Common Ownership SIMPLE IRA SEP IRA
Client left employer over the Summer to start her own company (Single member LLC with no employees) and her accountant suggested opening a SEP IRA. We also discussed a solo 401(K). Her husband owns a company (over 50%) and his company has a SIMPLE IRA. She has a 5% ownership in her husband’s company however takes no salary or works there.
We are getting feedback she most likely cannot do a solo 401(k) or a SEP IRA due to control group rules and she is eligible for the SIMPLE IRA. Any insight as to a retirement plan or type of IRA she can establish for herself? How can she contribute to the SIMPLE IRA if she is not an employee or works at her husband’s company?
Permalink Submitted by William Tuttle on Wed, 2021-11-24 21:16
If a spouse is employed in or has any ownership in the other spouse’s business they are considered to have each other’s ownership interest in each other’s businesses by family attribution. There Note: Even if the above was not true, simply having a minor child together also invokes the family attribution rules.
Since they both are considered to own > 50% in one business and 100% in the other. They are considered in a Brother-Sister Controlled Group and thus considered one employer for employer retirement plan purposes, she can not adopt her own employer retirement plan.
However, she is eligible for the SIMPLE IRA because she is consider an employee of the Controlled Group employer.
Permalink Submitted by David Berdow on Wed, 2021-11-24 21:54
How does she contribute to her husband’s company SIMPLE IRA if she is not an employee. Does she jsut open an account and write a check? Will there be a match as well?
Permalink Submitted by William Tuttle on Thu, 2021-11-25 02:40
I’m not entirely sure of Controlled Group logistics, but here is what makes sense by inference.
Opening the SIMPLE IRA account is fairly straightforward. All personal IRA accounts (traditional and Roth) and for employer plans (SEP and SIMPLE) are individual accounts opened by the individual. The only difference with SEP and SIMPLE IRAs is that they must be opened under the sponsoring employer’s plan.
A W-2 employee’s employee deferral must be deducted by the employer and deposited within 30 days after the end of the month of the deduction. Employer contributions must be deposited by the employer’s tax filing dealine including extensions.
Since a self-employed individual’s compensation is deemed earned on the last day of the year. They have until 1/30 of the following year to deposit their employee deferrals. They also have until their tax filing dealine including extensions to deposit their employer contributions.
Based on this, I would think you can directly deposit your employee deferrals and employer contributions yourself. I leave open the possibility that the SIMPLE IRA custodian may require the deposits to come from the business that adopted the SIMPLE IRA. In that case, you would send the deposits to the SIMPLE IRA sponsor for forwarding.
Note: The way you calculate maximum SIMPLE IRA employer contributions is different than for SEP IRA and one participant 401k plans. Also, the percentage calculation is a little tricky. Refer to IRA Publication 560; Chapter 3, SIMPLE Plans and Chapter 6. Table and Worksheets for the Self-Employed.
Permalink Submitted by David Berdow on Wed, 2021-12-01 14:06
Person over 50 contrbuted $4,333.36 to their employer sponsored 401k earlier this year. How much can they contribute to the SIMPLE IRA?
Permalink Submitted by William Tuttle on Wed, 2021-12-01 17:35
Their Maximum SIMPLE IRA employee deferral is the lessor of the employee deferral limit (2021 = $19,500) – the $4333.36 401k deferral = $15,166.64 or the SIMPLE IRA deferral limit (2021 = $13,500, + $3,000 catch-up contribution >= age 50 = $16,000). So the answer would be $15,166.64.
Permalink Submitted by David Berdow on Wed, 2021-12-01 17:50
Thank you and there is still a match which can be provided for the SIMPLE correct?
Permalink Submitted by William Tuttle on Thu, 2021-12-02 03:27
Correct