Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

September 21, 2012

If you started a business in 2012 or have an existing small business, you have ten days left (October 1) until the annual deadline to establish a SIMPLE-IRA if you want to make contributions this year for yourself or your employees.  A SIMPLE-IRA is a solid retirement option for small businesses for a number of reasons.  The first reason is that they are free and easy to set-up.  By comparison, if you start a plan such as a 401(k), you can bank on approximately$1,000 a year in administrative fees.  The SIMPLE-IRA (Savings Incentive Match Plan for Employees) is established by filling out an easy form (IRS Form 5304-SIMPLE) and signing and dating it.  You also need to contact a custodian which will be responsible for initially handling the funds.  If you have a financial advisor, this person will often be the point-person.  Otherwise, you can contact Vanguard, Fidelity, Schwab, or a number of other financial companies and they will be happy to set you up at no charge in minutes.  They may have account fees, but those should be minimal.

The SIMPLE-IRA allows the employees (and the owner) to contribute up to $11,500 of their wages through payroll deductions into a retirement account.  This directly reduces their taxable wages.  The other part is the employer match.  Each year, before the year starts, the employer chooses a one, two, or three percent match, or a two percent guaranteed contribution.  If the employer chooses one of the match options, they will match the employee’s (and their own) contributions dollar-for-dollar up to a cap of one, two, or three percent of the employee’s annual wages.  The match is tax deductible by the business but is not taxable income to the employee.  A business can choose to exclude employees that are not expected to make over $5,000 during the year or have not made over $5,000 in any two prior years (whether or not consecutive).

Self-employed individuals with or without employees can also take advantage of this plan.  If you are a sole proprietor, your wages are determined by your net income at the end of the year.  You must submit your contributions by January 30 of the following year.  The match for your employees and yourself does not have to be submitted until the tax return due date.

Self-employed individuals with no employees that net over $70,000 may wish to consider a SEP-IRA since you can contribute more at that point.  A SEP-IRA is also easy and inexpensive to maintain.

Of course, the best reason to set up a SIMPLE plan is to start contributing to your retirement and helping others see the value as well.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.