So far during IRA Awareness Week series, we have taken a look at the Roth and Traditional forms of Individual Retirement Accounts. Now we will finish by taking a look at the SEP and SIMPLE IRAs, those which people are the least familiar with, in no small part due to the fact that not many people have them. The vast majority of people use Roth or Traditional IRAs with 401(k) and similar plans rather than SEP or SIMPLE, so don’t worry if you don’t have one set up!
The SEP IRA
The Simplified Employee Pension IRA is the third variation of these types of account. Unlike the Roth and Traditional IRA programs, in most circumstances you do not fund your own SEP IRA – your employer does. Generally, they are used by small business owners to provide retirement benefits for themselves and their employees. Self-employed persons are the other primary users, but the rules are slightly different.
Fundamentally, the SEP IRA allows an employer to contribute to a Traditional IRA they establish in an employees’ name, rather than setting up a pension fund. This allows profit sharing plans (similar to 401(k) matching) up to 25% of the employees’ compensation or $42,000, whichever is less.
For more about the SEP IRA, visit the IRS webpage on the subject. (IRS Pub 560)
The SIMPLE IRA
The SIMPLE (Savings Incentive Match PLan for Employers) IRA is another form of simplified employee pension plan, available to businesses with fewer than 100 employees. It allows both you and your employer to make contributions (like a 401(k) plan) but has lower limits and lower administrative costs. Though it is called an IRA, it is treated somewhat differently for tax purposes.
Just like 401(k) plans, you contribute to the SIMPLE IRA via a pretax salary reduction, which your employer can choose to match (up to 3% of total salary). Alternatively, the employer is allowed to deposit a flat 2% of salary. The established contribution limits for SIMPLE plans are lower than for other types of retirement plans with employee matches: $10,500 for 2008 and $11,500 for 2009 (if you are under 50) or $13,000 and $14,000 respectively if you are over 50.
For more about the SIMPLE IRA, visit the IRS webpage on the subject. (IRS Pub 560)
Tags: goals, Income, investing, IRA, life, money, Retirement, savings, setting goals, traditional
