IRA, SEP, and SIMPLE Plans
Whether your retirement days are near or far, you should be up-to-date on the types of
retirement plans available to you and your employees. The plans you will hear most about
are IRAs, SEP and SIMPLE plans. In addition to providing for your retirement, they may
offer significant tax benefits today.
Individual Retirement Arrangement (IRA)
IRAs are plans that let you set aside money for your retirement. Banks, financial institutions, mutual funds, and stockbrokers are among those who offer IRA accounts.
Traditional IRAs. You can set up this IRA if you are under age 70 at the end of the year, and have taxable compensation greater than or equal to your contribution during the year. Generally, for 2003, you can contribute up to $3,000 ($3,500 if you are 50 or older); and it may be tax deductible in full or in part, depending on your circumstances. The amounts earned by your IRA contributions are usually not taxed until you withdraw the money. Generally, you can't withdraw money from your IRA before you turn age 59 without paying income taxes and a 10% additional tax.
Roth IRA. Regardless of your age, you may be able to set up a Roth IRA. In 2003, you can generally contribute up to $3,000 ($3,500 if you are 50 or older) a year depending on your income. This limit is reduced by any contributions you make to a traditional IRA. You can't deduct your contributions, but if certain requirements are met, earnings will be tax-free.
Self-employed people can participate in the following three plans even if their spouses are covered by a plan.
Qualified Plan
A qualified plan is one that meets the requirements of the Internal Revenue Code. You
can generally contribute more to a qualified plan than to a traditional IRA. For qualified
plans, total employer contributions for 2003 can be as much as 100 percent (up to a maximum
of $40,000) of the individual employee's compensation.
Simplified Employee Pension (SEP)
The SEP was specifically designed for small employers and has very few administrative
burdens or costs. The employer's contributions (which can be up to 25 percent of the
employee's compensation, or $40,000, whichever is less) are made directly to IRAs that
the employer sets up for the employees.
Savings Incentive Match Plan for Employees (SIMPLE)
Generally, an employer can set up a SIMPLE plan if he or she has 100 or fewer employees
and meets several other requirements. A SIMPLE plan is an arrangement under which an
employer makes contributions to employees' SIMPLE retirement accounts. The two types of
SIMPLE plans are the SIMPLE IRA and SIMPLE 401(k) plans.
See IRS Publication 590 (pdf), "Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs)," and IRS Publication 560 (pdf), "Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)."
Information courtesy of the Internal Revenue Service.
