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SIMPLE match from PREVIOUS employer?

Guest Kuryan Thomas

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Guest Kuryan Thomas

My previous employer has a SIMPLE IRA plan. He took the 3% matching option (i.e., all contributions are matched up to 3%).

However, rather than matching contributions each paycheck, he matches the entire year's contributions in one lump sum in April of the following year.

So, for example, my 1999 contributions were matched in one lump sum in April 2000.

I left this employer in May 2000. I shut down my Merrill Lynch SIMPLE and rolled it to a rollover IRA at Vanguard.

It never occurred to me to ask for the 2000 match when I left. What are my options now? Can I insist on receiving my 2000 match, and if so, how would I receive it (i.e., which account)?

Thank you.

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Guest Paul Leslie

One point I want to make--I hope you were in that SIMPLE plan at least two year before you rolled it over to an IRA. If you started 1/1/99 and in May of 2000 rolled that SIMPLE IRA to a traditional IRA, you are going to have income tax and penalties because you were not in the plan for 2 year. This is a special rule for SIMPLE plans. Just wanted to make that point for your information.

You are going to have to contact your previous employer to make arrangements. The employer has up to the due date including extension of the employer's tax return to deposit the matching, so you may be waiting. (Hopefully the employer might pay you off right away and they they would tell you where the matching is going to be deposited.) The employer does have to give you the matching portion otherwise they would be violating the plan.

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Guest Kuryan Thomas

Thanks for the information. I wish I had known about this board before I did the rollover, as I am now on the hook for the penalty. However, the hassle of dealing with Merrill was so high that I probably would have done the rollover anyway, even if I had known.

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Guest Paul Leslie

I was really hoping you were not going to say that. For your sake!!

Here is the scenario becasue you were not in the SIMPLE plan for two years: (WARNING this is ugly)

1. It is deemed you took the money out of the SIMPLE plan--Pay 25% penalty to Federal (your state may also charge a penalty) plus you have to report the rollover as regular income on your Federal tax return (probably the state too). This means right off the bat about 50% of that rollover is eaten up by penalties and taxes.

2. Because that money was put into a traditional IRA instead of SIMPLE IRA, it is as if you made a regular contribution to the IRA. The most that can be made to an IRA is 2,000 per year. If the rollover is more than $2,000, any amount in excess of $2,000 will have an additional 6% penalty tacked on.

Example--your rollover was 6,000

15% income tax bracket 6,000 x .15 = 900 if your in 28% bracket use .28

25% penalty for Fed 6,000 x .25 = 1500

6% excess contribution 4,000 x .06 = 240

Plus an state income taxes and penalties

So of that $6,000, you lost at least $3,640. ouch

You can avoid the 6% penalty for an excess contribution by withdrawing the excess amount by the due date of your tax return.

I can check for you to see if there is any way to get out of the 25% penalty and income taxes. I don't think so but I'll look.

Most broker/dealers will assume you contacted your tax advisor before doing anything, so I don't think you will have any recourse against them.

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Guest Kuryan Thomas

Wow, that is pretty bad. I'm on the hook anyway for the withdrawal penalty and tax. I could withdraw the excess over $2,000 to avoid a 6% penalty. But taking a longer term view, what if I either

a) Left the money in there and paid the 6% penalty but I get 30 years of tax-free compounding (I am 40 years old).

b) Withdraw the entire amount and put $2,000 in a Roth.

I realize no-one gives investment advice on a help website, but if you were in my situation, which option is better?

By the way, I do have a 401k at my current employer and my AGI is well beyond the limit for a deductible IRA. I've already made my non-working spousal $2,000 contribution, and my 401k is maxed out, so I don't have any real options to offset the income, except maybe some capital losses. About my only hope for avoiding a huge bill in April is that I've overpaid SS tax by a lot, since I had two employers this year.

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Guest Paul Leslie

Here where it gets kinda tricky.

The Roth is always a better option than a nondeductiable IRA assuming your AGI is less than $150,000. Remember Roth IRAs do have phaseout 150K to 160K for married filing joint.

The 6% penalty is not a one time penalty if you over contribute and leave the money in there. Any excess contributions are carried forward and considered to be a contribution in a future year. So it is possible to get penalized on the same dollars in more than one year.

Example with 6,000

Contribute 6000 in 1999 penalty is 6% of 4,000

4000 carried forward penalty for 2000 is 6% of $2000

2000 carried forward No penalty because less than 2000

This may not be the worse thing if the money in the IRA is growing faster than 6%. The earning on the excess contribtuion are not subject to penalty only the orginal contribution. In the long run the time value of money will worth paying the penalties. You would need to run the numbers to see what the difference is in 20, 30, 40 years between making 6k lump sum contribution with penalties vs. spreading it out over 3 years with no penalties assuming a certain rate of return.

Capital losses would be one method to reduce your income. Pay ahead on itemize deductions like property taxes or if take medical expenses have the procedures done in 2000 instead of 2001.

If you would want more specific numbers in your situation drop me an email

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