SIMPLE IRA question

[KarenMM]

Hello All - You will see by my messages sent that I don't post very often; until recently I was able to use the search utility to find most of my answers, but it seems to have changed and now doesn't recognize many accounting/tax specific terms, like "simple".

Anyway, here is my question: A sole proprietor client has had a SEP for years. With his recent downturn in sole prop income, his SEP contribution has been extremely limited, and he is looking for another retirement savings method. I suggested a SIMPLE plan, but am wondering what TTB means on page 13-4 when they say that you cannot MAINTAIN any other pension plan. I know he can't contribute to both the SEP and the SIMPLE in the same year, but is there any other concerns here? THANKS for any help you can give me.

[Kram BergGold]

Answer

Assuming a 2008 contribtuion has not been made to the SEP, your client is supossed to roll the SEP into an IRA before opening the SIMPLE. By doing this there will not be two retirment plans open in the same year.

[Bees Knees]

Assuming a 2008 contribtuion has not been made to the SEP, your client is supossed to roll the SEP into an IRA before opening the SIMPLE. By doing this there will not be two retirment plans open in the same year.

I don't believe that is necessary. A SEP-IRA is an IRA for all practical purposes once the money is in the account. A SEP plan does not require you to contribute every year, so in my opinion, as long as you do not contribute new money to the SEP-IRA once you open the SIMPLE, you should be fine.

[New York Enrolled Agent]

I agree with Bees and IRS Notice 98-4. The language from the notice (some verbiage has been excluded for simplicity)

A. B-3: Generally, an employer cannot make contributions under a SIMPLE IRA Plan for a calendar year if the employer, or a predecessor employer, maintains a qualified plan (other than the SIMPLE IRA Plan) under which any of its employees receives an allocation of contributions (in the case of a defined contribution plan) or has an increase in a benefit accrued or treated as an accrued benefit under section 411(d)(6) (in the case of a defined benefit plan) for any plan year beginning or ending in that calendar year. In applying these rules, transfers, rollovers or forfeitures are disregarded, except to the extent forfeitures replace otherwise required contributions. For purposes of this Q&A B-3, “qualified plan” means a plan,...a simplified employee pension (“SEP”) described in section 408(k), ...

Thus, if no employee receives allocations of contributions to the SEP for 2008, the notice does not require that you "close" the SEP when you open the SIMPLE.

[sea-tax]

I don't believe that is necessary. A SEP-IRA is an IRA for all practical purposes once the money is in the account. A SEP plan does not require you to contribute every year, so in my opinion, as long as you do not contribute new money to the SEP-IRA once you open the SIMPLE, you should be fine.

This is my understanding as well.

[JohnH]

I'm puzzled as to why the client would want to change plans just because business is down. He has more flexibility with the SEP than with any other retirement plan in good times and in bad. He can increase or decrease the contribution each year as he wishes, or skip a year entirely if necessary. Plus, he can file an extension to keep the contribution window open and not even commit the money for the SEP for the prior year until late in the current year.

[KarenMM]

Thanks all -

Thanks for the information here... it confirmed my feelings about just not contributing to a SIMPLE and any other plan... as to why he wants to open a SIMPLE, it's not just that business is down this year, it is that he expects his sole prop income to remain low for the foreseeable future and he wants to contribute as much as he can despite that fact. THANKS Karen