Keogh, SEP, SIMPLE or Just IRA...
What's Best for Me?

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.

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).

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