SIMPLE IRA + traditional IRA contribution?

Submitted by Patricia Passon on Tue, 2017-10-31 01:04

Client has both 1099 and W2 income. We have a SIMPLE IRA set up for the 1099 income. She is not set up as LLC or S Corp, just Schedule C filing. She is over 50 and not married. This year her net income is ~$12,000. I know that she can contribute the full amount of her net income. My question is regarding the ’employer’ contribution. Do we need to reduce her ’employee’ contribution so that she makes the 3% match ’employer’ contribution and it all fits within the net income? I realize that the employer contribution will further reduce her net income and perhaps that needs to be taken into account as well.

Second part of the conundrum … she has no employer retirement plan for the W2 income. Does the fact that she contributes to a SIMPLE for her 1099 income cause the income limits to come into play for deductibility of a traditional IRA contribution? In other words, does any retirement plan eligibility cause income limits to be tripped even though it applies to a different income source?

Thank you.​



Submitted by William Tuttle on Tue, 2017-10-31 04:34

  • Employer contributions for a SIMPLE IRA are mandatory, even for self-employed owners with no non-spouse employees.
  • Compensation = SIMPLE IRA net earnings which are calculated differently from a SEP IRA and a one-particiant 401k and is not reduced by the employer contribution. It is taken from Schedule SE; Line 4 short form or Line 6 long form. In most cases = net business profit * 92.35%, Most online calculators get this wrong. I use the Vanguard plan contribution calculator which is correct.
  • With $12,000 of net business profit, the maxium employee deferral is $11,082.00 and the required employer match is $332.46.
  • If the client is likely to have increased net business profits in the future, they should really adopt a one-participant 401k. They would be able to contribute 100% of net self-employment earnings up to $30,000. There is seldom a compelling reason to use a SIMPLE IRA when the business has no employees other than the owner(s) and optionally their spouse(s).
  • Almost forgot, yes self-employed SIMPLE IRA contributions make her an “active participant” in an employer retirmeent plan subject to the traditional IRA deduction lncome limit.

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