Question

Paul’s Paint-N-Plumbing, Inc. Case

Scenario:

Paul’s Paint-N-Plumbing, Inc. (3P) has been in business for 33 years. Paul is retiring and passing the business on to his two children in equal shares to manage and operate according to their skills and experience. The children, Paula and Prescott, decide to adopt a retirement plan for both current and future employees in an attempt to attract and retain talent. They have decided to adopt a SIMPLE IRA, funded by both employee and employer contributions.

Answer the following questions:

1. What are the advantages and disadvantages of offering a SIMPLE IRA over a qualified plan, such as a 401(k) plan?

2. If Philip (age 55), a long-time employee of 3P, wants to contribute both to the SIMPLE IRA at work and to a traditional IRA, what are the limits on his contributions and deductibility regarding the traditional IRA?

Answer 1

Simple IRA plans are used by small companies for their employees and its very easy to set up. Other advantages are -

1. Easy maintenance - its very simple to handle and your year end statements will be easy to understand and does not involve heafty fee payments.The employee benefits from this contribution because the employee gets extra amount for free towards their retirement and emplyer even get tax deduction for amount contributed for the same.

2. Its applicable for small companies only having not more than 100 employees.

Disadvantage is you have to pay large penalty amount in case you withdraw money from your account before retirement.

Answer 2 - Yes Philip can contribute both to simple IRA as well as traditional IRA but the deduction for whole amount contributed towards simple IRS and traditional IRS.

Being able to take a tax deduction for a contribution to your Traditional IRA depends on

• your modified adjusted gross income
• your tax-filing status
• whether or not you are considered an active participant in your employer-sponsored retirement plan

Your SIMPLE IRA contributions do have an impact on your traditional IRA if you fund your IRA on a pre-tax basis. Tax-deductible contributions to traditional IRAs are subject to income restrictions if funds were deposited during the same tax year into a retirement plan such as a SIMPLE IRA.