amount across all Simples is $10,000. Only if the salary deferral of one of the plans was not a SEP would you be able to use the $15,000 deferral limit among all plans.

I initially thought this but was dissuaded by looking at the Code (IRC 408(p)). It looks to me like the $10,000 SIMPLE limit is per employer, not per employee.

Also neglected was the matching employer contribution allowed for each Simple of 3% os salary.

Even though the self employed wear both employer and employee hats, the employer match addition is not applicable to SIMPLE contributions by the self-employed. I bumped into this either in the Code or in Pub 525 or 590.

For the moment I have to stick with my original opinion that OP's $19,000 works, but I'm certainly open to argument. That could, as noted, be augmented by employer contributions from his "regular" job.

Phil
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