SEP vs. SIMPLE IRA
Hi,
My father is a sole proprietor with a SEP IRA for his business right now. Based on his lower than expected income this year, I think it makes more sense to have him open a SIMPLE IRA because he will be able to contribute more to this plan. However, I am not sure whether he is allowed to have the SEP IRA and SIMPLE IRA both. He would not contribute to the SEP this year but the account would remain open. Does anyone know if there are any rules on whether or not he can keep the SEP open and open a SIMPLE before Oct.1 of this year? Or, would it possibly make sense to roll the SEP into his existing traditional IRA and then just use the SIMPLE going forward? I don’t envision him contributing more than $13k per year (he is 53) in 2008 to the SIMPLE or in future years.
Thanks in advance for the help!
Permalink Submitted by BruceM on Wed, 2008-07-30 13:48
If he is using the IRS model 5305-SEP, he may not contribute to another retirement plan of the same employer. And the rule for SIMPLE plans is that they cannot coexist with another retirement plan. And the IRS really isn’t concerned with a SEP being ‘open’, only whether contributions have been made to the plan for the year.
But at his income level, it is likely that he would be able to contribute more $$ with a SIMPLE IRA than a SEP.
BruceM
Permalink Submitted by [email protected] on Wed, 2008-07-30 13:51
Hi Bruce,
He will definitely be able to contribute more with the SIMPLE. My current idea was to close the SEP and roll it over into his traditional IRA and then open up a SIMPLE before Sept. 30. Does this seem prudent?
Permalink Submitted by BruceM on Mon, 2008-08-04 06:11
As I’d mentioned, a SEP is netiher ‘open’ or ‘closed’. It can exist by itself for as long as the employee wishes. The question is whether the employer contributed to the SEP for himself and the employee already for the year. If so, then the employer cannot offer another plan for this year if its a model 5305-SEP. But unlike a qualified plan, the employer doesn’t have to formally discontinue the SEP for the next year in order to offer another plan, such as a SIMPLE IRA. However if he does, he’ll have to follow the rules in offering the SIMPLE IRA by providing notifification of its availability to employees, allowing them to make salary deferral elections prior to the beginning of the plan year. Take a look at the instuctions for setting up a 5303- or 5304 SIMPLE at
http://www.irs.gov/retirement/sponsor/article/0,,id=139831,00.html
BruceM