Here's the rules that appear in IRS' Publication 560, Retirement Plans for Small Businesses:




"Deadline for setting up a SIMPLE IRA plan. You can set up a SIMPLE IRA plan effective on any date between January 1 and October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after you come into existence. A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan."




When you're self-employed, you're both the employer and the employee for the purposes of the SIMPLE. So, the first $6,500 you put away is done through a "salary reduction" arrangement. To be safe, that amount should be paid to the financial institution within 30 days of the end of the year.




As the employer, you'll also be required to contribute 3% of your net self-employment income into your SIMPLE account. You have until the due date of your tax returns, including extensions, to send in that money.




You need to keep in mind that the total amount you can contribute to retirement accounts through salary deferrals is $11,000 this year ($12,000 if you'll be 50 or older by December 31st.) That means if you're already contributing the maximum into a 401(k) or 403(b) through another employer, you're not allowed to contribute any money into your SIMPLE, and should probably opt to set up a SEP instead.




As October 1st has already passed, your remaining options are to set up a SEP IRA or perhaps, the new "individual 401(k) plan".

--- --- --- --- --- --- --- --- ---

Replying to:

I will have roughly $7500 in moonlighting income for 2002 (paid as an independent contractor). I was considering opening a Simple IRA and contributing the portion that cannot be deductde for work-related expenses. Is there still an Oct 1 deadline for establishing this account? I could not find any mention of this on the IRS website. Also, must these contributions be made through a salary reduction agreement, or can I decide later in the year to contribute money that has already been paid to me?

Zip Code: cpa@mdtaxes.com