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SIMPLE IRA - Is this an excess contribution?
Old 02-02-2007, 09:04 PM   #1
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SIMPLE IRA - Is this an excess contribution?

We're trying to compute the maximum allowable contributions for my wife's SIMPLE. She was self-employed with no other employees.

I thought I read in the IRS pubs that she could defer up to the amount of her net income (gross - 7.65%, assuming no other deductions). The company is supposed to kick in a 3% match.

Example: Gross income $1000, net income 0.9235 x $1000, or $923.50 (no business deductions). She deferred all $923.50 and THEN we added in the 3% employer match.

TaxCut is suggesting we put in too much. Is that the case?
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-03-2007, 12:43 PM   #2
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Re: SIMPLE IRA - Is this an excess contribution?

Yes, in your example, she's contributed too much.

Your wife is both the employer and the employee, which means the match has to come out of her earnings. In other words, you have $1000, total. There are worksheets at irs.gov to determine the exact amount she can contribute.

Also, the maximum for a SIMPLE is $10,000 + 3%.


P.S. Get a self-employed 401k for higher limits.
P.P.S. I'm not an accountant. Standard disclaimer applies.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-03-2007, 12:50 PM   #3
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Re: SIMPLE IRA - Is this an excess contribution?

I believe the maximum simple contribution for 2007 has gone up to $10,500 plus 3% match.

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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-03-2007, 12:51 PM   #4
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Re: SIMPLE IRA - Is this an excess contribution?

eridanus -

Thanks for the reply, but we did stay below the $1000. She had the 923.50 in salary deferral plus the 3% match (0.03 X 923.50 = $27.71), for a grand total of $951.21.

Am I missing something?
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-04-2007, 10:29 AM   #5
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Re: SIMPLE IRA - Is this an excess contribution?

You've got me on this one. Does TaxCut have a help line?

You might also post your question on the Fairmark Forum. http://fairmark.com/forum/
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-04-2007, 11:08 AM   #6
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Re: SIMPLE IRA - Is this an excess contribution?

So much for calling these "SIMPLE."

When a name has to be attached to a product to try to promote it, it's usually because it's not what the product really is. Kinda like the "fair" tax.

You probably checked a wrong box in your tax program (or didn't check one that needs to be checked). That's the danger with these programs unless people such as yourself know what the answer should be.

$1,000 * 0.9235 = $924

matching $924 * 0.03 = $28

Total = $952 (so you are correct)

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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-04-2007, 09:09 PM   #7
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Re: SIMPLE IRA - Is this an excess contribution?

The 3% comes from the $1000 so your wife actually made only $970 (the $30 was contributed by her "employer"). After SS tax, she made 895.80. This means that her maximum contribution is $895.80 * 1.03 = 922.67

As you can see, that doesn't add up either. It's an iterative process and breaks down into a few algebra problems.

1000 - ErC (employer contr.) = Y (actual pay)

(Y * .9235) * 1.03 = Maximum contribution = .9512Y = MaxContr

MaxContr + SE tax = 1000

SE tax = .0765 * (1000 - (.9235Y * .03))
= .0765 * (1000 - .0277Y) = 76.5 - .0021Y


.9512Y + 76.5 - .0021Y = 1000 = .9490Y + 76.5
.9490Y = 923.50

Y = $973.04 <== Her maximum pay with a 3% match

Take Y, subtract the SE tax, and then add in the match. ==> $925.56 is maximum contribution



***I just pulled these equations together. There are probably mistakes. You REALLY need the IRS worksheets. Alternatively, you can play with TaxCut until you find a contribution value it likes.

Edit: Correction to a formula. See? Don't trust 'em.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 01:21 PM   #8
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Re: SIMPLE IRA - Is this an excess contribution?

Thanks all for the answers and attempts, but I believe I finally got the correct answer from an old IRAHelp.com post:

Gross: $1000

Net income = (Gross - business expenses) = $1000 - 0 = $1000

Total Compensation for Self-Employed = (Net income X (1/2 of SE Tax rate)) = $1000 X 0.9235 = 923.50

Max SIMPLE contribution (including both employee and employer match) = lesser of IRS limit ($10,000) and Total Compensation = 923.50

As indicated, the employee contribution plus employer match together must not exceed $923.50. The employer match is capped at 3% of Total Compensation, or $27.71. The maximum employee contribution is then (923.50 - 27.71) = $895.79.

My mistake in all of this is not realizing that the TOTAL of employee and employer contributions must be less than the $923.50.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 02:43 PM   #9
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Re: SIMPLE IRA - Is this an excess contribution?

Quote:
Originally Posted by gindie
Max SIMPLE contribution (including both employee and employer match) = lesser of IRS limit ($10,000) and Total Compensation = 923.50
You were correct in your first post. Your net income is $1,000, not $923.50. Your max contribution is $952.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 04:05 PM   #10
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Re: SIMPLE IRA - Is this an excess contribution?

I think we're all wrong.

The authoritative source:

http://www.irs.gov/pub/irs-pdf/p560.pdf

Chapter 5 worksheets
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 05:57 PM   #11
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Re: SIMPLE IRA - Is this an excess contribution?

eridanus -

Thanks for the link.

In my quest I have reviewed that document several times. However, the opening paragraph of that Chapter 5 indicates that the worksheets are intended only for SEP-IRA (described in Chapter 2) and Qualified Plans (described in Chapter 4). A SIMPLE IRA (described in Chapter 3) is neither.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 06:09 PM   #12
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Re: SIMPLE IRA - Is this an excess contribution?

http://www.irs.gov/pub/irs-pdf/f5305sim.pdf

This is a worksheet from the IRS. When I read the definitions of "compensation" for self employed people, I agree with retire@40 on how he calculates the contribution.

Also, this is supported in pub560 which says:

If you are self-employed, compensation is your net earnings from self-employment (line 4, Section A, or line 6, Section B, of Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself.

I would call the TaxCut helpline and talk to them.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 06:25 PM   #13
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Re: SIMPLE IRA - Is this an excess contribution?



Try this simple IRA calculator:

http://finance.yahoo.com/calculator/career-work/qua-12

It gives $771 as the maximum contribution (with no catch up) if self employed earnings are $1000.

I am now totally confused.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 06:34 PM   #14
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Re: SIMPLE IRA - Is this an excess contribution?

Quote:
Originally Posted by Martha
It gives $771 as the maximum contribution (with no catch up) if self employed earnings are $1000.
So the SE tax is taken off the top before the employee contribution is calculated? Oy.

Where's the missing $76? (1000 - 15.3% = 847)
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 07:11 PM   #15
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Re: SIMPLE IRA - Is this an excess contribution?

Quote:
Originally Posted by eridanus
So the SE tax is taken off the top before the employee contribution is calculated? Oy.

Where's the missing $76? (1000 - 15.3% = 847)
Actually, it is 1/2 of the SE tax (7.65%) that is taken off, but that still doesn't come anywhere close to matching the $771 that Martha's source came up with!
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 07:12 PM   #16
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Re: SIMPLE IRA - Is this an excess contribution?

Quote:
Originally Posted by Martha

Try this simple IRA calculator:

http://finance.yahoo.com/calculator/career-work/qua-12

It gives $771 as the maximum contribution (with no catch up) if self employed earnings are $1000.

I am now totally confused.
What's there to be confused about? It just means the calculator is wrong.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 07:12 PM   #17
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Re: SIMPLE IRA - Is this an excess contribution?

Could be that the yahoo calculator is bunk.


I found another one that give $929.35 as the maximum contribution. Even though it says it is a 401k calculator, the results give results for different types of plans, including a simpleIRA.

http://www.pensiononline.com/poltool...rtnerid=908736
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 07:15 PM   #18
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Re: SIMPLE IRA - Is this an excess contribution?

Quote:
Originally Posted by retire@40
What's there to be confused about? It just means the calculator is wrong.
Well I did smile when I said I was confused.

Actually, it is disturbing that all the calculators I come up with have a different answer. It should not be that difficult. I found another calculator that gave $1030 as the answer.

The pensiononline calculator seems to make some sense--look at the breakdown. Retire@40, what do you think?
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 07:22 PM   #19
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Re: SIMPLE IRA - Is this an excess contribution?

Quote:
Originally Posted by Martha
Actually, it is disturbing that all the calculators I come up with have a different answer. It should not be that difficult. I found another calculator that gave $1030 as the answer.
Like I said a few posts ago, that's why they named this retirement plan "SIMPLE."

Without that title it would be even more confusing for most people.
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Re: SIMPLE IRA - Is this an excess contribution?
Old 02-05-2007, 07:27 PM   #20
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Re: SIMPLE IRA - Is this an excess contribution?

I think the correct answer is $1030. You can contribute up to the lesser of your gross income or $10,000 for 2006. In this case, that would be 1,000. Then, the employer contributes 3 percent of the gross, which is $30, so the total is $1,030.
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