Chapter 15 Item Set 8: SIMPLE IRAs

Pauls Paint - N - Plumbing, Inc. (3P) has been in business since 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.

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?

3. What are the annual dollar limits for contributing to a SIMPLE IRA and Traditional IRA? Also, what are the phase-out levels for making these contributions, including spousal IRA contributions?

4. Pete has been with 3P for a year and a half. He has deferred some of his compensation and has received a company match in the SIMPLE. Petes daughter is about to attend college, however, he has not saved any money for her education. What are the tax implications if Pete takes distributions from his SIMPLE IRA with 3p to pay for her college education expenses?