Keogh, SEP, SIMPLE or Just IRA...
An IRA is an Individual Retirement Account, and is usually available
to anyone who has net income from employment or self-employment
business. The contribution may or may not be deductible, depending on
whether you or your spouse are covered under a qualified pension plan
(including a Keogh, SEP or SIMPLE, as discussed below.) See the FAQ
on IRAs in the Individual area for details.
What's Best for Me?
A Keogh is a formal retirement plan for a self-employed person and his or
her employees. It can take the form of a profit sharing plan, a money purchase
plan, or both. In general, the contributions must be made for qualifying employees
as well as yourself in the same percentage, except for some defined benefit
plans which are "weighted" toward the business owner. The contribution
can be based on no more than $150,000 of net self-employment income, and the
percentage varies from 13-20% depending on the nature of the plan. Annual reports
are required. Professional guidance with a Keogh plan is strongly suggested.
A SEP is a Simplified Employee Pension, which, as the name implies, is a "no
frills" pension plan available to self-employment businesses. Like a Keogh,
you must contribute for eligible employees, but in the same percentage as yourself.
The potential income deferral is less than with a Keogh, but the plan is easier
to set-up and maintain, and you do not need to file annual reports.
The SIMPLE (Savings Incentive Match Plan for Employees) began in the 1997
tax year. Like a SEP, it allows you to defer income with a minimum of paperwork
or hassle. Once it is properly set up, a SIMPLE actually allows deferrals up
to the lesser of $6,000 or 100% of your net self-employment earnings (That's
right; if your business nets $6,500 or less, you can defer *all* of it, if you
set the plan up correctly!) The plan can also be set up as a "SIMPLE-401K"
to allow employee deferrals, similar to a 401K plan, but without all of the
compliance testing and paperwork. Three drawbacks: (1) SIMPLE must be the *only*
plan the business has, while a Keogh and SEP can "piggyback" on top
of one another (2) With a maximum deferral of $6.500, it is not a viable alternative
for businesses which net more than $30-40K and want to maximize their deferrals
and resulting tax savings and (3) Unlike a SEP and Keogh, which can be set up
until the end of the tax year (A SEP can be set up as late as the extended due
date of the return for the year), a SIMPLE must generally be in place by October
1 of the tax year.
What plan is right for you? Discuss your options with a local, knowledgeable
tax professional for the best guidance for your specific circumstances.
Click Here for 2002 Retirement
Comparison (51kb pdf).