Making the Most of a SIMPLE Plan and Some Advice for Homeowners

This week, Gail guides us through the intricacies of SIMPLE plans and helps homeowners decide whether they need to refinance.

Gail —

I enrolled into a SIMPLE IRA program on my job in May 2001.

1) Is my employer obligated to match to the 3% on my earnings prior to my enrollment?

2) If I should reach the max in September 2001, does the employer continue to match my earnings until 12/31/2001?

3) Finally, if I should choose to have deductions taken in a lump sum, is the employer obligated to match my earnings during times when I did not have a deduction?

Thank you

Monty

Dear Monty —

Your company's contribution to your SIMPLE plan is based on your annual salary — not how much income you made since joining the plan. Congress created SIMPLE plans in 1996 in order to encourage small companies to offer retirement plans to their employees. The name is actually an acronym for "Savings Incentive Match Plan for Employees." (Pretty cute, huh?)

As the name implies, they are a lot simpler to set up and administer than, say, a 401(k) or other type of qualified plan. Employees contribute to their accounts through payroll deductions. The maximum amount you can contribute this year is $6,500. This rises to $7,000 next year. Under the new 2001 Tax Act, the employee part of the contribution will go up each year by $1,000 until it hits $10,000 in 2005.

In addition, starting next year, employees who are over age 50 can contribute an extra $500. This "catch-up" amount also increases annually. Each year, the firm chooses one of two formulas to determine how much it must contribute to the plan. This can be changed each year, allowing for smaller contributions when the company is less profitable.

The most common option is for the company to match dollar-for-dollar what an employee puts in, up to a maximum of 3% of each employee's salary. If the firm hits a rough period, it can reduce its matching contribution to as little as 1%, but only for two years out of every five.

The second choice is for the company to simply contribute 2% of everyone's salary, whether an employee contributes anything or not. The deadline for the company to make its contribution to employee accounts is Dec. 31. If your employer is going to contribute a smaller percentage than it did the year before, it is supposed to notify all eligible employees in writing 60 days prior to the end of the year.

So, the amount your company contributes to your SIMPLE account will depend upon which method it's using to calculate its portion. Unfortunately, you will not know this until the end of October! If the company uses the "dollar-for-dollar" match, then it behooves you to at least contribute 3% of your annual salary. In this way, you not only reduce your taxable income, you also have the potential to receive the maximum company contribution allowed.

Even better: set your sights higher and try to contribute the full $6,500!

Gail

Howdy Gail!

My wife and I just bought a fixer-upper house for $35,000 and will be selling our current house for approximately $115,000. We expect to spend about $60,000 more on the fixer-upper once our current house is sold. Will we face a capital gains penalty?

Best Regards,

Kevin

Dear Kevin —

I wish all my answers could be this positive — and this short!

As long as this has been your primary residence for at least two out of the past five years, couples who file a joint tax return pay no capital gains tax on the first $500,000 in profits from the sale of their home. Theoretically, then, it's possible to repeat the process of buying and selling fixer-uppers every two years — provided the two of you can stand living in the dust and making all those moves!

Best wishes,

Gail

Gail,

My wife and I bought our first home almost 3 years ago and financed $80,000 at 8 and 3/8 percent with $4000 down. Our house was recently assessed at $100,000 for tax purposes and that is in line with homes selling near us.

We are hearing people talk about refinancing to get a lower rate. What factors should we consider in deciding whether or not to refinance?

Scott

Dear Scott —

There are a number of things to consider. First of all, why do you want to re-finance? Is it just to reduce your current mortgage payments or are you thinking of leveraging the increased value of your home to take out a larger loan? What for? Can you afford this? You could end up making roughly the same monthly payment but by extending the life of your loan, you will pay thousands more in the long run.

Another concern should be the kind of loan you currently have. Is it a fixed or adjustable rate? If adjustable, how often does the rate change? And do you have a prepayment penalty? What's the difference between the rate you're currently paying and what you'd have to pay on a new loan?

Don't forget to add up all the costs of obtaining a new mortgage, especially if you use a different lender than your current one. As a rough rule of thumb, closing costs typically run about 3% of your loan. This includes "points," origination fees, the cost of a new title search, potential legal fees, etc.

If you can't reduce your mortgage rate by more than one percent, it might not be worth the trouble because it could take you years to just break even. If you don't think you'll stay in this house that long, you shouldn't do it.

Try this exercise: subtract the estimated monthly payment on your new mortgage from your existing monthly payment. Then divide the amount you'll save monthly into the estimated closing costs on your new loan. Voila! Now you know how long it will take to break even on the transaction.

Frankly, it sounds as if you got a pretty sweet deal when you purchased your house. How is it that you only had to put down 5% of the price instead of the usual 20%? Is this why your interest rate is a bit higher? Could you come up with the extra cash if a new lender wanted more of a down payment?

If I were you, I'd start by contacting visiting some Web sites. Try www.bankrate.com and www.homestore.com. You'll find a wealth of information about all kinds of interest rates as well as calculators and links to lenders.

You next step is to contact your current lender. Tell them you're thinking of refinancing and ask what kind of deal they can offer you. Sometimes they'll cut their fees in order to keep the mortgage on their books.

Happy homeownerhsip!

Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.