Author Topic: Should I switch frim SIMPLE IRA to SEP IRA?  (Read 6398 times)

ac

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Should I switch frim SIMPLE IRA to SEP IRA?
« on: January 07, 2015, 11:55:22 AM »
I am the only employee in my boss's company.  I make 113k/yr and get a 3% match to a SIMPLE IRA that my boss pays at the end of the year (total compensation 116k/yr).  I maxed out my SIMPLE IRA employee contribution (12k 2014).  I would max it out for 2015 at 12.5k if we do not switch to SEP.

I ran this idea by my boss:  switch to a SEP IRA for 2015 where employer contribution can be 25% of salary.  Keep my total compensation at 116k/yr.  Pay the 25% monthly rather than waiting until end of year.  But because the 25% is tax free, I end up keeping more of the money long term.  And when FI happens, I'll send the SEP money to traditional IRA and then to a roth.

2013 and 2014 salary               $113
employer contribution to IRA       $3.4    tax free
Total pay out from employer       $116.4    
      
      
2015 annual proposed   
SEP IRA employer contribution       25%           tax free
SEP IRA employer contribution       $23.3    tax free
2015 salary                               $93.1    Before H.S.A., health insurance, and taxes
Total 2015 pay out                  $116.4    

My boss is warm to this idea and asked for details.  Before I send him details I wanted your advice:  Does this sound like a smart plan? 

Indexer

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #1 on: January 07, 2015, 12:23:22 PM »
The way you have spelled it out it looks pretty good.  SEPs also in general have better rules for withdrawal and transferring to other IRAs than a SIMPLE.  SIMPLEs can be a pain.  SEPs are basically traditional IRAs that let the employer contribute with higher limits.  Once its in your hands it operates very similar to a traditional. 

I'm actually not even sure if you need to go SEP->trad->Roth.  I think it might actually be possible to go SEP->Roth as a conversion, but you would want to double check that.  Just remember there is that 5 year clock when you do it before you can access the funds.

ac

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #2 on: January 07, 2015, 12:48:08 PM »
Thanks for the additional info!

dandarc

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #3 on: January 07, 2015, 12:59:11 PM »
Sounds like a good plan to me.

If you want to do even more, look at 401K plans.  Really easy if you're married to the boss (individual 401K), not quite as easy if not, but might be worth the hassle.

ac

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #4 on: January 07, 2015, 01:07:53 PM »
Thanks for the 401k idea.  We looked at that last year, but the company would have had to pay something like $500-$1000 to set it up.  Not married to the boss.  I really doubt the boss would be excited about paying to set up a 401k.

Hayden Frys Mustache

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #5 on: January 19, 2015, 09:30:30 PM »
Are there any limits on contributions to a Roth if the employer's contribution is greater than the IRA contribution limit? My boss contributed about $7,000 last year to my SEP, but I'd like to put more into a Roth. Can I do it?

dandarc

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #6 on: January 20, 2015, 07:50:11 AM »
Are there any limits on contributions to a Roth if the employer's contribution is greater than the IRA contribution limit? My boss contributed about $7,000 last year to my SEP, but I'd like to put more into a Roth. Can I do it?
Yes - you can fund a Roth IRA in addition to a SEP-IRA.  You have until your tax filing deadline to do this for 2014.

I think the IRS could do everyone a solid by renaming SEP-IRA and SIMPLE-IRA to something without "IRA" in the name.

Hayden Frys Mustache

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #7 on: January 20, 2015, 05:54:28 PM »
Are there any limits on contributions to a Roth if the employer's contribution is greater than the IRA contribution limit? My boss contributed about $7,000 last year to my SEP, but I'd like to put more into a Roth. Can I do it?
Yes - you can fund a Roth IRA in addition to a SEP-IRA.  You have until your tax filing deadline to do this for 2014.

I think the IRS could do everyone a solid by renaming SEP-IRA and SIMPLE-IRA to something without "IRA" in the name.

Amen to that - Thanks dandarc

ac

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #8 on: January 28, 2015, 09:08:23 AM »
My shocking update is that I don't have to switch from a SIMPLE to SEP.  I am adding the SEP to the tax deferred accounts. 

My now insanely high list of tax deferred contributions looks like this:

SEP IRA employer contribution    25%   tax free
SEP IRA employer contribution    $22.7    tax free fed, state, and fica
2015 salary                            $90.9      Before H.S.A., SIMPLE, health insurance, and taxes
2015 simple employer match    $2.7    required at 3%
2015 simple employee contribution    $12.5    tax free fed and state.  still have to pay fica.
2015 h.s.a. employee contribution    $6.6   tax free fed, state, and fica
Total 2015 pay out from employer    $116.4    Same as last year

So it's no skin off my employer's teeth:  I just get to bring my taxable salary down from $113k to $72k.  When tax time comes next year I'll decide if I should do a traditional or roth ira by what turbotax tells me.

The govt could do everyone a big favor by just picking one retirement account tax deferred amount for everyone regardless of employer sponsored plan, individual, self employed etc etc.  We don't need this many options.  Why can I only contribute $12.5k to my simple while my peers at seagate get to put away $17.5k? 

dandarc

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #9 on: January 28, 2015, 10:04:16 AM »
Nice!

fiveoh

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #10 on: January 28, 2015, 11:31:47 AM »
I'm pretty sure with an SEP IRA the company must contribute the same % to all employees.  That means your boss needs to do 25% for him as well. 

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

"Must I contribute the same percentage of salary for all participants?

Most SEPs, including the IRS model Form 5305-SEP, require you to make allocations proportional to your employees' salary/wages. This means that everyoneís contribution is the same percentage of salary.

If you havenít made contributions to participantsí SEP-IRAs equal to the same percentage of each participantís compensation, find out how you can correct this mistake.

If you are self-employed, base your contribution on net profit - minus one-half of the self-employment tax - minus your SEP contribution. See IRS Publication 560 on determining the contribution amount."
« Last Edit: January 28, 2015, 11:33:29 AM by fiveoh »

ac

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #11 on: January 29, 2015, 10:00:59 AM »
Thanks fiveoh.  Yes that's not a problem for us. 

ac

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #12 on: June 04, 2015, 02:41:35 PM »
So I was talking to Vanguard today about the employer contributions to both my sep ira and simple ira...and vanguard now tells me that for a single source of income, I can legally only have one ira.  Vanguard will do whatever I ask it, but if I get audited I may have trouble. 

A person can have both a sep and simple active in a given tax year, but each of those need to be funded from different sources.  So the vanguard lady told me...

Could a knowledgeable person please tell me if the above is true?  If true, what is my best action now?  We have had my employer contribute employer side contributions to both my sep and simple from january through may, and I have contributed employee contributions to simple january through may already for 2015. 

dandarc

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #13 on: June 04, 2015, 03:01:27 PM »
http://www.irs.gov/Retirement-Plans/Terminating-a-SIMPLE-IRA-Plan

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Can I terminate or amend my SIMPLE IRA plan in the middle of the year?
No, you cannot end your plan in the middle of the calendar year. Once started, you must continue your SIMPLE IRA plan for the entire calendar year, funding all contributions promised in the employee notice.

dandarc

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #14 on: June 04, 2015, 03:08:43 PM »
https://www.irahelp.com/slottreport/slott-report-mailbag-can-employer-have-both-sep-ira-and-simple-ira-plan-their-employees

Last question there is an emphatic "no" to having both at the same time, although that is not the IRS' website.

dandarc

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #15 on: June 04, 2015, 03:16:57 PM »
Looks like Vanguard customer service is right, as usual:

http://www.irs.gov/publications/p560/ch03.html#en_US_2014_publink10008873

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Who Can Set Up a SIMPLE IRA Plan?

You can set up a SIMPLE IRA plan if you meet both the following requirements.

You meet the employee limit.

You do not maintain another qualified plan unless the other plan is for collective bargaining employees.

dandarc

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #16 on: June 04, 2015, 03:21:13 PM »
Not getting clear answers when I Google "Is a SEP IRA a qualified plan?", but found the following line buried in publication 560 in the SEP-IRA section:

Quote
You currently maintain any other qualified retirement plan other than another SEP.

So, that sentence clearly assumes SEP = qualified plan.

ac

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Re: Should I switch frim SIMPLE IRA to SEP IRA?
« Reply #17 on: June 05, 2015, 08:01:45 AM »
Thanks dandarc

Does anyone have good advice about how to unwind 2015's SIMPLE + SEP's contributions?  I'm inclined to keep the SEP and ditch the SIMPLE.  But I don't know how to reroute the SIMPLE funds.