SIMPLE IRA's/401(k)s

[Guest sherryc]

A self-employed taxpayer with no employees established a SIMPLE plan in 2001. He has made a small contribution in 2002. However, he can contribute much more in 2002 to a 401(k) plan. A taxpayer cannot have both a SIMPLE plan and another retirement plan in the same year. But why wouldn't this work: Establish a 401(k) plan for 2002. This makes the SIMPLE plan invalid; therefore, he would have to take a distribution of all 2002 contributions to the SIMPLE.

FYI, taxpayer is over 59 1/2 . He can establish a single 401(k) plan with Oppenheimer at a cost of $15 per year. There is no 5500 reporting required until the asset value reaches $100,000. (I mention these so they will not be response issues.)

Thanks

Sherry

[Gary Lesser]

Sherry,

Essentially correct. The excess simple contributions for the year would be treated as EI. It is then removed by the individual, adjusted for gain/loss, generally on or before the tax filing date to avoid the 6% penalty tax. The IRS has unofficially indicated that the 2-year (25% penalty) rule would not apply. If under 59-1/2, the 10% penalty might apply. Convincing the bank that the 25% pernalty doesn't apply may be tough (cd always work it out with an explanation on the tax return). Hope this helps