Ed Slott's Free IRA Updates June 2008

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Ed Slott's Free IRA Update

July 2008

Volume 1, Number 7


In This Issue

  • Focus on SIMPLE IRAs 
  • Question of the Month
  • News, Rulings and Other Updates
  • Retirement Planning Tip
  • Ed Slott’s IRA Advisor – July’s Issue




July Focus – SIMPLE IRAs

Before you know it, October 1 will be upon us and employers who want to establish a Savings Incentive Match Plans for Employees (SIMPLE) IRA for 2008 for employees of small employers (SIMPLE) IRA for 2008 will have missed the deadline for doing so, unless all required paperwork and notification are completed by then.  For those who plan to establish a SIMPLE IRA for 2008, the following guidelines can be helpful.


Eligible Employers

A business owner may establish a SIMPLE IRA for his business only if he had no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year. For this purpose, all employees, including those who are not eligible to participate in the plan must be counted.


Eligible Employees

All employees who received at least $5,000 from the employer during any two preceding years, and are reasonably expected to receive at least $5,000 in compensation during the current year must be allowed to participate in the SIMPLE IRA.


Employees covered under a collective bargaining agreement and certain non-resident aliens may be excluded from the plan


Contribution Rules

Employees may make salary deferral contributions of up to $10,500 for 2008, providing the amount deferred does not exceed 100% of their compensation. Employees who are at least age 50 by the end of the year may defer an additional $2,500.


Employers must make either a matching contribution of 3% of compensation to all employees who make salary deferral contributions; or make a 2% non-elective contribution to all eligible employees whether or not they make salary deferral contributions. The 3% matching contribution can be reduced to at least 1% for two of every five years.


Notification Requirements

An employer must notify each employee of the employee’s opportunity to enter into a salary reduction agreement or to modify a prior agreement. This notification must be provided immediately before the employee’s 60-day election period.


For new SIMPLE IRAs, the 60-day period includes the date the employee becomes eligible. For example, if an employer establishes a SIMPLE IRA Plan effective as of August 1, 2008, each eligible employee becomes eligible to make salary reduction contributions on August 1 and the 60-day period must begin no later than August 1. As such, employees may make or change salary deferral elections for the year beginning August 1 and ending 60-days later.


Choosing the SIMPLE Plan Document

When establishing the SIMPLE IRA, the employer may choose to use either of the following:

  • Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution, or
  • Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution.


In some cases, the choice of form will be determined by the financial institution with which the employer chooses to establish the SIMPLE IRA Plan. For instance, Financial Institution ABC may only use the Form 5305-SIMPLE for establishing new SIMPLE IRA Plans, and if the employer wants to establish the SIMPLE IRA Plan with that financial institution; he would then need to use the Form 5305-SIMPLE.


So what’s the difference between the forms?


  • Form 5304-SIMPLE: If the employer uses Form 5304-SIMPLE, employees can choose the financial institution with which they want to establish their SIMPLE IRAs and the employer would be required to send their contributions to the employees’ SIMPLE IRAs at those financial institutions.


  • Form 5305-SIMPLE: All employees are required to establish their SIMPLE IRAs with the financial institution where the employer establishes the SIMPLE IRA Plan, and all SIMPLE IRA contributions for the plan would be made to accounts held with that financial institution. Employees that want to maintain their SIMPLE IRA at another financial institution may do so. However the employee will need to transfer or rollover their contributions from the SIMPLE at the employer’s financial institution to the SIMPLE at their own financial institution. The employer is required to provide notification to employees regarding fees that may (or may not) apply to such transfers.




Except for the Simplified Employee Pension (SEP) IRA, the SIMPLE IRA is considered to be the easiest plan to maintain for a business, as there are no administrative or top heavy testing and no 5500 filing requirements. However, employers should be aware of the notification requirements and ensure that they are satisfied so as to avoid associated penalties.


Detailed information on SIMPLE IRA Plans is available in IRS publication 560, available at www.irs.gov


Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of what the newsletter includes, you can preview past issues before subscribing.

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Question of the Month

Question: I left my former employer this year and still have a balance of over $250,000 in my account under the 401(k) plan that they established for their employees. I am thinking of rolling over the amount to my traditional IRA. However, I am in my early 50’s and would be subject to the 10% early distribution penalty if I take distributions from my traditional IRA. If I don’t find another job soon, I will need to make withdrawals from the balance. Should I leave the amount in the 401(k) plan so that I can make penalty free withdrawals at age 55 (or later)?


Answer: It depends. The age 55 exception applies only if you left your employer in the year that you reach age 55, or at a later age. If you left your employer at age 52, your withdrawals will not be exempted from the 10% early distribution penalty (under the age 55 rules) even if you leave the assets in the plan until you reach age 55.  However, since you no longer work for the employer, you would be eligible for the exemption under the substantially equal periodic payment (SEPP) rule for your 401(k) assets. Under the SEPP rule, you would be required to take distributions for five years or until you reach age 59 ½, whichever is longer, and the amount you are required to withdraw each year is determined by using one of three IRS pre-approved formulas. Extreme caution must be exercised when considering this option. You don’t want to be locked into a distribution for five years (or even longer) if you need funds for only a short term period.


There are other factors that should be considered, such as whether it makes sense to leave your assets with your former employer, or whether it is better to rollover the amount to your IRA. Talk to a financial advisor who is an expert in the field of plan distributions and rollovers, such as an Elite IRA Advisor.


News, Rulings and Other Updates

The IRS Issued Revenue Procedure 2008-29, which includes the 2009 inflation adjusted amounts for Health Savings Accounts (HSAs). The new amounts are as follows:


Annual contribution limitation

The annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,000.

The annual limitation on deductions for an individual with family coverage under a high deductible health plan is $5,950.

High deductible health plan

A “high deductible health plan” annual deductible limit is $1,150 for self-only coverage or $2,300 for family coverage and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) is $5,800 for self-only coverage or $11,600 for family coverage.



Qualified Reservist Distributions Made Permanent

The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART ACT) was signed into law on June 18.  The HEART Act provides incentives for members of the military and includes provisions such as making the qualified reservist distributions permanent.  You may recall that the qualified reservist distribution was previously defined as one taken by an active reservist, and meets the following requirements:


The reservist was ordered or called to active duty after September 11, 2001, and before December 31, 2007.

The reservist was  ordered or called to active duty for a period of more than 179 days or for an indefinite period because he is a member of a reserve component

The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement.

The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period.


July Retirement Planning Tip

In today’s economy, participants are finding it tempting to take loans and/or make withdrawals from their 401(k) accounts. Financial experts and pundits have responded with varying advice on whether this is a good financial move. An individual who finds himself faced with such a decision can read the numerous articles available on the topic, but should be wary of taking advice from anyone who has not reviewed and assessed his particular financial profile. While it is generally a bad financial move to take funds from your retirement account before you retire, there are exceptions under which it may make good financial sense. Individuals should discuss the matter with their financial advisors, in order to obtain professional guidance that is based on their specific financial profiles.


Highlights from Ed Slott’s IRA Advisor Newsletter - July 2008 Issue

The July 2008 issue of Ed Slott's IRA Advisor is now available online. The areas covered include the following:

IRA Trust Beneficiary Basics

Naming a Trustee

How to Name the Trust as Beneficiary

Separate Trusts


The Trust Can be Revocable or Irrevocable

How an IRA Trust Qualifies for the Stretch

Which Type of Trust?

Conduit vs. Discretionary Trust

Roth IRA Trust Option

Implementing the Trust After Death

Determining the Oldest Beneficiary

A Terminating Trust

Protecting Inherited IRAs from Creditors’ Claims


Guest IRA Expert

Seymour Goldberg, CPA, MBA, JD  

Senior Partner, Goldberg & Goldberg, P.C.                    

Jericho, NY

Be sure to review the July issue and post your questions on our message board at http://www.irahelp.com/phpBB/index.php?area=, where some of the best experts in the retirement field gather to discuss technical issues.

To view current and past issues of the IRA Advisor, click the link below to access our "Subscribers Only" section of our website:
http://irahelp.com/newsletter.php?area=a (for America Online users)

If you do not already subscribe to Ed Slott's IRA Advisor Newsletter, you may do so by clicking here and providing the required information, or by calling 800-663-1340. Each issue is 8 full pages of must-have tax information. Individuals who subscribe to the online version of the Ed Slott's IRA Advisor Newsletter, receive access to back issues at no additional cost.

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