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CHAPTER TITLE

to elect to receive their compensation or earned income as cash or to contribute them to their SIMPLE IRAs through a qualified salary reduction arrangement. The employer must then make a contribution to the employees’ SIMPLE plans on either a matching (up to three percent of compensation) or nonelective (two percent of compensa- tion) arrangement, no matter what elective the employee has chosen. If the employee has chosen to go with the salary reduction agreement, the employer will make the matching contribution, generally dollar for dollar up to three percent of compensation or $7000 (for the year 2002; see Table 14.3 for upcoming years). With the current limitations on deferral amounts, an employee whose employer sponsors a SIM- PLE program could have as much as $14,000 deferred during the year 2002, as long as the employee earns $233,000 of compensation or more (3 percent of 233,000 is approximately $7000). Employer con- tributions are done on a tax-deferred basis to the employee. There is no tax due on the account until distributions have begun. Employees contributing to their SIMPLE IRAs on the salary reduction plan will do so on a pretax basis. As with traditional IRAs, the gains and inter- est will accrue tax- deferred. The same distribution rules apply. For those people taking money out of their SIMPLE prior to age 591/2, there will be a 10-percent early-withdrawal penalty. But SIMPLE owners face an additional early-withdrawal penalty in certain cases. If you were to open up and contribute to a SIMPLE plan, and within two years of doing this took distribution from the account, you would face a 25-percent early-withdrawal penalty, rather than the 10-percent penalty. After the first two years, the penalty will drop back down to 10 percent. You may roll over a SIMPLE IRA from one to another

Table 14.3 SIMPLE Plan Contribution Limits

Year SIMPLE

2002

$7,000

2003

$8,000

2004

$9,000

2005

$10,000

2006

$10,000

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