Simple IRA at New Job and 401k at Old Job – Questions

Submitted by Richard Rea on Mon, 2016-01-18 20:28

As I was discussing in “2016 MFJ Roth Income Limits?” my most recent post, my DINK daughter changed jobs this year at the end of September.

The first 9 months of the year were spent at a company with a 401k plan and I believe she contributed $16,000 to that plan in the first nine months of 2015. I am having that $16,000 number confirmed this evening.

The new job which started in October has a Simple IRA, about which I have so many questions I will probably make a separate post, and it appears she made a total of $4,560 contributions in the last 3 months of the year.

Q1 – I worried that a total of $20,560 in tax deferred retirement contributions in CY 2015 is a problem?

Q2 – I never heard of a “Simple IRA” before and have only done a little reading on it mostly on the IRS site but what are the advantages and disadvantages of it?

Q3 – Looking at her monthly statements for Oct, Nov and Dec her contribution is $1,400 per month and the company matching contribution is $120 which I compute as an 8.57%. Sounds rater generous/high?

Q4 – The custodian is a brokerage called R. A. Davidson, and there doesn’t appear to be any web based system and I haven’t been able to get and information on “fees”. My blood pressure usually goes up when ever I see fees that exceed what Vanguard charges.



Submitted by Richard Rea on Mon, 2016-01-18 23:26

 “The first 9 months of the year were spent at a company with a 401k plan and I believe she contributed $16,000 to that plan in the first nine months of 2015. I am having that $16,000 number confirmed this evening.”……….The 401k contributions during the first part of 2015 are now being bounded between $12,000 and $14,000 .  The numbers are coming from pay stubs and custdoian statements.  The difference maybe the difference between the employee and employer contributions which now brings up this question ………..  Q5 – What is the “go to” piece of paperwork for the “real” 401k contribution number.  Is it the W-2 which actually goes to the IRS?   And what about unvested employer contributions that get “clawed back”, how will they be treated?  TIA

Submitted by Alan - IRA critic on Tue, 2016-01-19 00:40

  1. You are correct. There is an excess elective deferral violation here because while the 401k and SIMPLE IRA each have their own separate limits, the elective deferral limit of 18k applies to the total. She is therefore around 2,560 over the limit, which she needs to have returned to her along with any earnings by one of these plans before 4/18/2016.
  2. You can read about SIMPLE IRAs on the IRS site or google Notice 98-4 which contain wraps up mostly all the SIMPLE IRA rules and regulations. The main advantage to the employer is that there are no discrimination tests and it is easier to administer than a 401k plan. Not so many advantages to the employees, but often employers that adopt a SIMPLE IRA would not otherwise offer any plan. And there is a matching contribution.
  3. Matching options are either 1 to 3% of employee’s compensation or non elective contributions of 2% of compensation.
  4. You can bet the farm that the fees are much higher than Vanguard’s.
  5. The elective deferrals to each plan will show up on her W-2 from each employer, so you might as well wait the 2 weeks for the W-2 forms.
  6. Forfeited matching from either plan will just reduce her account balance, but have no current tax impact.
  7. Note that the return of elective deferrals is not mandated, so each plan can refuse. That would result in her having to add the 2560 to her line 7 wages for 2015. Then she would be taxed again at some point in retirement or whenever she withdraws from these plans. The 2560 would remain in the plans and would generate compound earnings for decades, so this would not good but also not be as bad as it sounds.

Submitted by Richard Rea on Tue, 2016-01-19 01:23

 Q3 – Looking at her monthly statements for Oct, Nov and Dec her contribution is $1,400 per month and the company matching contribution is $120 which I compute as an 8.57%. Sounds rater generous/high?………………..I have been reading about IRAs for hours now and when I look at Simple IRAs “matching money” I keep seeing a percentage like 3%.  It appears she is getting more like the 8% as stated above.  Is the 3% a minimum?………..One problem I find with the IRS is it all appears to be writen from the employeers perspectdive 

Submitted by Alan - IRA critic on Tue, 2016-01-19 01:55

What % of her earnings is she contributing? 

Submitted by Richard Rea on Thu, 2016-01-21 22:23

……appears to be the answer.   From her pay stubs she is grossing $4,000/month and making a $1,280 employee contribution……..(1280/4000=0.32)……The company is matching $120 which is a 3% matching…….As I understand it the max contribution per year for a Simple IRA is $12,500 so at the rate she is contributing she will hit that max before 10 months…….She often “front loads” her retirement contributions in the beginning of a calander/tax year…..For example 1) at her last (401k) job she could contribute a max of 75% of her pay check per month and did that starting in Jan until she hit the $18,000 max contribution limit and 2) she always makes her Roth IRA (back door) the first week in January.  In the last six year bull market, which may have finally ended, we felt it was an advantage put the money to work ASAP in the tax/calander year…………..The odd looking 32% is a residual rate from the last 4 months of 2015 when she said that was what was required to to achieve the $18,000 max for 2015.  She wants to bet me she isn’t over the 2015 max contribution limit.  lol

Submitted by Richard Rea on Thu, 2016-01-21 22:54

Deleted

Submitted by William Tuttle on Tue, 2016-01-19 02:59

The $18K employee salary deferral limit applies to the combined 401k and SIMPLE IRA employee salary deferrals. Employer contributions are not included when complying with this limit. Reading between the lines of your 1st two posts, she has 401k($12K) and SIMPLE IRA($4.2K) deferrals for a total of $16.2K The W-2 for the 401k employer will show the contribution in box 12 code D and the W-2 for the SIMPLE IRA employer in box 12 code S. You are calculating the match incorrectly. It is not on the deferral. but rather on the salary. $120/month would be 3% of $4K/month.

Submitted by Richard Rea on Thu, 2016-01-21 22:58

Thank you spirit rider, my bad.

Submitted by Alan - IRA critic on Tue, 2016-01-19 03:21

Since the total elective deferral amounts are not totally clear at this point and there is only 2 weeks left till the W-2s are received, I suggest waiting until the figures are firm. She may be under the limit or not. Or she may only be over by such a small amount that a corrective distribution is not worth the aggravation.

Submitted by Richard Rea on Thu, 2016-01-21 23:11

SeattleSun………”Q4 – The custodian is a brokerage called R. A. Davidson, and there doesn’t appear to be any web based system and I haven’t been able to get any information on “fees”. My blood pressure usually goes up when ever I see fees that exceed what Vanguard charges.”…………Alan, “You can bet the farm that the fees are much higher than Vanguard’s.”………….SeattleSun (new),  I just had a 3 way call with my daughter and the R.A. Davidson broker and the blood pressure spike. Investment options are just about anything, which is great.  Fees are $75 per trade and if account is over $300k, which of course it isn’t,  you can go with a 1.5% annual management fee unlimited trades………….. Q.6 “I vaguely remember something about a 2 year limit to move the money out of a Simple IRA?   Is that a roll over direct transfer or what?   Don’t want to take it out of the “tax defered” world, as tax defered compounding is a lovely thing to behold.

Submitted by Alan - IRA critic on Fri, 2016-01-22 01:19

  • SImple IRA funds cannot be transferred or rolled out of a SIMPLE IRA until 2 years have passed since the first contribution. And if a taxable distribution is chosen, taxes will apply plus an enhanced early distribution penalty of 25% instead of 10%. For high fee SIMPLE IRAs, the usual solution is to wait out the 2 years and then transfer out the balance to a TIRA, then periodically continue to transfer out new contributions as they again accumulate. But custodians of SIMPLE IRAs know this and set up the fee schedules appropriately.
  • Now, there IS an exception to the 2 year wait and it is called a “transfer SIMPLE IRA” if the SIMPLE Owner can locate a SIMPLE IRA Custodian to accept the transfer. To do this Davidson must be considered a “DFI” (designated financial institution) selected by the employer. If Davidson is not a DFI, this solution will not work.   I do not know if Vanguard or other similar custodians will open a “transfer SIMPLE IRA”  and if so what investment options are offered. But the IRS Regs forbid the current SIMPLE custodian to charge fees or penaties for such transfers out to a new transfer SIMPLE IRA. They may pretend not to know about this Reg but it is outlined clearly in Notice 98-4. It might be worth investigating. See Sec J in Notice 98-4 here:

https://www.irs.gov/pub/irs-drop/not98-4.pdf

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