Simple IRA's / SEP IRA's / Retirement Funding

Lien, age 35, recently left his employer, GoGoRoller, a roller blade manufacturer. He left after 18 months because the working conditions were unbearable. GoGoRoller sponsored a SIMPLE IRA. Lien deferred $3,000 into the plan during his time there and the employer contributed $1,500. When he terminated he withdrew the entire account balance of $4,750. Assuming he is in the 12% tax bracket, what is the tax and penalty consequence for this distribution?

$1,757.50 SIMPLE IRAs require a 25% penalty for early withdraws in the first two years if the participant does not meet any of the early withdrawal exceptions. He does not meet any of the exceptions and the distribution is within the first two years. The breakdown of employee deferrals, employer contributions and earnings is irrelevant. Contributions on behalf of Lien were $4,500 plus $250 of growth for a total of $4,750 in the account. Therefore, his tax and penalty consequence is $1,757.50 = $4,750 × 37%. The 37% is represented by 12% tax plus 25% penalty.

- Maximum contribution into a SEP - modification for owner

- 25% or $20,000 per employee. - The modification for the owner, a self-employed person is, would be: EE contribution % / 1 + EE contribution %.

simple IRA - max employer match - max employee contribution

- The compensation limit of $330,000 applies to SIMPLE IRAs is $9,900 (330,000 x 3%) max. - The employee can contribute up to 100% salary, or max of $15,500 for 2023. - 50 years old or older may make an additional catch-up contribution of $3,500

SEP-IRA plans are unique from defined contribution plans in which of the following areas: 1. Length of permissible exclusion from coverage based upon service. 2. Establishment date of the plan. 3. Income requirements for participation. 4. Can be paired with another plan.

1 and 3 - Employees can be excluded up to 3 years or age 21, whichever is longer. Employee needs to earn only $750 (2023) to be included in the plan. - defined contribution plans have a deadline by september 15. SEP IRA can be established and funded up to the date of filing the entity tax return, including extensions. SECURE Act 2019.

A SEP-IRA is a form of defined contribution plan (although not a qualified plan). Which of the following apply to BOTH the SEP-IRA and a traditional defined contribution plan? 1. Employer deductions limited to 15% of covered payroll. 2. Requires a definite, written, non-discriminatory contribution allocation formula. 3. Contributions cannot discriminate in favor of highly compensated employees. 4. Employer contributions subject to Medicare and Social Security taxes. 5. Affiliated service group rules apply. 6. Top-heavy rules do NOT apply. 7. Permissible disparity or integration is NOT allowed.

2, 3, and 4 only. Defined contribution plans have an employer deductibility limit of 25% of covered payroll. All defined contribution plans must have a written allocation formula so assets can be distributed in the mandated individual accounts. Employer contributions must bear uniform resemblance to compensation and cannot discriminate in favor of highly compensated. Employer contributions are not subject to any payroll related taxes. Top-heavy rules do apply to both. Both plans can integrate with Social Security (sometimes called permissible disparity). (Note: 5305-SEP does not allow permissible disparity.)

Which one of the following is a possible disadvantage of a Simplified Employee Pension plan (SEP) for an employer? A. A SEP must have a fixed contribution formula that is non-discriminatory. B. SEPs prohibit forfeitures.

B is correct "A" is a mandatory characteristic of all qualified defined contribution pension plans but not profit sharing plans.

Your client has been a business owner for six years. He recently established a SEP for his business. He has two employees of 24 months making $22,000 per year. He asked you to use the statutory maximum exclusions for all employees, including himself. He has self-employment earnings of $78,000. Assume he has self-employment tax of $11,000. The maximum plan contribution to the owner's account will be:

Maximum contribution is 25%. Because he is self-employed, the "S/E haircut" is required. The haircut is calculated at $78,000 less 1/2 of 11,000 ($5,500) = 72,500; then multiply by 20% (.25/1.25). Therefore, the maximum contribution is $14,500.

Satish has AGI of $74,000 (which is all comprised of earned income). She is single and age 51. Her employer made a $6,300 contribution to her SEP for the current year. What is her available deduction allowed for a Traditional IRA contribution?

She can contribute to a Traditional IRA since she has earned income. She is considered an active participant because her employer made a contribution to the SEP on her behalf. Her deduction will be limited because she is within the AGI limitation for a single active participant ($73,000 - $83,000) (2023). She is also entitled to the catch up contribution of $1,000 because she is 50 or older. Therefore, her deductible contribution is: 7,500 × ((74,000 - 73,000)/10,000) = $750 is not allowed so $7,500 - $750 = $6,750 is permitted.

Farmer Fred

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