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SIMPLE IRAs for self-employeds


steve-o
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I have a client who wants to start a SIMPLE IRA. She has a Schedule C and makes about $10-15 K per year. Can she still start a SIMPLE IRA for 2005? I know if there are other employees, they must be given a 60-day notice period. However, can that be waived in the case of a self-employed individual with no other employees?

Also, does the salary reduction have to be made in advance? That is, for 2006, would she have to give notice of how much to defer by 12/31/05? This can't be done at the end of the year as a tax planning tool, can it?

If she currently has a SEP agreement in place, would this preclude her from having a SIMPLE IRA for 2005 anyway? Or could the SEP be terminated and then the SIMPLE IRA be started in its place?

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A SIMPLE has to be started by Oct 1, unless it's a new employer coming into existence after Oct 1.

A salary deferral election has to be in place before the money is earned - for a sole proprietor, that's Dec 31.

The mere existence of a SEP isn't a problem, IMO, but making contributions to it for a given year will invalidate the SIMPLE for that year.

Ed Snyder

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Right... there is no exception to the October 1 deadline for self-employed individuals with no employees.

You may already know this- but for the benefit of someone who may not…. if a business owner did complete the Form 5304 or 5305-SIMPLE by October 1, the deadline to establish has been satisfied-even if the financial institution was not presented with the paperwork until after October 1….just want to mention that as I find many client confuse ‘establishing the plan’ , with ‘opening the account’…

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Good point, but...financial institutions may have that same confusion. I've had them refuse to open an accont because they didn't have the paperwork in their hands, proving the plan was established, "shortly" after Oct 1.

(Actually, my memory is a little fuzzy...I may have just called and asked this as a general question and then learned to be careful, but the point is that it's a potential problem.)

Ed Snyder

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You are right Bird. I too have had such experiences…The challenge is that ( in many cases) the staff members at the financial institutions are not retirement plan experts , and they are usually not familiar with the retirement plan rules- except for contribution limits, deadlines to establish plans ( without understanding the difference between opening an account and establishing a plan) and other basic rules…not their fault. They are trying to what they think is right and may appreciate being educated. When you know they are wrong- demand to speak with a manager …

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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  • 3 weeks later...
Guest archimedes_pie

So.....

Could the owner create paperwork showing the plan was established on time but, no one participated until the last month of the year, when they received a bonus? Thus, after there was a need to establish an "account" the financial instituion was contacted, and an account needed to be opened for the year, which just passed. Then deposits could be made to the previous year, up till the last day of January (assuming only a single employee deferal was made in late Dec), and if the employee deferral was more than 3% of his or her wages for the year, the employer would also match 3% of all wages for the year. Is this a work-around? that would work?

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