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401(k). 401(k) plans are better for two very important goals of small plan sponsors: maximizing contributions and skewing employer contributions. However, the SIMPLE IRA is still very attractive to employers who look for low-cost plan with few administrative burdens.

SIMPLE 401(k) plans are different from the SIMPLE IRAs because the employees don’t own their individual accounts. The other requirements for a SIMPLE 401(k) are the same as for the SIMPLE IRA, however, the 401(k) must meet some additional requirements that are set forth for traditional 401(k)s.

Keogh Plans Keogh plans have been around much longer than SIMPLEs, as they were established in 1962 as part of the Self-Employed Individuals Retirement Act. Historically, Keogh plan followed statutory provi- sions that governed partnerships and people who are self- employed. However, as discussed in Chapter 10, the only distinction that still exists is the manner in which self-employed individuals determine their income for the purpose of applying the above limitations.

Keogh defined contribution plans allow up to 20 percent of earned income or $40,000, whichever is less. So if you were to earn $20,000 per year doing some extra work that was considered self- employment work, you could start a Keogh with a $4000 contribu- tion for that calendar year. Those who contribute to a Keogh will still be able to make their annual contributions to their traditional and Roth IRAs.

Keoghs are subject to the same tax treatment as other types of retirement accounts. Interest and gains are accrued on a tax- deferred basis. Any withdrawal made before age 591/2 will be sub- ject to a 10- percent early-withdrawal penalty, and all withdrawals will be subject to ordinary income tax. Contributions made on an employee’s behalf for an employee won’t be counted as part of the employee’s current taxable income, and any contributions made by an employee as part of a salary reduction agreement will be done on a before-tax basis.

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