Undo SIMPLE IRA Contributions

[Guest Noidy]

I added to a SIMPLE IRA for 2002 but should not have because a SEP is much more appropriate for my situation. Can I "undo" my $7,000 of employee SIMPLE contributions without penalties and taxes? The $7,000 is now worth about $6,500 and I haven't yet filed my 2002 tax return. If yes, how is this handled?

[Gary Lesser]

By contributing to a SEP for 2002, you will effectively eliminate the SIMPLE plan (which generally can not co-exist with a SEP). The SIMPLE contributions are not deducted if self-employed (reflected included as "wages" on W-2 if not SE). Amounts contributed to SIMPLE-IRAs are then corrected as excess (which will take into account the loss).

You may be eligible for an deduction for the loss if you itemize (subject to 2% floor) and you fully distribute all SIMPLE-IRA amounts from all SIMPLE-IRAs and recieve back less than the nondectible contributions (i.e., the excesses that were taxed) made to the account.