Self-Employed Individual: SEP-IRA & SIMPLE IRA Plans
I have a potential new client that is self-employed (sole proprietorship & no other employees) and currently has a SIMPLE IRA plan for her business. However, in 2010 she has not made any contributions to the SIMPLE IRA plan. She would like to establish a SEP-IRA instead for 2010 to maximize her allowable contributions. The potential client’s CPA called me as the client’s current advisor told her she couldn’t establish or fund the SEP-IRA for 2010. My initial research indicates the current advisor is not correct. I found the following FAQs on the IRS’ web-site (http://www.irs.gov/retirement/article/0,,id=111419,00.html#4) and wanted to check with this Forum to see if I’m missing anything:
If an employer has a SEP, can it also have other retirement plans? An employer can maintain both a SEP and another plan. However, unless the other plan is also a SEP, the employer cannot use Form 5305-SEP; the employer must adopt either a prototype SEP or an individually designed SEP.
________________________________________
Is there a deadline to set up a SEP?
A SEP can be set up for a year as late as the due date (including extensions) of the business’s income tax return for that year.
Based on these facts as I understand them, do you agree the self-employed client can establish and fund a SEP-IRA in 2010 despite having a SIMPLE IRA plan in place? Thanks in advance.
Permalink Submitted by Alan Spross on Tue, 2011-03-15 19:34
I agree with you. The following SIMPLE IRA requirement is copied from Form 5305 SIMPLE and is also part of 5304 SIMPLE:
>>>>>>>>>>>>>>>>>>>
2. You do not maintain during any part
of the calendar year another qualified
plan with respect to which contributions
are made, or benefits are accrued, for
service in the calendar year. For this
purpose, a qualified plan (defined in
section 219(g)(5)) includes a qualified
pension plan, a profit-sharing plan, a
stock bonus plan, a qualified annuity
plan, a tax-sheltered annuity plan, and a
simplified employee pension (SEP) plan.
>>>>>>>>>>>>>>>>>>>>
Based on this wording, it appears if you established your SIMPLE IRA, you could then set up a SEP IRA with it’s later deadline date. Making a SEP contribution appears to nullify the SIMPLE IRA for the calendar year. Of course, there are other problems if you funded the SIMPLE IRA, but in this case it would likely not be funded since many self employed do not determine their net earnings until they do their tax return.