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PENSION UPDATE
I am writing you this letter to advise you of an
exciting new type of pension plan. About three years ago,
Congress quietly passed a new tax law which created this new
form of pension plan. This new plan is referred to as the
'SIMPLE IRA'.
This new plan requires no annual IRS filings, nor
does it require a yearly fee be paid to a pension specialist
to administer the plan. Finally, there are no complicated
formulas to follow. As Martha Stewart would put it, "it's a
good thing".
The plan works as follows:
1) Each employee and/or owner can contribute up to $7,000.00
per year provided the employee/owner makes at least that
much salary. This contribution is in the form of a
deduction (in the same manner as a 401K contribution) from
gross wages and thus reduces taxable wages. The
contribution, however is still subject to FICA. (also the
same as a 401K). For years beginning with 2002, employees
or owners over the age of 55 can contibute an extra $500.00 to
above the base of $7,000.00
2) In addition, as an added benefit, the employer can choose
to make an additional contribution of 1% to 3% of each
person's salary to the plan, PROVIDED that the person has
elected to contribute at least that much to his pension.
EXAMPLES:
i. Employee #1 has an annual salary of $20,000.00 and
decides not to deduct anything from his salary
towards the SIMPLE. Since the employee has
contributed nothing, no contribution is due from the
employer towards this employee.
ii. Employee #2 also has an annual salary of $20,000.00
and decides to deduct $100.00 per week from his
salary for a total yearly deduction of $5,200.00.
The employer has elected to contribute 3% of salary,
or in this case $600.00 (3% of 20,000.00). Since
the employee has contributed more than $600.00 the
employer must make the 3% contribution of $600.00.
iii. Owner #1 has an annual salary of $100,000.00. He
elects to contribute $7,000.00. (The maximum
contribution) In addition, his business can also
contribute 3% of his salary, ($3,000.00) for a
total yearly contribution of $10,000.00. (if over 55,
add an extra $500 for a grand total of $10,500.00.
3) The plan can be set up to exclude employees who are part
time (less than 20 hours per week) and can also exclude
employees until they have worked at least 2 years.
4) Finally, if the spouse of the owner is also on payroll
for at least $6,000.00 the spouse can also contribute a
full $6,000.00. Thus a married couple can contribute
$12,000.00.
5) This SIMPLE IRA plan is in lieu of a regular IRA, or any
other pension plan, but considering that you and your
wife can only contribute a total of $4,000.00 per year to
a regular IRA as opposed to $12,000.00 plus the 3%
kicker, this plan offers a much larger contribution.
The above SIMPLE IRA is available through most
brokerage houses and mutual funds. We have set up many of
these plans (including our own) through the Fidelity Fund.
Although no pension plan specialist is required to set up the
plan, the initial paperwork is extensive and time consuming.
We can assist you in setting up your plan for a one time fee
of $500.00 which covers the preparation of the initial
paperwork and instruction on how to work the plan on an on-
going basis.
If you are interested in having us assist you in
setting up this SIMPLE IRA plan, or have any questions,
please feel to call.
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Important *** changes have been implemented to
increase the amount of Elective Deferrals. Additional "Catch-up" contributions are also now available for Participants who reach age 50 on or before December 31 of the applicable year.
The Elective Deferral limits and the Age 50 Catch-up
limits are:
TAX YEAR DEFERRAL CATCH-UP CONTRIBUTION
2002 $ 7,000. $ 500.
2003 8,000. 1,000.
2004 9,000. 1,500.
2005 10,000. 2,000.
2006 10,000. as adj. 2,500.
After 2005, the $10,000 Deferral limit will be increased
for Cost of Living, adjustments in increments of $500.00. After 2006, the $2,500.00 Catch-up Contribution limit will be increased for Cost of Living Adjustments in increments of $500.00. |
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SIMPLE IRA UPDATE
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