Financial Planners: Help Your Clients Self-Direct Their Retirement Accounts

Fund a Private Money Loan Using Your IRA!

Choosing a Employer Retirement Plan: SIMPLE IRA

SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan. Available to any small business – generally with 100 or fewer employees Easily established by adopting Form 5304-SIMPLE, 5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan document Employer cannot have any other retirement plan No filing requirement for the employer Contributions: Employer is required to contribute each year either a: Matching contribution up to 3% of compensation, or 2% nonelective contribution for each eligible employee Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation Employees may elect to contribute Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money How does a SIMPLE IRA plan work? Example 1: Elizabeth works for the Rockland Quarry Company, a small business with 50 employees. Rockland has decided to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s compensation. Under this option, if a Rockland employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution. Elizabeth has a yearly compensation of $50,000 and contributes 5% of her compensation ($2,500) to her SIMPLE IRA. The Rockland matching contribution is $1,500 (3% of $50,000). Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year is $4,000 (her $2,500 contribution plus Rockland’s $1,500 contribution). The financial institution holding Elizabeth’s SIMPLE IRA has several investment choices and she is free to choose which ones suit her best. Example 2: Austin works for the Skidmore Tire Company, a small business with 75 employees. Skidmore has a SIMPLE IRA plan for its employees and will make a 2% nonelective contribution for each of them. Under this option, even if a Skidmore employee does not contribute to his or her SIMPLE IRA, that employee would still receive an employer contribution to his or her SIMPLE IRA equal to 2% of compensation. Austin’s annual compensation is $40,000. Even if Austin does not contribute this year, Skidmore must still make a contribution of $800 (2% of $40,000). Pros and Cons: Easy and inexpensive to set up and operate Employees share responsibility for their retirement No discrimination testing required Inflexible contributions Lower contribution limits than some other retirement plans Who Contributes: Employer must contribute and employee may contribute. Contribution Limits: Total contributions to each employee’s SIMPLE IRA are limited. Filing Requirements: An employer generally has no filing requirements. Participant Loans: Not permitted. The assets may not be used as collateral. In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59-1/2. Also, if withdrawals are made within the first two years of participation, the 10% additional tax is increased to 25%.

To SEP or To (K) -- That Is The Question.

A lot of small employers do not know what a SEP is. Although it is not the best plan for all businesses, under the right circumstances this type of retirement plan could be looked at as a cheap alternative to a 401(k).

Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.

The characteristics of a SEP are as follows:

• Available to any size business
• Easily established by adopting Form 5305-SEP, a SEP prototype or an individually designed plan document
  • If Form 5305-SEP is used, cannot have any other retirement plan (except another SEP)
• No filing requirement for the employer
• Only the employer contributes
  • To traditional IRAs (SEP-IRAs) set up for each eligible employee
  • Employee is always 100% vested in (or, has ownership of) all SEP-IRA money

How does a SEP work?

Jed works for the Rambling RV Company. Rambling RV decides to establish a SEP for its employees. Rambling RV has chosen a SEP because the RV industry is cyclical in nature, with good times and down times. In good years, Rambling RV can make larger contributions for its employees and in down times it can reduce the amount. Rambling RV’s contribution rate (whether large or small) must be uniform for all employees. The financial institution that Rambling RV has chosen for its SEP has several investment funds from which to choose. Jed decides to divide the contribution to his SEP-IRA among three of the available funds. Jed, an employee, cannot contribute because SEPs only permit employer contributions.

Pros and Cons:

• Easy to set up and operate
• Low administrative costs
• Flexible annual contributions – good plan if cash flow is an issue
• Employer must contribute equally for all eligible employees

In a nutshell:

Who Contributes: Employer contributions only

Contribution Limits: Total contributions to each employee’s SEP-IRA are limited.

Filing Requirements: An employer generally has no filing requirements.

Participant Loans: Not permitted. The assets may not be used as collateral.

In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59 1/2.