Employer Iras And It's Types

You can establish an employer IRA as long as you are in business and earn a profit. You don't have to have employees working for you, and it doesn't matter how your business is organized: You can be a sole proprietor, partner in a partnership, member of a limited liability company, or owner of a regular or S corporation.

The great advantage of employer IRAs is that you can contribute more than you can with traditional IRAs and Roth IRAs, both of which have lower annual contribution limits. And as long as you meet the requirements for establishing an employer IRA, you can have this type of IRA in addition to one or more individual IRAs.

SEP-IRA

SEP-IRAs are designed for self-employed. Any person who receives self-employment income from providing a service can establish a SEP-IRA. It doesn't matter whether you work full time or part time. You can even have a SEP-IRA if you are covered by a retirement plan at a full-time employee job.

A SEP-IRA is a simplified employee pension. It's very similar to an IRA, except that you can contribute more money under this plan. Instead of being limited to a $5,000 to $6000 annual contribution (2008), you can invest up to 20% of your net profit from self-employment every year, up to a maximum of $46,000 a year in 2008. You don't have to make contributions every year, and your contributions can very from year to year. As with other IRAs, you can invest your money in almost anything (stocks, bonds, notes, mutual funds).

You can deduct your contributions to SEP-IRAs from your income taxes, and the interest on your SEP-IRA investments accrues tax-free until you withdraw the money. Withdrawals from SEP-IRAs are subject to the same rules that apply to traditional IRAs. This means that if you withdraw your money from SEP-IRA before you reach age 59.5, you'll have to pay a 10% tax penalty plus regular income taxes on your withdrawal, unless an execption applies. And you must begin to withdraw your money by April 1 of the year after the year you turn 70.

Simple IRAs

Self-employed people and companies with fewer than 100 employees can set up SIMPLE IRAs. If you establish a SIMPLE IRA, you are not allow to have any retirement plans for your business (although you may still have an individual IRA). SIMPLE IRAs are easy to set up and administer and will enable you to make larger annual contributions than a SEP or Keogh plan if you earn less than $10,000 per year from your business.

SIMPLE IRAs may only be established by an employer on behalf of its employees. If you are a sole proprietor, you are deemed to employ yourself for these purposes and may establish a SIMPLE IRA in your own name as the employer. If you are a partner in a partnership. LLC member, or owner of an incorporated business, the SIMPLE IRA must be established by your business, not you personally.

Contributions to SIMPLE IRAs are divided into two parts. You may contribute:
up tp 100% of the net income from your business up to an annual limit - the contribution limit is $10,500 for 2008 ($13,000 if you were born before 1955), and
a matching contribution which can equal 3% of your net business income.

If you're an employee of your incorporated business, your first contribution (called a salary reduction contribution) comes from your salary, and the matching contribution is paid by your business.

The limits on contributions to SIMPLE IRAs might seem very low, but they could work to your advantage if you earn a small income for your business - for example, if you only work at it part time. This is because you can contribute an amount equal to 100% of your earnings, up to the $10,500 or $13,000 limits. Thus, for example, if you net earnings are only $10,000, you could contribute the entire amount (plus a 3% employer contribution). You can't do this with any of the other plans because their percentage limits are much lower. For example, you may contribute only 20% of your net self-employment income to a SEP-IRA or keogh, so you would be limited to a $2000 contribution if you had a $10,000 profit.

The money in a SIMPLE IRA can be invested like any other IRA. Withdrawals from SIMPLE IRAs are subject to the same rules as traditional IRAs, with one big exception: Early withdrawals from SIMPLE IRAs are subject to a 25% tac penalty if the withdrawal is made within two years after the date you first contributed to your account. Other early withdrawals are subject to a 10% penalty, the same as traditional IRAs, unless an exception applies.