SIMPLE Retirement Plans for Self-Employed Individuals: A Comprehensive Guide

This article is part of a series on self-employed retirement plans, and was written by Robert D. Flach. Robert has been preparing business and individual tax returns for people in all walks of life since 1972. He writes the tax blogs THE WANDERING TAX PRO.

SIMPLE Plan

Another simple self-employed retirement option is the SIMPLE plan. Here SIMPLE stands for “Savings Incentive Match Plan for Employees”. A SIMPLE plan is a “compensation” deferral plan, similar in concept to the basic employer-sponsored 401(k).

Plan establishment and contribution deadlines. A SIMPLE plan must be established by October 1st of the first tax year the plan is to be effective.  So if you do not already have one in place it is too late to be able to contribute to a SIMPLE for 2008. Once the plan is set up you have until the due date of the 1040, including extensions, to actually make the contribution. If you had established a SIMPLE in 2007 you have plenty of time to make a contribution for 2008.

Where to open a SIMPLE Plan. Small business retirement plans are found with many major brokerage houses, including Vanguard, Fidelity, Merrill Edge, TD Ameritrade, Charles Schwab Investments and more.

Contribution limits. Because it is a deferral of compensation a SIMPLE has lower contribution limits. The maximum contribution you can make to a SIMPLE for 2008 is $10,500, plus an additional $2,500 if the “employee” will be age 50 or older at the end of 2008. For 2009 the basic maximum jumps to $11,500, with the same additional $2,500 “catch-up” contribution allowed.

The amount of “employee” contribution allowed to be made to a SIMPLE is not limited to a percentage of the business profit. You can contribute as much as 100% of the net profit reported on Schedule C or C-EZ, up to the statutory dollar maximum. If the profit for 2008 is $10,000, the maximum contribution is $10,000. If it is $25,000, the maximum is either $10,500 or $13,000 depending on the individual’s age.

Employer match required. A SIMPLE plan also requires an employer match of 1% to 3%. So a self-employed “owner-employee” with $25,000 in net profit can set aside as much as $13,750.

Benefits of SIMPLE Plan

One of the benefits of a SIMPLE plan to the owner is that it allows a business with lower net profit to set aside a larger percentage of that profit for retirement. It is excellent for a sideline business where the owner has sufficient other sources of income (i.e. W-2 wages) to cover living expenses and does not need the business income. Here are some additional benefits to investing with a SIMPLE Plan:

Immediate vesting. As with a SEP IRA, SIMPLE contributions are made to a traditional IRA account, and participants are “100% vested” at the moment the contribution is made.

Traditional or Roth options. A taxpayer can contribute the maximum to both a SEP-IRA or a SIMPLE-IRA and a “regular” traditional or, if he/she qualifies, a ROTH IRA. If you qualify, check out where to open a Roth IRA account information here.

Minimal costs. In the case of both the SEP-IRA and the SIMPLE-IRA the costs to establish the plan are minimal, if any.  And there is no required annual paperwork – no filing of a return or report with the government.

Here is more information about Self-Employed Retirement Plans.