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The discussion is about simple and SEP IRAs, as well as traditional IRAs. These accounts provide tax-efficient ways for self-employed individuals and small business owners to save and invest money while taking advantage of tax deductions. The main differences between SIMPLE and SEP IRAs are the eligibility criteria and contribution limits. 401(k) plans are similar to SIMPLE IRAs but are for larger companies. Contributions to SIMPLE and SEP IRAs are tax-deferred, and withdrawals during retirement are taxed as ordinary income. Employers can choose to contribute to these accounts, and the contribution limits vary depending on the type of account. It is important to consult a financial professional and CPA when setting up and managing these accounts. Hey, everyone. Welcome to Money Math. I'm here with Ishmael Garcia. Hey, Bryce. How's it going? It's going fantastic. Today's show, we're going to be talking about simple and set IRAs as well as traditional IRAs. I had a client recently sit down with me, small business owner in the insurance game, and was wanting a tax-efficient way to put as much cash away and invest it as possible, but also taking advantage of all of the tax deductions that go with these accounts. He has five employees and was going for the max efficiency for tax deductions. And simple and set IRAs are really efficient ways as a self-employed person or a small business owner to take advantage of various tax contingencies that go with each of these accounts. I think there's one thing to cover real quick, Bryce. People are always looking for a tax deduction, and that's something that you ran across with your client and what you were doing. I think the old typical CPA advice is, hey, you just need to go out and spend this money, but this is another option for you to get a tax deduction and not have to just buy something that you might not need. Right. And also give a benefit to a lot of your full-time employees or employees on the books in order to retain labour, which has been a huge issue with the market nowadays is retaining employees. And this is a great benefit that you can offer as well as take advantage of the tax deduction. So going into SIMPLES and SEPs, just basic differences. SIMPLES, you need to be a business with 100 or fewer employees. And to participate in the plan, the employees must have at least $5,000 in compensation between any two previous calendar years and expect to earn at least $5,000 in the current year you're going to offer the plan. If you go to SEPs, all employees must be offered the same benefits in the SEP. And the only exclusion for a SEP would be any part-time employees or those who have not worked two of the past five years. So the main key difference being $5,000 of compensation for the SIMPLES participation, whereas the SEP leans towards any full-time employees that have not worked between two and the five of the previous five years. And, Bryce, maybe give them a breakdown, right, of a 401k real quick and how close that is to a SIMPLES. And some people might have not heard of a SIMPLES or they might have not heard of a SEP IRA, but usually most people have heard of a 401k. That's great. That would have been great if I had that prepared. No, no. Maybe just answer that as far as, like, well, a 401k is kind of like the bigger brother of a, you know, SIMPLES IRA, where it's just for, you know, companies with more than 100 people, you're still getting the tax deduction and you're still getting a matching contribution, something along those lines. Okay. That's a great question, Ishmael. A lot of people are familiar with 401k plans being offered at work. 401ks would be the big brother to the SIMPLES in terms of more employees, more than 100 employees at the place where you're employed. And it's very similar in terms of you're taking a match, you are withholding a certain percentage of your check every month, and the employer is matching up to a certain percentage of whatever you are matching or withholding for the year. So a lot of similarities. It allows workers to defer a certain portion of their wages into a retirement account and, as well, getting similar tax advantages. The basic difference would be the size of the company offering it. Yeah, I think you covered that really well right there. All right, moving on. So the main issue with the client, as I alluded to in the preface here, was the tax treatment of the contributions that they were trying to utilize in order to get as much money into the market and saved as possible in the most tax efficient way. So with SIMPLES, the plan operates as tax deferred. All right? Employers receive the tax deduction for the contributions, and employees take the contribution off of the taxable income for the current year. So the account goes tax deferred, right? So these are pre-tax dollars going into this account. The withdrawals at the retirement age would be taxed as at your ordinary income rate. So the contributions for SIMPLES can be up to 3% of your employee's compensation. But if your employees choose not to contribute, you're not required to do a contribution. But you can do a non-elective contribution of up to 2%. The contribution limits for the SIMPLES for 2023 would be $16,000. Those over the age of 50 can make an additional catch-up contribution of $3,000. If you look at the SEFT, the plan operates similar as a tax deferred retirement plan. So the employers receive the tax deduction, obviously, for contributions similar to the SIMPLES, and they grow tax deferred as well. So, however, with the SEFT, you are only participating as an employer, and you can contribute up to 25% of your compensation, or the max of $69,000 as of 2024. So the key difference therein lies. The SEFT would be more similar to a profit-sharing plan, as in it's flexible. You don't have to offer it every year, while as the SIMPLES is every year to a preset match limit where you have to offer it to all your employees, in which they can go ahead and decide whether or not they want to participate, but you as an employer aren't required to. But in terms of SEFTs, once it's established, employers are not required to contribute every year. That's why it's similar to a profit-sharing plan. I know a lot of ag companies like to utilize this just because of the amount of self-employed persons that are in ag. And income varies greatly in agriculture. It goes up and it goes down a lot, and these SEFTs are really handy in order to take advantage of years you have great, a lot of income laying around. And like Ishmael alluded to, you do not want to sit in front of your CPA and buy a bunch of equipment and stuff you don't need necessarily if you can take advantage of the tax deduction this way. But SIMPLES, once they're established, you have to, as an employer, contribute every year. One drawback is a simple IRA, you cannot roll it into a traditional IRA without being in it for two years from the first time you've joined the plan. And as an employer looking at a SIMPLE, we talk a lot about the cost-benefits for various investment vehicles that we recommend, and the startup costs with a SIMPLE generally are lower than the average 401k. Did you get my message? Uh-uh. You didn't get the notes? Oh, there it is. Yeah. I was talking about 2024. Sorry. Oh, gotcha. You're good. I mean, I guess we could just, I don't know, put that in the show notes. Oh, okay. Yeah. Yeah, I was going off 2024 numbers. Okay, let's see. Anyways, any thoughts on that, Ishmael? Yeah, I guess my only initial thought is, regardless of which one you choose, this is a great plan to offer. These are great plans to offer to your employees. It's not just a marketing trick. It truly is. It's an extra incentive and a bonus that, hey, if you're willing to work hard for me and you're willing to contribute not only to the plan but to the company, I'm going to give you something back, right? And if I'm matching you 3% on your wages on a SIMPLE IRA, you put in 3% and I match the 3%, that's a 100% return right off the bat right there just by putting the money in. Now that money is going to start to compound over time and it's going to grow to a decent amount especially if you're starting this while you're young. Right. And one quick planning point with the SIMPLE because it's 2024 limits are $16,000. One option that you must consider with employees that say they're not making very much over $5,000, that employee cannot go into their savings and pull out $16,000 and put into the account. It has to be – they cannot contribute more than their gross income for the current year for contributing to the SIMPLE. And as tempting as that would be because obviously its limits are higher than, say, a traditional or a Roth IRA, your employee could think they could go a backdoor, for instance, and put more into this account. It cannot be more than their gross income for the year in terms of planning purposes from the employer or the employee contributing to the SIMPLE. Maybe mention, Bryce, too, that you can't just go out and take $16,000 from the bank and put it in there. This has to be withheld from your paycheck. Okay, I thought, yeah. Or can you do that? Can you do that? You have to show at least enough income. You have to show over $16,000 income if you want to max it out for the year. Okay, I guess we can cut that out. Yeah and that's why you can do that plus the match. Okay. Up to the limit. Bryce, where does someone go about setting one of these up? Like someone might be listening to this and saying, okay great I want to do something for my employees. I want to get the tax deduction but where the heck do I set this up? You definitely need to loop in a financial professional at this point. We've done quite a few SIMPLES at Parker Advisors and this is something you definitely need the help of, a financial services specialist. In terms of a financial plan, getting all of your employees set up, getting all of the accounts under one program and just efficiently being able to contribute and execute a match. Definitely something that's not do-it-yourself. How important is it to loop in your CPA too with your financial professional? It's absolutely crucial because as we went through this client example of wanting to go through and establish a SIMPLE for instance, he floated the idea can I still utilize a traditional IRA which is the same variation of both a SIMPLE and a SEP as terms of tax treatment. Can I wrap a traditional IRA into this, contribute to both and take the tax deduction with both of those? Without having a CPA there or having CPA knowledge and tax treatment, you're going to be floundering around trying to find an advisor, trying to find somebody to answer that question for you. In terms of a traditional IRA contribution with a SIMPLE contribution, you need a CPA to answer where are you in terms of your annual gross income because you will get limited out and you can still contribute to a traditional if you're over the AGI amount. However, you do not get the tax deduction for the year. For instance, married file jointly, you have to be in the $230,000 to $240,000 range if you're not contributing to any other plan to be able to still take a tax deduction for the IRA contribution for the current year. But if your both spouses are covered, for instance, by the SIMPLE, it lowers the AGI down to $123,000 to $140,000 as your limit to take the tax deduction. So it's crucial to have a CPA involved in this decision. And these really are long-term plans. This isn't just something that you're going to put money in to get the tax deduction and take right back out in a year, two years or five years. These are really long-term strategies and it's just like a traditional IRA. It's just like a Roth IRA. If you take these out before 59.5, you are going to face a penalty from the IRS for taking this out early. Right. And another planning purpose we need to involve here is the fact, the availability of a Roth conversion. Ishmael, I know you've done quite a few recently. What would be the effect of utilizing a SIMPLE with converting that money to a Roth? Oh man, this question gets me absolutely fired up, Bryce. As Gavin said when I had him on the podcast, we really are in a tax cell right now as far as where tax rates are. After the Tax Cuts and Jobs Act of 2017 goes away and sunsets, the 12% current tax bracket, the federal, is going to jump up to 15% in 2026. The 22% tax bracket will jump up to 25% and the biggest jump is going to be from the 24% tax bracket jumping up to 28%. So getting as much money converted into a Roth, yes it's going to hurt to bite the bullet and pay the tax now. But getting to put it into an account where it's going to continue to grow but grow truly tax free, is going to pay dividend compared to these other accounts when you do retire and now you start withdrawing it and now you're having to pay tax on it. That's just going to continue to get higher and higher, especially as the account gets bigger right. For example, we have the required minimum distribution that you're going to face whether you're with a SIMPLE, a SEP or a traditional IRA. And what that is, is that once you hit 73, the IRS says hey this money's never been taxed before. So you know you got to start taking some of this out and paying taxes on it. And so boom you're hit with the tax bill there and especially as your account's gotten bigger, that's more that you're having to take out out of the account facing you with the larger tax bill. Rather than just biting the bullet now, I know it stings and hurts but you bite the bullet now and it's completely tax free moving forward. We're both proponents of tax free millionaires and there still is uncertainty moving forward how much longer Roth accounts may or may not be offered. And taking advantage of what Ishmael alludes to, the known rate and known certainty what will be coming out of your paycheck now, maybe that's reason to redo the math on what your tax bill will be. Again, needing a CPA or tax professional looped in to decide whether or not it's cost effective to pay an ordinary income rate 40 years from now versus paying what Ishmael gave, the known rate now that is going to be much lower. And we have to take in consideration the effects of inflation 40 years from now. There are so many variables that are unknown versus known when making the Roth conversion decision. For instance, 15% of say you have $100,000 of taxable income, 15% now versus 15% after 40 years of growth on a tax deferred account. You can't even compare it apples to apples in my mind. And the client was very adamant of just mitigating the tax bill now. That is the only incentive for him other than retaining key talent to his company is mitigating the amount of money that goes to Uncle Sam. Well, effective and I'm glad he is making this decision because if you look at it, he and his wife will be able to do $32,000 total because they meet the annual gross income range. Every year they're able to contribute to this for 30 or so years he has left. Being he's 38 years old, I'm glad that this is an incentive for him to stay to the market and it will take more tax planning on the back end for this client because he's going to have to now budget and understand he has an ordinary income tax bill moving through until he passes away. Now, if he would have done just the traditional IRA, Bryce, he would have gotten no match, wouldn't have gotten as high of a contribution since he would have been capped at the $7,000 for him and $7,000 for his wife being under the age of 50 for 2024. Being able to have a simple IRA is going to allow him to make the higher contribution, get the higher tax deduction, get the match too and just stash as much cash as he's able to put in there. Right. And in my mind, if you look at, say he phased himself out of the limits to do a traditional and a simple in terms of tax deduction. In my mind then, if you still want to put the additional $7,000 in the market, now it's time to have a Roth on the bottom end, right? And you're not mitigating any tax but you still have the availability and options to put as much cash away as possible. You said that, that was interesting. I got to stop saying, you know, stuff like that. Now if he had done just the Roth, same thing Bryce, he would have put it in, right? Just the $7,000 limit for him, $7,000 limit for his wife. It's growing tax free which is what we want but by doing the simple IRA, he's putting in more than he would be able to just put straight into the Roth, convert that in two years, pay the tax now and now he really has a mega backdoor Roth, right? By funding it with so much money. Absolutely. And it just all comes down to whether or not you want to suffer now or later, right? And the same goes for small businesses, entrepreneurs, they always have that decision early on. In your 20s to 30s, you're establishing your business, you're establishing your income and what your scale might be and more often than not, you're faced with the suffer now or suffer later problem whether it shows itself in terms of tax or the cost of expansion or cost of scale and when you relate that decision to say contributing to a simple or doing a backdoor Roth, my advice will always be suffer now versus later Just because of what we've already pointed out, it's known what the suffering limit will be in the current environment. You do not know your medical expenses, you don't know your cost of long-term care. We could have 8%, 9% inflation for 15 years. We do not know that. But mitigating as much suffering to the current year and working through it because you're earlier in your career, you can pull more hours, you can loop in your spouse to help you with your entrepreneurial activities or business. It's crucial to make that decision in my opinion now. No feedback on that. One second. Dude, I have this article that I printed and it goes through SEPs, it goes through simples, it goes through the pros and cons. I think we should almost use this as an outline. I think it would have been great. Yeah. I do have. What's funny is this is all stuff we know. It's harder when you have to rip it off the top of your head. You have to rip it, yeah. I mean, that's kind of all I have, really. Yeah, no, that's great. I mean, once we do the editing, gosh, this will be 15 minutes. I just think there's so many numbers and there's so many variables, you can't rip too far. So I'll just wrap this up then. Okay. And we'll just end it right there. Okay. Okay. Wait, actually, Bryce, this article has a great bottom line summary. Do you want me to send you that real quick? Maybe you can read that real quick, and I think it would be a great way for you to sum it up. Okay. Are you emailing it to me? Yeah, hold on. I'm just going to copy and paste it in the chat. Okay. Okay, read that real quick and see what you think. Yeah, this would be a great way just to end it. And then maybe say like, just give them a stupid disclosure that EventX makes us give. Like, you know, this isn't a one… and it kind of says it in there, but just consult with your financial professional as this may not be suitable for all people, something like that. Yeah, okay. Self-employed people, they're in charge… What? Maybe do your personal and be like, well, this was a great episode, and then finish with that. Okay, okay, okay. I was just thinking how it would wrap into the end of where I finished with like now. Okay. Wrap it into that, but… Maybe you could say like, long story short, self-employed people are in charge of saving for their own retirement. Okay. No, this was a great discussion about self-employed… Self-employed… Oh, God, I fucked that up. Just say what I said. Just say, long story short, Ishmael, you know, long story short, Ishmael, self-employed people are in charge of saving for their own retirement. Yeah, yeah. Long story… You slapped right as I took off. Long story short, Ishmael, self-employed people, they're in charge of saving for your own retirement. There are tax-advantaged ways to save, and it's not a one-size-fits-all situation. You want to consult a financial planner about the best way for you to save if you're self-employed. But no matter what retirement saving vehicle you're going to choose, getting into the habit of putting money aside is crucial for your continued financial health. It's not one-size-fits-all, but consult your financial planner. Consult your CPA. Make sure that you have all your bases covered to get advice for your particular situation. And be excited. You know, this is a plan, like I said earlier, that you're offering to your employees as a way for them to begin saving for their own wealth journey, right? And then you're throwing a little bit of a sprinkle on top of that by giving them that match. Absolutely. And any questions, where can they find you, Ishmael? Yeah, they can reach us at our office number here at ParkerAdvisors at 208-337-3271. Or you could find me and Bryce on our website at Parker-Advisors.com. Absolutely. Any more questions, you can reach me at my line at 208-697-2202 through the Parker Advisor website or my email, Bryce, at ParkerAdvisors.com. That's all I had. Awesome. Thanks, guys. We'll talk to you next week. Yep.