A Conversation with Larry Divers
The second part of our series begins with this comforting statement by Chief Buttonwood of the SEC Retirement Police. “I’m pleased to report that we closed the barn door just after the acronyms ran out and I think we did a darn good job of it.”
Maybe not. Fortunately, with Cannon EVP and Retirement Services Expert Larry Divers as temporary Senior Investigative Agent, the acronyms which remain on the lam shall be caught, he tells me. That very moment something catches my eye. “Larry! The Roth IRA just ran past!”
We give chase. Larry says we must capture the Roth IRA because if it mixes in with traditional IRAs—either deductible or not deductible— there will be lots of problems. “Remember”, Larry yells, “there are many different types of Individual Retirement Accounts and they are not the same. You can’t take money from a Roth IRA and put it into a traditional IRA without converting it.” (Note: this is not a religious ceremony. It is a taxation ceremony).
Moments before Roth tries to mix with traditional IRAs, which would create a taxable event, Larry tackles the acronym. We drag it to his car and lock it in the trunk. Unfortunately, the other IRAs and IRA-based account acronyms have run away.
“You live in Washington, DC,” Larry says to me, “where would they go?”
I don’t even have to think about it. “To O’Neil’s, it’s an Irish pub on Capitol Hill where lobbyists hang out. I’m certain all the IRAs ran there to see if they could get their contribution limits increased or better tax treatment.”
“Let’s get the more complicated ones first,” he says. We jump into Larry’s car and he drives through DC traffic like a madman, which means we are going ten miles an hour. We pull up to O’Neil’s and burst in. There they are: a SEP, a SIMPLE, and a SARSEP sitting at a table drinking beer with a dozen lobbyists.
What’s important to know is these three miscreants were established by the Federal Government as variations on a standard IRA to serve different purposes. According to the Internal Revenue Service, there are three of these plans.
The first is “A Simplified Employee Pension (SEP) plan which provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA).*
The second says the IRS, is “A SIMPLE IRA plan [which] provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or non-elective contributions. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SIMPLE IRA).”**
The third plan is a SARSEP, or Salary Reduction Simplified Employee Pension Plan. Because the SIMPLE IRA replaced the SARSEP, this last isn’t as common since it had to be established before 1997. But you could easily run across such a plan for the following reason. According to the IRS, “Employers who established SARSEPs prior to January 1, 1997, can continue to maintain them and new employees of the employers hired after December 31, 1996, can participate in the existing SARSEPs. ***
Because they don’t go away or convert automatically to a SIMPLE IRA, they sit in the tax code ready to trip an unsuspecting FA. The most important thing to remember about all three of these plans is that they are just variations on a traditional IRA and the IRS says the plans must follow “the same investment, distribution, and rollover rules as traditional IRAs.”
However, Senior Investigative Agent Larry Divers points out that there is a different regulation which applies to a SIMPLE IRA that doesn’t apply to the others. If you make an early withdrawal within the first two years after you establish a SIMPLE IRA, the IRS levies a 25% early withdrawal penalty plus regular income tax. With the other IRAs the early withdrawal penalty is 10%.
“Friends,” Larry says, “when working with different types of retirement accounts, you need to remember how dangerous retirement acronyms can be.
To learn more about this topic, register for our Retirement Plan Services I course.
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