3433-vol. 6 issue 2-3.pmd - iarfc

Volume 6, Issue 2 & 3 55
contributions allowed are the same for the SEP IRAs and the Individual 401(k),
the actual allowable contributions for the Individual 401(k) may be higher. As
previously noted, this is due to the stratification of deductions. With the
Individual 401(k), the employer can deduct 100% on the first $15,500 of eligible
compensation.
SIMPLE IRA
The Saving Incentive Match Plan for Employees (SIMPLE) IRA
differs from other IRAs in that it requires employers to make contributions to
the plan. These contributions may be matching contributions based on the
salary-reduction/elective deferral contributions made by employees. Alternatively,
the contributions may be made to each eligible employee regardless of
whether the employee made salary-reduction contributions to the plan.
The maximum 2008 contribution that the employee can make to a
SIMPLE IRA is $10,500 with an additional $2,500 if the taxpayer is 50 or older.
Employer’s mandatory matching contributions are in addition to these
amounts. Like other employer plans, the SIMPLE IRA allows employers a tax
deduction for contributions made on behalf of employees. The employee’s
contributions to the SIMPLE IRA also are not taxable. The only tax consequences
to the employees are the taxes due when the distributions from the
SIMPLE IRA are received.
Planning Strategies
Keogh Plans
A Keogh plan is an employer-funded retirement plan designed for
unincorporated businesses or self-employed individuals. As a general rule,
only the employer can make contributions to a Keogh. No employee contributions
are permitted. Similar to other retirement plans, these contributions are
tax-deductible by the employer while the employee is not taxed on the
contributions made on his/her behalf or on the earnings in the plan until a
distribution is made.
Keogh plans can be set up as defined benefit or as defined contribution
plans. However, the most common types of Keoghs are defined contribution
plans established as profit-sharing, money purchase, or combination
plans. Profit-sharing Keoghs are the most flexible inasmuch as the contribution
in any given year depends on the profits made by the company. In good
years, the contribution to the Keogh will be higher; in down years, the
contribution to the plan will be lower. Unlike profit-sharing Keogh plans,
money purchase Keogh plans require the employer to make annual contributions
of a predetermined percentage of compensation. Combination Keogh
plans include some of the features of both profit-sharing and money purchase
plans. With combination plans, the employer designates a fixed percentage for