A reader recently asked,"What are the advantagesand disadvantagescreated by paperworkand future contributionswhen closing my Money PurchaseKeogh Plan and opening a SIMPLE[savings incentive match plan foremployees] IRA for future contributions?" Due to the technical nature ofthe question, I contacted a local businessassociate who specializes in thearea of pension administration, DavidKitcoff, a third-party administratorand managing director of Kitcoff-APSIInc, in Miami, Fla.
A Keogh plan is a qualified retirementplan for an unincorporated business.It follows the same rules as aplan for an incorporated business, so aKeogh plan can be a profit-sharing,401(k), money purchase, or even adefined benefit plan. Most money purchaseplans were converted into eithera profit-sharing or 401(k) plan in2002 when the contribution limit forprofit-sharing plans increased from15% of salary to 25% of salary plusthe 401(k) deferral.
The advantage of a qualified plan isprimarily the higher deductible contribution.If you are under age 50 andyour net Schedule C income is at least$161,750, the maximum contributionto a 401(k) plan for 2005 is $42,000.If you are age 50 or older, the maximum2005 contribution is $46,000,provided your net Schedule C incomeis at least $165,800.
The disadvantage of a qualifiedplan is the paperwork. If the planassets are over $100,000, a form5500-EZ needs to be filed each year.In addition, the plan document needsto be updated every time Congresschanges the rules, which occurs everyyear. In the past, the required amendmentsdid not have to be done everyyear. They were lumped togetherunder various acronyms (eg, TEFRA,DEFRA, REA, TRA 86, and GUST)and the plan document would have tobe entirely restated at a later date.Recently, there seems to be a trend torequire interim amendments. The costto annually administer a qualified plancould be as high as $1000, and a similaramount would have to be paidwhenever the plan documents need tobe entirely restated.
The advantage of a SIMPLE plan isthe reduced paperwork and the significantlyreduced fees to administer it. Thedisadvantage is the lower deductiblecontribution. Under a SIMPLE plan, themaximum 2005 contribution for anindividual under age 50 is $10,000 plus3% of salary. For those age 50 andolder, the maximum contribution for2005 is $12,000 plus 3% of salary.
Under a qualified plan, employeesare generally eligible on January 1 orJuly 1 after 1 year of service, at least1000 hours annually. Under a SIMPLEplan, employees are eligible if they hadat least $5000 of salary in the 2 yearsprior to the current year. Regardingprotection of assets, under the BankruptcyAbuse Prevention and ConsumerProtection Act of 2005, qualifiedplans and SIMPLE plans basicallyhave the same level of protection.Eventually, the $1,000,000 limitationfor SIMPLE accounts may come intoplay and be the only major differencebetween the two.
Whether a Keogh or SIMPLE planis better for you depends on the level ofcontribution you want and your levelof self-employment income. However,you may ask yourself if the cost ofadministration is worth the benefit ofthe Keogh plan.
and his partner, Harris L.
Kerker, are principals of the Asset Planning,
Group, Inc., in Miami, Florida. The company
specializes in investment, retirement, and
estate planning. Mr. Kosky also teaches corporate
finance in the Saturday Executive and Health Care
Executive MBA Programs at the University of Miami in Coral
Gables, Florida. Mr. Kosky and Mr. Kerker welcome questions
or comments at 800-953-5508 or e-mail Mr. Kosky
directly at ProfessorKosky@aol.com.
Thomas R. Kosky