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SIMPLE PLAN DEADLINE LOOMS

September 19, 2002

Many small businesses and self-employed taxpayers wait until the last quarter to start their year-end planning. Unfortunately, one arrow is no longer in the tax planning quiver by then: the “SIMPLE IRA” retirement plan. While most plans can be set up anytime before the end of the year, SIMPLE IRA plans must take effect by October 1 to apply to the current year.

HOW THEY WORK: SIMPLE IRA plans function somewhat like 401(k) plans. Employees designate an amount to be taken out of pay tax-free; this amount is contributed to an IRA for the employee designated “SIMPLE IRA.” Employees may defer up to $6,500 of compensation annually ($7,000 if they reach age 50 by year-end). The employer is generally required to match the contribution dollar-for-dollar, up to 3% of the employee’s compensation. Alternatively, employers can contribute up to 2% of compensation for all-employees on a non-match basis.

WHY THEY CAN BE ATTRACTIVE: They are, well, simple. They can be established by completing a short IRS form. Form 5304-SIMPLE sets up a plan where employees select their own IRA custodians; Form 5305 is used if all contributions are to be made to a SIMPLE-IRA “designated financial institution” selected by the company. Once contributions are made, the employer’s involvement is over. No annual Form 5500s are required, and the employer doesn’t have to select mutual funds for the employees to choose from. They are relatively easy and cheap to maintain.

WHY THEY AREN’T MORE POPULAR: Self-employed taxpayers often can make larger contributions to old-fashioned SEP-IRAs. The contribution limits for employees are larger under traditional 401(k) plans. They cannot be combined with traditional profit-sharing plans, so they preclude popular plan features that funnel benefits to owners.

WHO CAN USE THESE: SIMPLE IRA plans may be set up by businesses with no more than 100 employees earning over $5,000.

WHERE YOU CAN LEARN MORE: here

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