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Last Chance to Start a SIMPLE-IRA
The deadline for setting up this retirement account falls on Oct. 1

The individual retirement account got a big shot in the arm this year -- thanks to the Roth IRA, a more-versatile version of the traditional IRA. But the new IRA's biggest drawback is still the stingy $2,000 limit.

Of course, if you work for a big company, you can contribute up to $10,000 to your 401(k) plan if your salary's high enough. But what if you're self-employed or you moonlight to boost your income from a job that doesn't have a 401(k) plan? Are you stuck with a $2,000 IRA? Fortunately, not. Consider a SIMPLE-IRA, a plan that lets you split the difference and contribute $6,000 per year. (SIMPLE stands for Savings  Incentive Matching Plan for Employees and suggests that small businesses will run into relatively little red tape establishing these retirement accounts.)

SIMPLE-IRAs are available for small businesses with fewer than 100 employees. If you work for such a company, then your employer is probably aware of SIMPLE-IRAs -- they've been around since Jan. 1, 1997. But if you're the boss and have maybe one or two employees, or if you do some freelance work on the side, you might want to set up your own SIMPLE-IRA before the deadline for this tax year expires this Thursday.

Let's say you're a spouse who stays home with the kids, plus you work part-time in a business that generates $6,000 per year in income. You can put $6,000, the entire amount, into a SIMPLE-IRA, which grows on a tax-deferred basis the way traditional IRAs do. Once you hit age 59 1/2, you can begin to withdraw the money, though you'll pay tax on the withdrawals.

In addition, if you have $2,000 in wages from other sources, then you can set up a Roth IRA for that amount. Generally, the Roth IRA grows tax free. Now you have $8,000 in retirement savings working for you.

STARTUP SAVINGS. If your income is relatively low, the SIMPLE-IRA beats another savings vehicle for self-employed people, the SEP-IRA, which lets you contribute about 13% of your income to savings. People with modest side businesses who use SIMPLE-IRAs "can get a much larger deduction than they otherwise could get with a SEP-IRA," says Bernie Kent, a certified public accountant with PricewaterhouseCoopers in Detroit.

For instance, if you have $20,000 in moonlighting income, then by putting $6,000 into a SIMPLE-IRA, you've socked away 30% of your income. "You'd have to have about $46,000 in income before the SEP-IRA would produce a higher contribution than the SIMPLE-IRA," says Kent.

Things get a bit more complicated if you employ a few people and want to use a SIMPLE-IRA. The reason: You have to make contributions to your employees' retirement accounts if they wish to participate.

The contributions generally must be either: 1) a dollar-for-dollar match of the employee's contribution, up to 3% of the employee's compensation, or 2) simply 2% of the employee's compensation. So let's say you pay a part-time employee $20,000 per year and the person chooses to contribute the maximum $6,000 to the account. You would kick in either 1) $600 or 2) $400 on their behalf. "All of our clients choose the 3% match because they want to help their employees save," says Sue McGrath, managing director for Piper Jaffray in Portland, Ore. "If the employees don't save, then there's no match."

If you have a family business, in which husband, wife, and children work together, then a SIMPLE-IRA can really be a good savings vehicle. If the business starts to generate a lot of income, then each employee can sock away $6,000 per year, plus employer matches of up to $6,000. "So pretty soon, you can put some hefty amounts away," says McGrath.

If a SIMPLE-IRA seems right for you in 1998, better hurry. You have only until Thursday, Oct. 1, to set one up at your friendly bank, mutual fund, or brokerage firm. Once you have it set up, though, you have until Dec. 31 to fund it.

By Stuart Weiss in Portland

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