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20131040ez 8. 20131040ez Distributions and Rollovers Table of Contents DistributionsMinimum Required Distributions No Special 10-Year Tax Option Transfer of Interest in 403(b) ContractAfter-tax contributions. 20131040ez Permissive service credit. 20131040ez Tax-Free RolloversHardship exception to rollover rules. 20131040ez Eligible retirement plans. 20131040ez Nonqualifying distributions. 20131040ez Second rollover. 20131040ez Gift Tax Distributions Permissible distributions. 20131040ez Generally, a distribution cannot be made from a 403(b) account until the employee: Reaches age 59½, Has a severance from employment, Dies, Becomes disabled, In the case of elective deferrals, encounters financial hardship, or Has a qualified reservist distribution. 20131040ez In most cases, the payments you receive or that are made available to you under your 403(b) account are taxable in full as ordinary income. 20131040ez In general, the same tax rules apply to distributions from 403(b) plans that apply to distributions from other retirement plans. 20131040ez These rules are explained in Publication 575. 20131040ez Publication 575 also discusses the additional tax on early distributions from retirement plans. 20131040ez Retired public safety officers. 20131040ez If you are an eligible retired public safety officer, distributions of up to $3,000, made directly from your 403(b) plan to pay accident, health, or long-term care insurance, are not included in your taxable income. 20131040ez The premiums can be for you, your spouse, or your dependents. 20131040ez A public safety officer is a law enforcement officer, fire fighter, chaplain, or member of a rescue squad or ambulance crew. 20131040ez For additional information, see Publication 575. 20131040ez Distribution for active reservist. 20131040ez The 10% penalty for early withdrawals will not apply to a qualified reservist distribution attributable to elective deferrals from a 403(b) plan. 20131040ez A qualified reservist distribution is a distribution that is made: To an individual who is a reservist or national guardsman and who was ordered or called to active duty for a period in excess of 179 days or for an indefinite period; and During the period beginning on the date of the order or call to duty and ending at the close of the active duty period. 20131040ez Minimum Required Distributions You must receive all, or at least a certain minimum, of your interest accruing after 1986 in the 403(b) plan by April 1 of the calendar year following the later of the calendar year in which you become age 70½, or the calendar year in which you retire. 20131040ez Check with your employer, plan administrator, or provider to find out whether this rule also applies to pre-1987 accruals. 20131040ez If not, a minimum amount of these accruals must begin to be distributed by the later of the end of the calendar year in which you reach age 75 or April 1 of the calendar year following retirement. 20131040ez For each year thereafter, the minimum distribution must be made by the last day of the year. 20131040ez If you do not receive the required minimum distribution, you are subject to a nondeductible 50% excise tax on the difference between the required minimum distribution and the amount actually distributed. 20131040ez No Special 10-Year Tax Option A distribution from a 403(b) plan does not qualify as a lump-sum distribution. 20131040ez This means you cannot use the special 10-year tax option to calculate the taxable portion of a 403(b) distribution. 20131040ez For more information, see Publication 575. 20131040ez Transfer of Interest in 403(b) Contract Contract exchanges. 20131040ez If you transfer all or part of your interest from a 403(b) contract to another 403(b) contract (held in the same plan), the transfer is tax free, and is referred to as a contract exchange. 20131040ez This was previously known as a 90-24 transfer. 20131040ez A contract exchange is similar to a 90-24 transfer with one major difference. 20131040ez Previously, you were able to accomplish the transfer without your employer’s involvement. 20131040ez After September 24, 2007, all such transfers are accomplished through a contract exchange requiring your employer’s involvement. 20131040ez In addition, the plan must provide for the exchange and the transferred interest must be subject to the same or stricter distribution restrictions. 20131040ez Finally, your accumulated benefit after the exchange must be equal to what it was before the exchange. 20131040ez Transfers that do not satisfy this rule are plan distributions and are generally taxable as ordinary income. 20131040ez Plan-to-plan transfers. 20131040ez You may also transfer part or all of your interest from a 403(b) plan to another 403(b) plan if you are an employee of (or were formerly employed by) the employer of the plan to which you would like to transfer. 20131040ez Both the initial plan and the receiving plan must provide for transfers. 20131040ez Your accumulated benefit after the transfer must be at least equal to what it was before the transfer. 20131040ez The new plan’s restrictions on distributions must be the same or stricter than those of the original plan. 20131040ez Tax-free transfers for certain cash distributions. 20131040ez A tax-free transfer may also apply to a cash distribution of your 403(b) account from an insurance company that is subject to a rehabilitation, conservatorship, insolvency, or similar state proceeding. 20131040ez To receive tax-free treatment, you must do all of the following: Withdraw all the cash to which you are entitled in full settlement of your contract rights or, if less, the maximum permitted by the state. 20131040ez Reinvest the cash distribution in a single policy or contract issued by another insurance company or in a single custodial account subject to the same or stricter distribution restrictions as the original contract not later than 60 days after you receive the cash distribution. 20131040ez Assign all future distribution rights to the new contract or account for investment in that contract or account if you received an amount that is less than what you are entitled to because of state restrictions. 20131040ez In addition to the preceding requirements, you must provide the new insurer with a written statement containing all of the following information: The gross amount of cash distributed under the old contract. 20131040ez The amount of cash reinvested in the new contract. 20131040ez Your investment in the old contract on the date you receive your first cash distribution. 20131040ez Also, you must attach the following items to your timely filed income tax return in the year you receive the first distribution of cash. 20131040ez A copy of the statement you gave the new insurer. 20131040ez A statement that includes: The words ELECTION UNDER REV. 20131040ez PROC. 20131040ez 92-44, The name of the company that issued the new contract, and The new policy number. 20131040ez Direct trustee-to-trustee transfer. 20131040ez If you make a direct trustee-to-trustee transfer, from your governmental 403(b) account to a defined benefit governmental plan, it may not be includible in gross income. 20131040ez The transfer amount is not includible in gross income if it is made to: Purchase permissive service credits, or Repay contributions and earnings that were previously refunded under a forfeiture of service credit under the plan, or under another plan maintained by a state or local government employer within the same state. 20131040ez After-tax contributions. 20131040ez For distributions beginning after December 31, 2006, after-tax contributions can be rolled over between a 403(b) plan and a defined benefit plan, IRA, or a defined contribution plan. 20131040ez If the rollover is to or from a 403(b) plan, it must occur through a direct trustee-to-trustee transfer. 20131040ez Permissive service credit. 20131040ez A permissive service credit is credit for a period of service recognized by a defined benefit governmental plan only if you voluntarily contribute to the plan an amount that does not exceed the amount necessary to fund the benefit attributable to the period of service and the amount contributed is in addition to the regular employee contribution, if any, under the plan. 20131040ez A permissive service credit may also include service credit for up to 5 years where there is no performance of service, or service credited to provide an increased benefit for service credit which a participant is receiving under the plan. 20131040ez Check with your plan administrator as to the type and extent of service that may be purchased by this transfer. 20131040ez Tax-Free Rollovers You can generally roll over tax free all or any part of a distribution from a 403(b) plan to a traditional IRA or a non-Roth eligible retirement plan, except for any nonqualifying distributions, described later. 20131040ez You may also roll over any part of a distribution from a 403(b) plan by converting it through a direct rollover, described below, to a Roth IRA. 20131040ez Conversion amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. 20131040ez See Publication 590 for more information about conversion into a Roth IRA. 20131040ez Note. 20131040ez A participant is required to roll over distribution amounts received within 60 days in order for the amount to be treated as nontaxable. 20131040ez Distribution amounts that are rolled over within the 60 days are not subject to the 10% early distribution penalty. 20131040ez Rollovers to and from 403(b) plans. 20131040ez You can generally roll over tax free all or any part of a distribution from an eligible retirement plan to a 403(b) plan. 20131040ez Beginning January 1, 2008, distributions from tax-qualified retirement plans and tax-sheltered annuities can be converted by making a direct rollover into a Roth IRA subject to the restrictions that currently apply to rollovers from a traditional IRA into a Roth IRA. 20131040ez Converted amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. 20131040ez See Publication 590 for more information on conversion into a Roth IRA. 20131040ez If a distribution includes both pre-tax contributions and after-tax contributions, the portion of the distribution that is rolled over is treated as consisting first of pre-tax amounts (contributions and earnings that would be includible in income if no rollover occurred). 20131040ez This means that if you roll over an amount that is at least as much as the pre-tax portion of the distribution, you do not have to include any of the distribution in income. 20131040ez For more information on rollovers and eligible retirement plans, see Publication 575. 20131040ez If you roll over money or other property from a 403(b) plan to an eligible retirement plan, see Publication 575 for information about possible effects on later distributions from the eligible retirement plan. 20131040ez Hardship exception to rollover rules. 20131040ez The IRS may waive the 60-day rollover period if the failure to waive such requirement would be against equity or good conscience, including cases of casualty, disaster, or other events beyond the reasonable control of an individual. 20131040ez To obtain a hardship exception, you must apply to the IRS for a waiver of the 60-day rollover requirement. 20131040ez You apply for the waiver by following the general instructions used in requesting a letter ruling. 20131040ez These instructions are stated in Revenue Procedure 2013-4, 2013-1 I. 20131040ez R. 20131040ez B. 20131040ez 126 available at www. 20131040ez irs. 20131040ez gov/irb/2013-01_IRB/ar09. 20131040ez html, or see the latest annual update. 20131040ez You must also pay a user fee with the application. 20131040ez The user fee for a rollover that is less than $50,000 is $500. 20131040ez For rollovers that are $50,000 or more, see Revenue Procedure 2013-8, 2013-1 I. 20131040ez R. 20131040ez B. 20131040ez 237 available at www. 20131040ez irs. 20131040ez gov/irb/2013-01_IRB/ar13. 20131040ez html, or see the latest annual update. 20131040ez In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including: Whether errors were made by the financial institution; Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error; Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check); and How much time has passed since the date of distribution. 20131040ez For additional information on rollovers, see Publication 590. 20131040ez Eligible retirement plans. 20131040ez The following are considered eligible retirement plans. 20131040ez Individual retirement arrangements. 20131040ez Roth IRA. 20131040ez 403(b) plans. 20131040ez Government eligible 457 plans. 20131040ez Qualified retirement plans. 20131040ez If the distribution is from a designated Roth account, then the only eligible retirement plan is another designated Roth account or a Roth IRA. 20131040ez Nonqualifying distributions. 20131040ez You cannot roll over tax free: Minimum required distributions (generally required to begin at age 70½), Substantially equal payments over your life or life expectancy, Substantially equal payments over the joint lives or life expectancies of your beneficiary and you, Substantially equal payments for a period of 10 years or more, Hardship distributions, or Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or excess annual additions and any allocable gains. 20131040ez Rollover of nontaxable amounts. 20131040ez You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another eligible retirement plan, traditional IRA, or Roth IRA. 20131040ez The transfer must be made either through a direct rollover to an eligible plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional IRA or Roth IRA. 20131040ez If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. 20131040ez Direct rollovers of 403(b) plan distributions. 20131040ez You have the option of having your 403(b) plan make the rollover directly to a traditional IRA, Roth IRA, or new plan. 20131040ez Before you receive a distribution, your plan will give you information on this. 20131040ez It is generally to your advantage to choose this option because your plan will not withhold tax on the distribution if you choose it. 20131040ez Distribution received by you. 20131040ez If you receive a distribution that qualifies to be rolled over, you can roll over all or any part of the distribution. 20131040ez Generally, you will receive only 80% of the distribution because 20% must be withheld. 20131040ez If you roll over only the 80% you receive, you must pay tax on the 20% you did not roll over. 20131040ez You can replace the 20% that was withheld with other money within the 60-day period to make a 100% rollover. 20131040ez Voluntary deductible contributions. 20131040ez For tax years 1982 through 1986, employees could make deductible contributions to a 403(b) plan under the individual retirement arrangement (IRA) rules instead of deducting contributions to a traditional IRA. 20131040ez If you made voluntary deductible contributions to a 403(b) plan under these traditional IRA rules, the distribution of all or part of the accumulated deductible contributions may be rolled over if it otherwise qualifies as a distribution you can roll over. 20131040ez Accumulated deductible contributions are the deductible contributions: Plus Income allocable to the contributions, Gain allocable to the contributions, and Minus Expenses and losses allocable to the contributions, and Distributions from the contributions, income, or gain. 20131040ez Excess employer contributions. 20131040ez The portion of a distribution from a 403(b) plan transferred to a traditional IRA that was previously included in income as excess employer contributions (discussed earlier) is not an eligible rollover distribution. 20131040ez Its transfer does not affect the rollover treatment of the eligible portion of the transferred amounts. 20131040ez However, the ineligible portion is subject to the traditional IRA contribution limits and may create an excess IRA contribution subject to a 6% excise tax (see chapter 1 of Publication 590). 20131040ez Qualified domestic relations order. 20131040ez You may be able to roll over tax free all or any part of an eligible rollover distribution from a 403(b) plan that you receive under a qualified domestic relations order (QDRO). 20131040ez If you receive the interest in the 403(b) plan as an employee's spouse or former spouse under a QDRO, all of the rollover rules apply to you as if you were the employee. 20131040ez You can roll over your interest in the plan to a traditional IRA or another 403(b) plan. 20131040ez For more information on the treatment of an interest received under a QDRO, see Publication 575. 20131040ez Spouses of deceased employees. 20131040ez If you are the spouse of a deceased employee, you can roll over the qualifying distribution attributable to the employee. 20131040ez You can make the rollover to any eligible retirement plan. 20131040ez After you roll money and other property over from a 403(b) plan to an eligible retirement plan, and you take a distribution from that plan, you will not be eligible to receive the capital gain treatment or the special averaging treatment for the distribution. 20131040ez Second rollover. 20131040ez If you roll over a qualifying distribution to a traditional IRA, you can, if certain conditions are satisfied, later roll the distribution into another 403(b) plan. 20131040ez For more information, see IRA as a holding account (conduit IRA) for rollovers to other eligible plans in chapter 1 of Publication 590. 20131040ez Nonspouse beneficiary. 20131040ez A nonspouse beneficiary may make a direct rollover of a distribution from a 403(b) plan of a deceased participant if the rollover is a direct transfer to an inherited IRA established to receive the distribution. 20131040ez If the rollover is a direct trustee-to-trustee transfer to an IRA established to receive the distribution: The transfer will be treated as an eligible rollover distribution. 20131040ez The IRA will be considered an inherited account. 20131040ez The required minimum distribution rules that apply in instances where the participant dies before the entire interest is distributed will apply to the transferred IRA. 20131040ez For more information on IRAs, see Publication 590. 20131040ez Frozen deposits. 20131040ez The 60-day period usually allowed for completing a rollover is extended for any time that the amount distributed is a frozen deposit in a financial institution. 20131040ez The 60-day period cannot end earlier than 10 days after the deposit ceases to be a frozen deposit. 20131040ez A frozen deposit is any deposit that on any day during the 60-day period cannot be withdrawn because: The financial institution is bankrupt or insolvent, or The state where the institution is located has placed limits on withdrawals because one or more banks in the state are (or are about to be) bankrupt or insolvent. 20131040ez Gift Tax If, by choosing or not choosing an election, or option, you provide an annuity for your beneficiary at or after your death, you may have made a taxable gift equal to the value of the annuity. 20131040ez Joint and survivor annuity. 20131040ez If the gift is an interest in a joint and survivor annuity where only you and your spouse have the right to receive payments, the gift will generally be treated as qualifying for the unlimited marital deduction. 20131040ez More information. 20131040ez For information on the gift tax, see Publication 559, Survivors, Executors, and Administrators. 20131040ez Prev Up Next Home More Online Publications
IRS Letters and Visits to Return Preparers
The Internal Revenue Service sends many letters annually to federal tax return preparers. Beginning in November 2013, the agency began its fifth year of a hands-on effort to improve the accuracy and quality of filed tax returns and to heighten awareness of preparer responsibilities. Approximately 12,000 letters will be sent to tax return preparers nationwide. Types of letters sent include:
Letter 4810 - Sent in November 2013 advising the recipient that an IRS representative will contact them to schedule an educational visit to review their responsibilities in correctly preparing the Schedule C.
Letter 5105 - Sent in December 2013 recommending the recipient review all Schedule C and preparer due diligence rules, as well as pay special attention to Schedule C accuracy in 2014.
Letter 5271 - Sent in December 2013 recommending the recipient review all Additional Child Tax Credit (ACTC) and preparer due diligence rules, as well as pay special attention to ACTC accuracy in 2014.
Letter 5272 - Sent in December 2013 recommending the recipient review all Additional Child Tax Credit (ACTC) and preparer due diligence rules, as well as pay special attention to ACTC accuracy in 2014 on returns where dependents have an Individual Tax Identification Number (ITIN).
Letter 5292 - Sent in November 2013 advising the recipient that an IRS representative will contact them to schedule an educational visit to review their responsibilities in correctly following preparer tax identification number (PTIN) rules.
The IRS also regularly checks whether federal tax return preparers are compliant with their own tax filing and payment responsibilities.
Letter 4911 - Sent to notify paid tax return preparers that they are not compliant with their personal tax responsibilities and should resolve the matter to avoid affecting their status as a preparer tax identification number (PTIN) holder.
IRS Letters and Visits to Return Preparers: FAQs
Page Last Reviewed or Updated: 19-Dec-2013
20131040ez 3. 20131040ez SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. 20131040ez Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. 20131040ez In addition, you will contribute matching or nonelective contributions. 20131040ez SIMPLE plans can only be maintained on a calendar-year basis. 20131040ez A SIMPLE plan can be set up in either of the following ways. 20131040ez Using SIMPLE IRAs (SIMPLE IRA plan). 20131040ez As part of a 401(k) plan (SIMPLE 401(k) plan). 20131040ez Many financial institutions will help you set up a SIMPLE plan. 20131040ez SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. 20131040ez Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. 20131040ez For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. 20131040ez Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. 20131040ez You meet the employee limit. 20131040ez You do not maintain another qualified plan unless the other plan is for collective bargaining employees. 20131040ez Employee limit. 20131040ez You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. 20131040ez Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. 20131040ez Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). 20131040ez Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. 20131040ez Grace period for employers who cease to meet the 100-employee limit. 20131040ez If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. 20131040ez A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. 20131040ez Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. 20131040ez Coverage under the plan has not significantly changed during the grace period. 20131040ez The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. 20131040ez The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. 20131040ez Other qualified plan. 20131040ez The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. 20131040ez Exception. 20131040ez If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. 20131040ez Who Can Participate in a SIMPLE IRA Plan? Eligible employee. 20131040ez Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. 20131040ez The term “employee” includes a self-employed individual who received earned income. 20131040ez You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. 20131040ez For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. 20131040ez However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. 20131040ez Excludable employees. 20131040ez The following employees do not need to be covered under a SIMPLE IRA plan. 20131040ez Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. 20131040ez Nonresident alien employees who have received no U. 20131040ez S. 20131040ez source wages, salaries, or other personal services compensation from you. 20131040ez Compensation. 20131040ez Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. 20131040ez Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. 20131040ez If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. 20131040ez How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. 20131040ez Each form is a model savings incentive match plan for employees (SIMPLE) plan document. 20131040ez Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. 20131040ez Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. 20131040ez Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. 20131040ez The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. 20131040ez Keep the original form. 20131040ez Do not file it with the IRS. 20131040ez Other uses of the forms. 20131040ez If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. 20131040ez Meeting employer notification requirements for the SIMPLE IRA plan. 20131040ez Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. 20131040ez Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. 20131040ez Deadline for setting up a SIMPLE IRA plan. 20131040ez You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. 20131040ez This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. 20131040ez If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. 20131040ez A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. 20131040ez Setting up a SIMPLE IRA. 20131040ez SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. 20131040ez A SIMPLE IRA must be set up for each eligible employee. 20131040ez Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. 20131040ez A SIMPLE IRA cannot be a Roth IRA. 20131040ez Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. 20131040ez Deadline for setting up a SIMPLE IRA. 20131040ez A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. 20131040ez See Time limits for contributing funds , later, under Contribution Limits. 20131040ez Credit for startup costs. 20131040ez You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. 20131040ez For more information, see Credit for startup costs under Reminders, earlier. 20131040ez Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. 20131040ez The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. 20131040ez Your decision to make either matching contributions or nonelective contributions (discussed later). 20131040ez A summary description provided by the financial institution. 20131040ez Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. 20131040ez Election period. 20131040ez The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). 20131040ez However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. 20131040ez A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. 20131040ez For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. 20131040ez Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. 20131040ez Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. 20131040ez You, as the employer, must make either matching contributions or nonelective contributions, defined later. 20131040ez No other contributions can be made to the SIMPLE IRA plan. 20131040ez These contributions, which you can deduct, must be made timely. 20131040ez See Time limits for contributing funds , later. 20131040ez Salary reduction contributions. 20131040ez The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. 20131040ez These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. 20131040ez You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. 20131040ez If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. 20131040ez Catch-up contributions. 20131040ez A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 20131040ez The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. 20131040ez Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. 20131040ez However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 20131040ez The catch-up contribution limit. 20131040ez The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. 20131040ez Employer matching contributions. 20131040ez You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. 20131040ez This requirement does not apply if you make nonelective contributions as discussed later. 20131040ez Example. 20131040ez In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. 20131040ez Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. 20131040ez You make 3% matching contributions. 20131040ez The total contribution you make for John is $2,000, figured as follows. 20131040ez Salary reduction contributions ($25,000 × . 20131040ez 05) $1,250 Employer matching contribution ($25,000 × . 20131040ez 03) 750 Total contributions $2,000 The total contribution you make for yourself is $5,200, figured as follows. 20131040ez Salary reduction contributions ($40,000 × . 20131040ez 10) $4,000 Employer matching contribution ($40,000 × . 20131040ez 03) 1,200 Total contributions $5,200 Lower percentage. 20131040ez If you choose a matching contribution less than 3%, the percentage must be at least 1%. 20131040ez You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. 20131040ez You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. 20131040ez Nonelective contributions. 20131040ez Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. 20131040ez If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. 20131040ez Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). 20131040ez If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. 20131040ez Example 1. 20131040ez In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. 20131040ez Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. 20131040ez You make a 2% nonelective contribution. 20131040ez Both of you are under age 50. 20131040ez The total contribution you make for Jane is $4,320, figured as follows. 20131040ez Salary reduction contributions ($36,000 × . 20131040ez 10) $3,600 2% nonelective contributions ($36,000 × . 20131040ez 02) 720 Total contributions $4,320 The total contribution you make for yourself is $6,000, figured as follows. 20131040ez Salary reduction contributions ($50,000 × . 20131040ez 10) $5,000 2% nonelective contributions ($50,000 × . 20131040ez 02) 1,000 Total contributions $6,000 Example 2. 20131040ez Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. 20131040ez Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . 20131040ez 02) 1,500 Total contributions $13,500 Time limits for contributing funds. 20131040ez You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. 20131040ez You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. 20131040ez Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. 20131040ez When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. 20131040ez You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. 20131040ez Example 1. 20131040ez Your tax year is the fiscal year ending June 30. 20131040ez Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. 20131040ez Example 2. 20131040ez You are a sole proprietor whose tax year is the calendar year. 20131040ez Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. 20131040ez Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 20131040ez For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. 20131040ez Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 20131040ez (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. 20131040ez ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. 20131040ez SIMPLE IRA plan contributions are not subject to federal income tax withholding. 20131040ez However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. 20131040ez Matching and nonelective contributions are not subject to these taxes. 20131040ez Reporting on Form W-2. 20131040ez Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. 20131040ez You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 20131040ez You must also include them in box 12. 20131040ez Mark the “Retirement plan” checkbox in box 13. 20131040ez For more information, see the Form W-2 instructions. 20131040ez Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. 20131040ez Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. 20131040ez However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. 20131040ez Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. 20131040ez Early withdrawals generally are subject to a 10% additional tax. 20131040ez However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. 20131040ez More information. 20131040ez See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. 20131040ez More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. 20131040ez SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. 20131040ez A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. 20131040ez However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. 20131040ez Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. 20131040ez If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. 20131040ez See Catch-up contributions , earlier under Contribution Limits. 20131040ez You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. 20131040ez No other contributions can be made to the trust. 20131040ez No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. 20131040ez The employee's rights to any contributions are nonforfeitable. 20131040ez No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). 20131040ez Compensation is defined earlier in this chapter. 20131040ez Employee notification. 20131040ez The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. 20131040ez See Notification Requirement in this chapter. 20131040ez Credit for startup costs. 20131040ez You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. 20131040ez For more information, see Credit for startup costs under Reminders, earlier. 20131040ez Note on Forms. 20131040ez Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. 20131040ez To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. 20131040ez Prev Up Next Home More Online Publications