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Employee Pension Plans
(SEP) |
Employee Savings Match IRA
(SIMPLE) |
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Who It's For |
- Small Businesses with less than 10 employees
- Self employed individuals in any business type
- Salaried employees with businesses on the side (they may be eligible to contribute to a SEP IRA in addition to a 401(K) plan at their full time job)
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- Small business employers with 100 or fewer employees who want to set up an IRA program for their employees and either:
- Contribute to the their employees individual SIMPLE IRAs or,
- Match their employee’s contributions to their SIMPLE IRA
- Employees can also contribute to the SIMPLE IRA while also benefiting from their employer’s contributionsContributions are tax deducible to employer.
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Benefits |
- Contributions are tax deductible to employer
- Employer can choose whether or not to fund a SEP IRA plan each year.
- Earnings are tax-deferred until they are withdrawn from the SEP IRA
- Generally a SEP IRA plan is the simplest and least costly employee sponsored retirement plan
- Ability to select from a wide range of investments
- Easy to set up and administer
- No extra reporting to IRS is necessary
- SEP IRA helps to attract and retain employees
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- Contributions made on behalf of SIMPLE IRA plan participants are tax deductible to the employer
- Participating employee contributions are made with pre-tax dollars thus reducing employee’s taxable salary
- Earnings are tax-deferred until they are withdrawn from the SIMPLE IRA
- Employees select and control their own investments
- A SIMPLE IRA plan is less expensive to set-up and administer than a 401(k) plan
- No extra reporting to the IRS is necessary
- SIMPLE IRA helps the employer attract and retain employees
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Eligibility |
- Employer can require that:
- Employee must be 21 or older and/or
- Employee must be employed by the business for three out of the last five years of business
- Employee must have earned a cumulative wage of at least $450 from you the prior year
- Or an employer can have less restrictive requirements
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- Employer must have 100 or fewer employees and have no other retirement plan for any taxed year in which the SIMPLE IRA is maintained (unless the other plan is a retirement plan governed under a collective bargaining agreement)
- Employer must use IRA forms when setting up the plan
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Annual Contribution Limits |
- Maximum annual contribution limit for 2005 is between 0% and 25% of an employee’s compensation up to $41,000
- Employer makes all of the contributions
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- Employer can either
- Contribute up to 2% of compensation to all employees eligible to participate in the plan
- Dollar-for-dollar matching up to 3% of compensation for employees who make contributions to a SIMPLE IRA plan (The matching contribution may be reduced to 1% of compensation for two out of the five years.)
- Eligible employees can choose whether or not to participate in the plan
- They can invest up to $10,000 of their annual pre-tax salary for 2005
- If they are age 50 or older by 12/31/05, they can add an additional catch-up contribution of up to $50
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Contribution Deadlines |
Employer can make a SEP contribution up to the tax filing deadline (plus extensions) for the prior tax year
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- SIMPLE IRAs must be established no later that October 1st of the year they are effective
- Employee salary deferrals must be sent to the financial institutions as soon as reasonably possible
- Monthly contributions can be made up to the tax filing deadline (plus extensions) for the prior tax year
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Withdrawals |
- Withdrawals of taxable amountsfrom a SEP IRA are subject to ordinary income tax and if taken prior to age 59½ maybe be subject to a 10% penalty tax
- There may be exceptions to the penalty tax such as death, disability, home purchase, education, medical expenses, etc. (withdraw up to $10,000 in your lifetime for first home)
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- Withdrawals of taxable amounts from a SEP IRA are subject to ordinary income tax and if taken prior to age 59½ maybe be subject to a 10% penalty tax
- There may be exceptions to the penalty tax such as death, disability, home purchase, education, medical expenses, etc. (withdraw up to $10,000 in your lifetime for first home)
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Distribution Requirements |
Must begin to take contributions by April 1st of the year after you become 70½ years old
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Must begin to take contributions by April 1st of the year after you become 70½ years old
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Tax Deductions for Contributions |
Employer IRA contribution may have an impact on tax deductibility of contributions to individual IRA
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Eligible employees who want to participate can contribute pre tax dollars
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