• How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.
• Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.
• If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.
• Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.
• You can do the following quick computation to determine whether some of your benefits may be taxable:
  • First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.
  • Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.
• The 2010 base amounts are:
  • $32,000 for married couples filing jointly.
  • $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
  • $0 for married persons filing separately who lived together during the year.

Links:
Publication 915, Social Security and Equivalent Railroad Retirement Benefits

Note:
Social Security Benefits are exempt from North Carolina income even if taxable on the federal return.

 

Roth IRA 5 year rule. Withdrawals from your Roth IRA will only be classified as qualified distributions if it has been at least 5 years since you first opened and contributed to your Roth IRA, regardless of your age when you opened it. As an example, you can normally make penalty free withdrawals at age 59½, but if you made your first contribution at age 58, you would need to wait until age 63 to withdraw any earnings made on that portion of your contributions.

There are exceptions to these rules. Read on to learn more about qualified and non-qualified distributions, and as always, consult with a financial professional if you have any questions before you make any withdrawals or distributions.

Roth IRA Qualified and Non-qualified Distributions

It is important to understand the difference between qualified and non-qualified distributions before making any withdrawals or taking distributions from your Roth IRA. Provided your it meets the 5 year rule, a qualified distribution from your Roth IRA will be both tax and penalty free, which is important because either of these can seriously erode any gains your investments may have earned. A non-qualified distribution may trigger both taxes and early withdrawal penalties, decimating the value of the investments in your Roth IRA.

Qualified distributions. Qualified distributions are withdrawals that are both tax and penalty free. In most cases, withdrawals made after age 59½ will be qualified distributions, provided they meet the 5 year rule for investment gains. According to IRS Publication 590:

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
2. The payment or distribution is:

• Made on or after the date you reach age 59½,
• Made because you are disabled,
• Made to a beneficiary or to your estate after your death, or
• One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

Non-qualified distributions. Non-qualified distributions are withdrawals which do not meet the requirements of a qualified distribution, and may be subjected to taxes or early withdrawal penalties. In many cases, non-qualified distributions will be taxed as ordinary income and be subjected to the 10% early withdrawal penalty.

Exceptions to early withdrawal penalty (aka 10% penalty)

There are some exceptions that allow you to make withdrawals from your Roth IRA that are subjected to ordinary income taxes, but are not subjected to the 10% early withdrawal penalty. Some of these include:

• The distributions are part of a series of substantially equal payments (minimum five years or until the Roth IRA owner reaches age 59½, whichever is longer).
• You have unreimbursed medical expenses exceeding 7.5% of your Adjusted Gross Income (AGI).
• You are paying medical insurance premiums after losing your job.
• The distributions are not more than your qualified higher education expenses (for yourself or eligible family members).
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.
• The distribution is a qualified disaster recovery assistance distribution.
• The distribution is a qualified recovery assistance distribution.

Order of Roth IRA Distributions

The IRS makes it easier for taxpayers to make penalty free withdrawals from their accounts by the way they assign the order of IRA withdrawals. Again, referring to IRS Publication 590, Roth IRA distributions occur in the following order:

1. Regular contributions.
2. Conversion and rollover contributions, on a first-in first-out basis.
3. Earnings on contributions.

As you can see, regular contributions are the first to be withdrawn, and they can be withdrawn at any time without taxes or penalties. The taxable portion of your withdrawals is held until the end, making it easier for you to make a penalty free withdrawal.

Roth IRA Withdrawals for first home purchase or college expenses

Roth IRAs have a feature that allows account holders to make qualified distributions for a first home purchase or for qualified college expenses.

First home purchase withdrawal from Roth IRA. Early Roth IRA withdrawals for the purchase of a first home are allowed up to a $10,000 life time maximum per account. Withdrawals can be made for the purchase of your first home, or the benefit can be used for your children or grandchildren. However, the $10,000 limit is always in effect, regardless of who the money is used for.

Using a Roth IRA for college expenses. You can avoid early withdrawal penalties associated with early Roth IRA distributions if you use the funds for qualified higher education expenses for yourself, your spouse, your children, or their descendants.

Pros and Cons of early Roth IRA withdrawals

The ability to make tax and penalty free withdrawals from Roth IRAs is a level of flexibility not found in most other retirement accounts. But just because you can do it doesn’t mean you should. Even though you may not pay any taxes or penalties to withdraw some of your funds, doing so may hurt your long term retirement planning.

Roth IRAs offer a great tax diversification strategy and making early withdrawals, qualified or not, hampers your retirement planning and limits the amount of money you will have in retirement. Compound interest is one of the most powerful forces in the universe, but making withdrawals limits the amount of money you have working for you and reduces the amount of time your money has to compound, effectively reducing your potential retirement nest egg. I recommend looking at all options before making early withdrawals from your Roth IRA.

Source: Cashmoneylife

 

Credits are the “building blocks” we use to find out whether you have the minimum amount of covered work to qualify for each type of Social Security benefits. If you stop working before you have enough credits to qualify for benefits, your credits will stay on your record. If you return to work later on, you can add more credits so that you can qualify. No benefits can be paid if you do not have enough credits.

Previously called “Quarters of Coverage.” As you work and pay taxes, you earn credits that count toward your eligibility for future Social Security benefits. You can earn a maximum of four credits each year. Most people need 40 credits to qualify for benefits. Younger people need fewer credits to qualify for disability or survivors benefits.

The credits are based on the amount of your earnings. We use your work history to determine your eligibility for retirement or disability benefits or your family’s eligibility for survivors benefits when you die.

Each year the amount of earnings needed for credits goes up slightly as average earnings levels increase. The credits you earn remain on your Social Security record even if you change jobs or have no earnings for a while

In 2011, you receive one credit for each $1,120 of earnings, up to the maximum of four credits per year.

How long must you work to qualify for Social Security?

The number of credits you need to be eligible for benefits depends on your age and the type of benefit.

Retirement benefits

Anyone born in 1929 or later needs 10 years of work (40 credits) to be eligible for retirement benefits. People born before 1929 need fewer years of work.

Disability benefits

How many credits you need for ­disability benefits depends on how old you are when you become disabled.

• If you become disabled before age 24, you generally need 1½ years of work (six credits) in the three years before you became disabled.
• If you are 24 through 30, you generally need credits for half of the time between age 21 and the time you became disabled.
• If you are disabled at age 31 or older, you generally need at least 20 credits in the 10 years immediately before you became disabled. The following table shows examples of how many credits you would need if you became disabled at various selected ages. This table does not cover all situations

Survivors benefits

When a person who has worked and paid Social Security taxes dies, certain members of the family may be eligible for survivors benefits. Up to 10 years of work is needed to be eligible for benefits, depending on the person’s age at the time of death. Survivors of very young workers may be eligible if the deceased worker was employed for 1½ years during the three years before his or her death.

Social Security survivors benefits can be paid to:

• A widow or widower—full benefits at full retirement age, or reduced benefits as early as age 60.
• A disabled widow or widower—as early as age 50.
• A widow or widower of any age who takes care of the deceased’s child who is younger than age 16 or disabled, and receiving Social Security benefits.
• Divorced spouses under certain conditions.
• Unmarried children younger than age 18, or up to age 19 if they attend elementary or secondary school full time. Under certain circumstances, benefits can be paid to stepchildren, grandchildren or adopted children.
• Children who were disabled before age 22 and remain disabled.
• Dependent parents age 62 or older.
• Contact us if you need more information about your family’s situation.

Medicare

The Social Security credits you earn also count toward eligibility for Medicare when you reach age 65. You may be eligible for Medicare at an earlier age if you get disability benefits for 24 months or more. Those who have permanent kidney failure or get disability benefits because of amyotrophic lateral sclerosis (Lou Gehrig’s disease) do not have to wait 24 months to receive Medicare coverage. Your dependents or survivors also may be eligible for Medicare at age 65 or earlier if they are disabled. People who have permanent kidney failure and need kidney dialysis or a kidney transplant may be eligible for Medicare at any age based on a spouse’s or parent’s earnings as well as their own

Make sure your records are accurate

Each year your employer sends a copy of your W-2 (Wage and Tax Statement) to Social Security. Social Security compares your name and Social Security number on the W-2 with our records. When we find your name and number, your earnings shown on the W-2 are recorded on your lifelong earnings record. Your lifelong earnings record is what we use to figure whether you can get future benefits and the benefit amount.

It is critical that your name and Social Security number on your Social Security card agree with your employer’s payroll records and W-2. If they do not agree, your employer may get a letter from Social Security. This letter does not mean that your employer should change your job, lay you off, fire you or take other action against you. You need to correct the error. It is up to you to make sure both records are correct. If your Social Security card is not correct, contact any Social Security office. Tell your employer if your name and Social Security number are incorrect on the employer’s record.

Special Rules for the Self-Employed

Special rules for earning Social Security coverage apply to certain types of work.

If you are self-employed, you earn Social Security credits the same way employees do (one credit for each $1,120 in net earnings, but no more than four credits per year). Special rules apply if you have net annual earnings of less than $400

Most people who pay into Social Security work for an employer. Their employer deducts Social Security taxes from their paycheck, matches that contribution and sends taxes to the Internal Revenue Service (IRS) and reports wages to Social Security. But self-employed people must report their earnings and pay their taxes directly to IRS.

You are self-employed if you operate a trade, business or profession, either by ­yourself or as a partner. You report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you must report your earnings on Schedule SE in addition to the other tax forms you must file.

Figuring your net earnings

Net earnings for Social Security are your gross earnings from your trade or business, minus your allowable business deductions and depreciation.

Some income does not count for Social Security and should not be included in ­figuring your net earnings:  

• Dividends from shares of stock and ­interest on bonds, unless you receive them as a dealer in stocks and securities;
• Interest from loans, unless your business is lending money;
• Rentals from real estate, unless you are a real estate dealer or regularly provide services mostly for the convenience of the occupant; or
• Income received from a limited partnership.

Paying Social Security and Medicare taxes

The Social Security tax rate for 2010 is 15.3 percent on self-employment income up to $106,800. If your net earnings exceed $106,800, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings.

There are two income tax deductions that reduce your taxes.

First, your net earnings from self-­employ­ment are reduced by half of your total Social Security tax. This is similar to the way employees are treated under the tax laws, because the employer’s share of the Social Security tax is not ­considered wages to the employee.

Second, you can deduct half of your Social Security tax on IRS Form 1040. But the deduction must be taken from your gross income in determining your adjusted gross income. It cannot be an itemized deduction and must not be listed on your Schedule C.

If you have wages as well as self-­employ­ment earnings, the tax on your wages is paid first. But this rule is important only if your total earnings are more than $106,800. For example, if you will have $30,000 in wages and $40,000 in self-employment income in 2010, you will pay the appropriate Social Security taxes on both your wages and business earnings. However, in 2010, if your wages are $77,500 and you have $30,000 in net earnings from a business, you do not pay dual Social Security taxes on earnings more than $106,800. Your employer will withhold 7.65 percent in Social Security and Medicare taxes on your $77,500 in earnings. You must pay 15.3 percent in Social Security and Medicare taxes on your first $29,300 in self-employment earnings and 2.9 percent in Medicare tax on the remaining $700 in earnings.

Optional method

If your actual net earnings are less than $400, your earnings can still count for Social Security under an optional method of reporting. The optional method can be used if your gross earnings are $600 or more or when your ­profit is less than $1,600.

You can use the optional method only five times in your life. Your actual net must have been $400 or more in at least two of the last three years, and your net earnings must be less than two-thirds of your gross income.

Here is how it works:

• If your gross income from self-employment is between $600 and $2,400, you may report two-thirds of your gross or your actual net earnings; or
• If your gross income is $2,400 (or more) and the actual net earnings are $1,600 (or less), you may report either $1,600 or your actual net earnings.
• Effective tax year 2008 and after, the maximum amount reportable using the optional method of reporting will be equal to the amount needed to get four work credits for a given year. For example, for tax year 2009, the maximum amount reportable using the optional method of reporting would be $4,480 ($1,120 x 4).

Family business arrangements

Family members may operate a business together. For example, a husband and a wife may be partners or run a joint venture. If you operate a business ­together as partners, you should each report your share of the business profits as net earnings on separate self-employment returns (Schedule SE), even if you file a joint income tax return. The partners must decide the amount of net earnings each should report (for example 50 percent and 50 percent).

 

If you’re approaching retirement, you may be wondering where to park the money that’s sitting in your employer’s 401(k) plan. Should you transfer the balance to an Individual Retirement Account (IRA) as soon as you retire? Should you take a lump-sum payment and reinvest the money elsewhere? Should you leave the entire balance in your employer’s plan? As with most financial decisions, this one is not one-size-fits-all. Before taking action, it’s wise to take a close look at your particular needs and circumstances, as well as the advantages and disadvantages of each investment option. Consider the following:

• Investment options in a 401(k) plan may be limited. Cafeteria-style 401(k) plans generally offer fewer investment options than IRAs and this, in turn, may impact long-term planning. For example, an IRA may provide the option of purchasing individual bonds instead of bond funds. With an individual bond, you may be able to get a fixed interest rate for more predictable income. On the other hand, if you don’t have the time or inclination to research investment options, you may want to leave your nest egg in a solid 401(k) plan. Employers often reduce the number of mutual funds in a 401(k) plan to a few high quality, well managed funds with low fees. In addition, limited funds mean less recordkeeping. For some folks, that’s a real advantage.

• Some investment options may not be available in an IRA. In general, IRAs provide more investment alternatives than company retirement plans. But some options — stock ownership plans, for example — may not be available outside your employer’s plan.

• IRA fees may be higher. Large companies are often able to negotiate discounted fees for their 401(k) participants. Leaving your money in an employer’s plan may cut down on investment costs and put more of your money to work.

• Consider your retirement age. With an IRA, you’ll incur a 10% penalty if you make withdrawals before turning age 59½. Retirees can begin taking penalty-free withdrawals from a 401(k) plan at age 55. So if you’re planning to retire between those ages, you might want to leave your money in the employer plan.

• Beware the transfer. If you decide to move your money to an IRA, it’s generally best to have the money transferred directly to a new tax-deferred account. Unless the funds are quickly reinvested in a qualified retirement account, you could face significant tax consequences.

For guidance in making your retirement financial decisions, give us a call.

 

The most problematic situation occurs when my client thinks they owe not additional tax because taxes were withheld from the distribution. That is not always the case.  Your fiduciary probably withheld a flat rate of 10% or 20% depending on the amount of the distribution. However, if you are in a 28% tax bracket and you don’t meet one of the exceptions, you could also owe a 10% penalty for a total of 38% federal tax.

Another problem is that clients sometimes think they can but the money back into a retirement account. They can if they do it within 60 days of the distribution and they have to put the full distribution not the net amount they received.  You can get the tax withheld back when you file your tax return.

10% Penalty from Early Distributions from a Retirement Plan

If you withdraw money from a qualified retirement plan, you may be subject to an additional tax of 10%. This is penalty for taking an early distribution from an individual retirement account (IRA), 401(k), 403(b), or other qualified retirement plan before reaching age 59 1/2. There are exceptions to this 10% penalty. A little known fact is this penalty may apply to Roth IRAs, even if it has been at least five years since you first opened up your Roth account. For Roth IRA account holders, it will be crucially important to review the exceptions to the 10% penalty, as otherwise the Roth distribution could become subject to both tax and the 10% penalty.

Here’s what you need to know about the early distributions and their tax consequences.

The additional tax on an early distribution is 10% of the taxable amount. The taxable amount is also included in your taxable income. This 10% tax is in addition to regular income taxes. I call this the early withdrawal tax penalty, because it is similar to the penalty banks charge when you liquidate a savings account early. You can avoid this additional tax penalty if you meet certain criteria, but you cannot avoid including your retirement withdrawal from your taxable income. So you will want to consider the tax impact before you tap your retirement accounts for short-term financial emergencies.

If you withdraw money from a SIMPLE IRA and you first began participating in a SIMPLE IRA plan within the past two years, then your early distribution penalty is 25% instead of 10%.

Reporting the Early Distribution Penalty

You figure the additional tax either directly on Form 1040 or on Form 5329, depending on your particular tax situation. Please refer to the Instructions for Form 5329 for all the details. Generally, you calculate the additional tax penalty directly on Form 5329 if you meet one of the exceptions and the retirement plan did not report the exception on Form 1099-R box 7.

Exceptions to the Early Distribution Penalties

You do not have to pay the additional 10% tax penalty on your early retirement distribution if you qualify for certain exceptions. There are two sets of exceptions. The first set below applies to individual retirement accounts (both traditional and Roth IRAs). The second set of exceptions applies to 401(k) and 403(b) retirement plans.

Exceptions for Early Distributions from an IRA:

• You had a “direct rollover” to your new retirement account,
• You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days,
• You were permanently or totally disabled,
• You were unemployed and paid for health insurance premiums,
• You paid for college expenses for yourself or a dependent,
• You bought a house*,
• You paid for medical expenses exceeding 7.5% of your adjusted gross income**, or
• The IRS levied your retirement account to pay off tax debts.

Exceptions for Early Distributions from a Qualified Retirement Plan such as a 401(k) or 403(b) plan:

• Distributions upon the death or disability of the plan participant.
• You were age 55 or over and you retired or left your job.
• You received the distribution as part of “substantially equal payments” over your lifetime.
• You paid for medical expenses exceeding 7.5% of your adjusted gross income.**
• The distributions were required by a divorce decree or separation agreement (“qualified domestic relations court order”),

* The home-buying exception has the following additional criteria: you did not own a home in the previous two-years, and only $10,0000 of the retirement distribution qualifies to avoid the tax penalty.

** You do not need to itemize in order to claim the medical expense exception.

If the exception is properly coded in box 7 of your 1099-R form, you do not need to fill out Form 5329. If an exception applies and is not recorded in box 7, then you need to fill out Form 5329.

1099-R Box 7 Distribution Codes

The following is a list of distribution codes that may appear in box 7 for Form 1099-R to report distributions from a retirement account. This list is taken from Instructions for Forms 1099-R & 5498.

Distribution Codes for 1099-R Box 7

You calculate the additional tax on early withdrawals from a retirement account using Form 5329  lines 1 through 4.

Line 1: Report the taxable distribution from box 2a of Form 1099-R.

Line 2: Enter the amount not subject to the additional tax because an exception applies. Enter the appropriate exception code.

Line 3: Subtract line 2 from line 1. This is the amount of retirement distributions that are subject to the additional tax.

Line 4: Multiply the figure on line 3 by 0.10. Also enter this amount on Form 1040 line 60. If the distribution was from a SIMPLE IRA, the penalty may be 25% instead of 10%. The 25% penalty applies if you began participating in a SIMPLE IRA account within the past two years. Multiply the amount on Line 3 by 0.25 instead.

Exception Codes for Form 5329 Line 2

The following exception codes are to be used for Form 5329 Line 2 to inform the IRS that part or all of your retirement withdrawal is not subject to the early withdrawal tax penalty. The following exception codes are found in Instructions for Form 5329.

• 01 Qualified retirement plan distributions (does not apply to IRAs) if you separated from service in or after the year you reach age 55 (age 50 for qualified public safety employees).
• 02 Distributions made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from an employer plan, payments must begin after separation from service).
• 03 Distributions due to total and permanent disability.
• 04 Distributions due to death (does not apply to modified endowment contracts).
• 05 Qualified retirement plan distributions up to (1) the amount you paid for unreimbursed medical expenses during the year minus (2) 7.5% of your adjusted gross income for the year.
• 06 Qualified retirement plan distributions made to an alternate payee under a qualified domestic relations order (does not apply to IRAs).
• 07 IRA distributions made to unemployedindividuals for health insurance premiums.
• 08 IRA distributions made for higher education expenses.
• 09 IRA distributions made for purchase of a first home, up to $10,000.
• 10 Distributions due to an IRS levy on the qualified retirement plan.
• 11 Qualified distributions to reservists while serving on active duty for at least 180 days.
• 12 Other (see Other, below). Also, enter this code if more than one exception applies.

 

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don’t want to spend time and high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners. Here’s why…

Self-employed business owners contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLEs calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $11,500 in 2010, after which it can rise further with the cost of living.

Catch-up. Owner-employees age 50 or over can make a further $2,500 deductible “catch-up” contribution as employee in 2010.

2. Employer “matching” contribution
The employer match equals 3% of employee’s earnings.

Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee plus a further $2,500 employee catch-up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $15,200.

The SIMPLE plan is good for the home-based business and can be ideal for the moonlighter – the full-time employee, or the homemaker, with modest income from a sideline self-employment business.

With living expenses covered by your day job (or your spouse’s job), you could be free to put all your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

The SIMPLE plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules – in investment options, spousal rights, creditors’ rights – don’t have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan’s custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.

What’s Not So Good About SIMPLEs

Other plans can do better than SIMPLE once self-employment earnings become significant.

Example: If you are under 50 with $50,000 of self-employment earnings in 2010, you could contribute $11,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $13,000. In contrast, a Keogh 401(k) plan would allow a $25,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $35,500 with a 401(k).

Because investments are through an IRA, you’re not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will in practice have fewer investment options than if you were your own trustee, as you would be in a Keogh.

It won’t work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

There’s this problem if the SIMPLE is for a sideline business and you’re in a 401(k) in another business or as an employee: the total amount you can put into the SIMPLE and the 401(k) combined can’t be more than $16,500 (2010 amount) – $21,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.

So someone under age 50 who puts $8,000 in her 401(k) can’t put more than $8,500 in her SIMPLE in 2010. The same limit applies if you have a SIMPLE while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started in a SIMPLE

You can set up a SIMPLE on your own by using IRS Form 5304-SIMPLE or 5305-SIMPLE – but most people turn to financial institutions.

SIMPLES are offered by the same financial institutions that offer IRAs and Keogh master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an “effective date” – the beginning date for payments out of salary or business earnings. That date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

Keoghs, SEPs, and SIMPLES Compared

Please contact us if you are interested in exploring retirement plan options, including SIMPLE plans.