SEP IRA

Archive for May, 2005

Question: Roth IRA or Target Retirement Fund?

I’ve reached the Contribution limit on my SIMPLE IRA and have a little extra to put away. Should I open up a Roth IRA or a Target Retirement Fund? Also, what are the investment limits for each?

Answer: Apples and oranges. A Roth IRA is a type of retirement account within which you can hold a target retirement date fund or other investments. “The investments are the cookies; the IRA is the cookie jar.”

Question: I have a 401k. I did a rollover to a Roth Flex. I took a distribution and put the rest into a CD?

I paid my 10% on that distribution at the time I took it out 12/06. Do I need to complete a 8606 or 5329??
Also, A SEP or SIMPLE IRA is not a 401K correct?

Answer: Did all this happen in the same year? I assume so. You do not have a SEP or SIMPLE so disregard those terms in the forms.

When you moved your money from the 401k to a Roth IRA, you had to first transfer it to a regular IRA. When it was converted to a Roth IRA the money is taxed as ordinary income. When it is distributed you will pay an additional 10% penalty since the money was not in the account for five years, even if the Roth was in existence before you put the 401k money into it (see Pub 590).

You will receive three Forms 1099R

1. For the rollover of the 401k to the traditional IRA.
2. For the conversion of the traditional IRA to the Roth IRA
3. For the distribution from the Roth IRA.

You need Form 8606 Part II for #2, Form 8606 Part III for #3. Since penalty applies to your Roth distribution, you will also complete Form 5329.

MarketRiders CEO Mitch Tuchman on CNN “Your $$$$$” with Ali Velshi & Christine Romans

Question: I have two employers. One offers a 401k and the other a SIMPLE IRA with employer matching. Which should I use?

The 401k has higher Contribution limits of course. Can I contribute the max to each? Or at least contribute to the max of employer matching?

Answer: A SIMPLE IRA or a SIMPLE 401k? They are two different creatures entirely. Bacsue you said the SIMPLE had a match I’ll assume it’s a 401k. As an employee, the amount that you can defer (or contribute) is limited to $15,500. This is called the 402(g) limit. You personally can’t exceed this from a combination of all plans. In addition, there are plan limits. The 401k plan limit is 100% of your income (or lower if limited by 402(g) or plan design). So you can contribute to a 401k up to $15,500 so long as you make $15,500. However, the SIMPLE 401k limit is lower…for that you can only put in $10,000.

So, how much you should put in each is dependent upon a few things…the match in the 401k and your position in the 401k.

The 401k is subject to discrimination testing. The SIMPLE is not…so if you’re a highly paid individual then there is no fear of discrimination testing failure in the SIMPLE so I would max that out and then only put in the amount to get the max match in the 401k. HOWEVER, if you’re a non-highly paid individual then you may be able to curry favors from the owner of the 401k by maxing out THAT plan to help them with any potential discrimination testing issues….sometimes it’s not always about the $$.

So long as you are receiving maximum match in both and you’re putting away as much as you can up to the $15.5k limit then which one gets the excess is not critical. Factors such as discrimination testing, plan fees, investment choices, etc etc should be deciding factor.