How Much Can Be Contributed on My Behalf?

The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made.

Salary reduction contributions limit. Salary reduction contributions (employee-chosen contributions) that your employer can make on your behalf under a SIMPLE plan are limited to $7,000 for 2002 ($8,000 for 2003).

If you are a participant in any other employer plans during 2002 and you have elective salary reductions or deferred compensation under those plans, the salary reduction contributions under the SIMPLE plan also are included in the annual limit of $11,000 for 2002 ($12,000 for 2003) on exclusions of salary reductions and other elective deferrals.

You, not your employer, are responsible for monitoring compliance with these limits.

Additional elective deferrals can be contributed to your SIMPLE if:

• You reached age 50 by the end of 2002, and
• No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.

The most that can be contributed in additional elective deferrals to your SIMPLE is the lesser of the following two amounts.

1. $500 for 2002 ($1,000 for 2003), or
2. Your compensation for the year reduced by your other elective deferrals for the year.

The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them.

Matching employer contributions limit. Generally, your employer must make matching contributions to your SIMPLE IRA in an amount equal to your salary reduction contributions. These matching contributions cannot be more than 3% of your compensation for the calendar year. See Matching contributions less than 3%, later.

Example 1. In 2002, Joshua was a participant in his employer's SIMPLE plan. His compensation, before SIMPLE plan contributions, was $41,600, or $800 per week. Instead of taking it all in cash, Joshua elected to have 12.5% of his weekly pay ($100) contributed to his SIMPLE IRA. For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $7,000 limit on these contributions.

Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. Because his employer's matching contributions must equal Joshua's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600).

Example 2. Assume the same facts as in Example 1, except that Joshua's compensation for the year was $240,000 and he chose to have 2.916% of his weekly pay contributed to his SIMPLE IRA.

In this example, Joshua's salary reduction contributions for the year (2.916% — $240,000) were equal to the 2002 limit for salary reduction contributions ($7,000). Because 3% of Joshua's compensation ($7,200) is more than the amount his employer was required to match ($7,000), his employer's matching contributions were limited to $7,000.

In this example, total contributions made on Joshua's behalf for the year were $14,000, the maximum contributions permitted under a SIMPLE IRA for 2002.

Matching contributions less than 3%. Your employer can reduce the 3% limit on matching contributions for a calendar year, but only if:

1. The limit is not reduced below 1%,
2. The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and
3. Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which they can enter into salary reduction agreements.

For purposes of applying the rule in item (2) in determining whether the limit was reduced below 3% for the year, any year before the first year in which your employer (or a predecessor employer) maintains a SIMPLE IRA plan will be treated as a year for which the limit was 3%. If your employer chooses to make nonelective contributions for a year, that year also will be treated as a year for which the limit was 3%.

Nonelective employer contributions limit. If your employer chooses to make nonelective contributions, instead of matching contributions, to each eligible employee's SIMPLE IRA, contributions must be 2% of your compensation for the entire year. For 2002, only $200,000 of your compensation can be taken into account to figure the contribution limit.

Your employer can substitute the 2% nonelective contribution for the matching contribution for a year, only if:

1. Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution, and
2. This notice is provided within a reasonable period during which employees can enter into salary reduction agreements.

Example 3. Assume the same facts as in Example 2, except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Because his employer's nonelective contributions are limited to 2% of up to $200,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $4,000. In this example, total contributions made on Joshua's behalf for the year were $11,000 (Joshua's salary reductions of $7,000 plus his employer's contribution of $4,000).

When Can I Withdraw
or Use Assets?

Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. These rules are discussed in chapter 1.

Your employer cannot restrict you from taking distributions from a SIMPLE IRA.

Are Distributions Taxable?

Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. If the distribution is an early distribution (discussed in chapter 1), it may be subject to the additional tax on early distributions. See Additional Tax on Early Distributions, later.

Rollovers and Transfers Exception

Generally, rollovers and trustee-to-trustee transfers are not taxable distributions.

Two-year rule. To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA.

After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan).

Additional Tax on Early Distributions

The additional tax on early distributions (discussed in chapter 1) applies to SIMPLE IRAs. If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer's SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%.

Also, if a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed.

Previous | First | Next

Publication Index | 2002 Tax Help Archives | Tax Help Archives | Home