Gary in Indiana--what is a SIMPLE IRA? : LUSENET : Country Families : One Thread


regarding my earlier post on how homesteaders save for retirement, Gary mentioned a SIMPLE IRA. Is this the same as a SEP? I have a SEP (and a Roth and a traditional). I am able to have the SEP because I am self employed. But Gary's description of the SIMPLE sounded like I could contribute more to a SIMPLE than a SEP. Just curious.

thanks in advance.

-- Cat (, January 02, 2002


Gee... I've never been a 'Subject' before. ;o) First, a disclaimer; I am in no way, shape, manner, form or function any kind of expert in finance, financial planning, retirement planning or anything related thereto. What I'll tell you is based on what I believe to be good information. I'm not trying to mislead anyone or sell anything here. As with anything you read on the internet, use it as a starting point to do your own research. That having been said, here goes.

In a SIMPLE (Savings Incentive Match PLan for Employees/Employers) IRA participants are allowed to contribute up to $6,000 annually. In addition to that the employER may match their contribution up to 3% of that employEE's gross annual income. It's a wonderful deal and you can still contribute the statutory limit to your regular or Roth IRA above and beyond the $6,000.

Here's the one 'catch,' as I see it. This plan must be offered to ALL qualified employees. The idea there, I believe, is to make certain it's not used solely as a vehicle to allow the owner to shelter money without allowing employee participation. If you are a sole proprietor or a partner in a business with no other non-partner employees, however, you ARE allowing ALL employees to participate. It just happens that ALL employees ARE owners. ;o)

In my case, I have a sole proprietorship with one SIMPLE plan and am an equal partner with one other person in another venture which has it's own SIMPLE plan. With a regular IRA besides, that's over $14,000 I can put into qualified tax deferred retirement accounts.

My understanding is that with a SEP there are situations where you can contribute more than with a SIMPLE plan based solely on income as the SEP has either no upper limit or a very high upper limit. For example, if the SEP limit is 6% of earnings and you earn $250,000 you would be better off with a SEP as your contribution would be $15,000 (6% of $250,000) as opposed to the SIMPLE plan which would allow me to contribute a total of $13,500 ($6,000 plus $7,500 [3% of $250,000]). Let me be very clear here and state I do not recall right now what the SEP rules are and only used this as an example. In any event, you'll need to do some old fashioned algebra to determine which allows you to contribute more. Keep in mine your obligations on employee participation and employer matching contributions if you do employ 'outside the family.'

While I would love to have to worry about which plan would be best for me (and have the income to warrant that concern), I don't. I figure for me, for now, for the businesses I have, the SIMPLE plans are the way to go. I'm not recommending them to you or anyone else. The only thing I do recommend is that you exercise your own due diligence and make your decision accordingly. ;o) I hope this helps.

-- Gary in Indiana (, January 02, 2002.

thank you very much, Gary.

-- Cat (, January 03, 2002.

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