Q. My question is about whether I can set up a new, deductible SIMPLE IRA in the same tax year I participated in a corporate retirement plan and 401(k) account. I retired early in the year, after making some contributions in the first quarter. I’m now working as an independent consultant and would like to set aside some of my consulting income. What do you think about SIMPLE IRAs?
A. A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA is a good retirement plan for a small business.
A brief explanation of this plan follows:
All compensation up to contribution limits can be contributed to the plan. Limits for 2014 are $12,000. A catch-up contribution of an additional $2,500 is allowed for those participants who are 50 or older.
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The SIMPLE IRA plan is only available for businesses with 100 or fewer employees. The plan must be set up by Oct. 1 for the plan to be effective this year. Contributions will be treated as made in a particular tax year if they are designated for that tax year and made by the tax return due date, including extensions, of your federal return.
An employer match is required. This is generally 3 percent of the employee contribution. You can reduce this to a 1 percent match every two years of a five-year period. If you don’t want to match employee contributions, you can contribute 2 percent on behalf of each eligible employee regardless of their participation in the plan.
The SIMPLE IRA plan must be the only retirement plan to which you make contributions for your business. If a participant meets the qualifications to contribute to a Roth IRA, contributing to a SIMPLE IRA will not affect their ability to do so.
If an employee is also a participant in another employer’s retirement plan they are subject to an overall limit in salary reduction contributions. For 2014, the limit for 401(k) plans is $17,500 with an additional $5,500 catch-up for those 50 or older. You need to review your contributions at your previous employer and determine your total 401(k) contributions and any other salary deferrals to qualified plans to know what amount you can contribute to a SIMPLE plan for 2014.
If you want to save more money on a pre-tax basis than the SIMPLE IRA allows, you may want to consider establishing a solo or individual 401(k). Up to certain limits, your company can provide a 25 percent match to your contributions. Tax reporting is more complex for this type of plan, but only once it is of substantial value. A Form 5500 must be filed once the account value reaches $250,000.
As always, a meeting with a tax professional is suggested when determining which retirement plan would be the best fit for your personal business situation.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624