Simple-IRA for new sole propritor.

[Moe Howard]

Sole proprietor started his business on 11/20/01. He will probably have net profit of $15,000 between 11/20/01 - 12/31/01. He has no employees.

He wants to establish a Simple-IRA for calendar year 2001, within the next few days.

MY QUESTIONS:

1) Can he contribute a max of $ 6,950 to his new Simple-IRA account for year 2001 (if he does in fact have $15,000 net profit from 11/20/01 - 12/31/01) ..... comprised as follows ?

$6,500 elective deferral + $450 [3% match on $15,000 income] = $ 6,950

2) By what deadline must he contribute the $6,500 elective deferral ?

3) By what deadline must he contribute the $ 450 match ?

4) For next year (2002) ... must he contribute his elective deferrals monthly ? ... or can he wait and make one big lump contribution for the whole year 2002 ?

5) Since he gets no salary check from his business (remember he is a sole-proprietor) ... are the words "elective deferals" & "match" the proper terms to use when discussing his contributions.

[Gary Lesser]

** An existing employer may establish a SIMPLE IRA Plan effective on any date between January 1 and October 1 of a year beginning after December 31, 1996, provided that the employer (or any predecessor employer) did not previously maintain a SIMPLE IRA Plan. This requirement does not apply to a new employer that comes into existence after October 1 of the year the SIMPLE IRA Plan is established if the employer establishes the SIMPLE IRA Plan as soon as administratively feasible after the employer comes into existence. If an employer (or predecessor employer) previously maintained a SIMPLE IRA Plan, the employer may establish a SIMPLE IRA Plan effective only on January 1 of a year. [iRS Notice 98-4, K-1]

1) Can he contribute a max of $ 6,950 to his new Simple-IRA account for year 2001 (if he does in fact have $15,000 net profit from 11/20/01 - 12/31/01) ..... comprised as follows ? $6,500 elective deferral + $450 [3% match on $15,000 income] = $ 6,950

** Almost so. $15,000 x .9235 = $13,852.50 = (NESE under IRC 1402) x 3 percent = $415.58 match.

2) By what deadline must he contribute the $6,500 elective deferral ?

** Generally, as soon as they can be reasonably segregated from the business assets, but not later than 15 days after the end of the month in which the payroll deduction was made. Note: partnerships may have a longer period; that is, not until the net income/loss is determined (and then the above rule applies). [see Preamble to proposed plan asset regulations [ERISA Reg 2510.3-102] It is not clear whether the partnership rule can be extended to a sole proprietor.

3) By what deadline must he contribute the $ 450 match ?

** By the due date of the business tax return (but only $415.58).

4) For next year (2002) ... must he contribute his elective deferrals monthly ? ... or can he wait and make one big lump contribution for the whole year 2002 ?

** Can wait, but must complete election forms before end of year (before profits are determined at 12 p.m. on Dec 31).

5) Since he gets no salary check from his business (remember he is a sole-proprietor) ... are the words "elective deferals" & "match" the proper terms to use when discussing his contributions

** Yes.

[Guest SteveHample]

Thanks for mentioning the adustment in the 3% match for self employment tax. I feared some type of circular logic adjustment for the "profit after the 3% profit incentive had been deducted". Remaining question is where to report it, different CPAs have given different answers over the past years.

E.g., the hypothetical sole proprietor now goes to report the $415.58. Does he simply add this to the $6,500 and enter $6,915.58 on his 1040 line 29 IRA adjustments? (some tax software has kicked that out in past years) Or does he enter it on Schedule C?

Thanks.

[Gary Lesser]

The entire amount is claimed as an adjustment/deduction on line 30 -"Self-employed SEP. SIMPLE, and qualified plans" of Form 1040. Contributions for nonowners are claimed on the Schedule C.