Advanced Underwriting Consultants

Question of the Day – January 18

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: If a SIMPLE plan participant withdraws money from the SIMPLE IRA within two years of beginning participation in the plan, does the 25% penalty tax apply?

Answer: Not always.

During the first two years of participation, SIMPLE plans have special tax rules with regard to distributions.  Here’s what the IRS says:

Generally, the same tax results apply to distributions from a SIMPLE IRA as to distributions from a regular IRA (i.e., an IRA described in section 408(a) or (b)). However, a special rule applies to a payment or distribution received from a SIMPLE IRA during the 2-year period beginning on the date on which the individual first participated in any SIMPLE IRA plan maintained by the individual’s employer (the “2-year period”).

Under this special rule, if the additional income tax on early distributions under section 72(t) applies to a distribution within this 2-year period, section 72(t)(6) provides that the rate of additional tax under this special rule is increased from 10 percent to 25 percent. If one of the exceptions to application of the tax under section 72(t) applies (e.g., for amounts paid after age 59 1/2, after death, or as part of a series of substantially equal payments), the exception also applies to distributions within the 2-year period and the 25-percent additional tax does not apply….

The 2-year period described in the previous question begins on the first day on which contributions made by the individual’s employer are deposited in the individual’s SIMPLE IRA.

A distribution from a SIMPLE plan during the first two years, regardless of the participant’s age, is eligible only for rollover into another SIMPLE plan.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 21

Ask the Experts!

Here’s the question of the day.

Question: What are the deadlines for an employer to establish a SEP IRA or a SIMPLE IRA?

Answer: A SEP is funded with employer contributions only.  It can be set up and funded for a year as late as the due date (including extensions) of the business’s income tax return for that year.

SIMPLE IRA plans accept both employer and employee contributions.  They are always calendar year plans and ordinarily can be set up any time between January 1 and October 1 of a year.

There are two exceptions to the rule: if the employer is a new business that comes into existence after October 1 of a particular year, the SIMPLE IRA can be set up as soon as administratively feasible.  Also, if the business has ever maintained a SIMPLE IRA in the past, a new SIMPLE IRA can be established only on January 1.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.