Money Management

How 401(k) limits may vary

Q I'd like to adopt a 401(k) plan under the SIMPLE (Savings Incentive Match Plan for Employees) rules. Are the contribution limits the same as for a 401(k) tied to a conventional profit-sharing plan?

A No. For 2002, a SIMPLE 401(k) participant younger than 50 can contribute no more than $7,000 of salary to the plan, compared with $11,000 to a profit-sharing 401(k). Older participants can contribute an extra $500 "catch up" to a SIMPLE 401(k). The regular 401(k) catch-up amount is $1,000. Employer matching contributions don't reduce these limits.

If a witness to a will marries a beneficiary

QWhen I made my will several years ago, I asked a friend who wasn't an heir to witness my signature. Now he and my daughter plan to marry. What must I do about the will to make sure my daughter can still inherit under it?

A Nothing. Generally, a witness who's a beneficiary or the spouse of a beneficiary can't inherit under a will. However, this prohibition applies only at the time of signing. Your daughter will still get her legacy, because her future husband wasn't disqualified when he served as a witness. That's true even if the will names him executor or trustee and he receives a fee for serving in either capacity.

When an MSA makes sense

QI'm self-employed and have to buy health insurance. Am I eligible for a medical savings account?

A You can contribute to this type of tax-favored account (known as an Archer MSA) in 2002 if your family health policy has an annual deductible of at least $3,300 but not more than $4,950, and it doesn't require a total copay exceeding $6,050 for covered benefits. You can contribute up to 75 percent of the annual policy deductible to an MSA and subtract the amount from your gross income.

An IRS-approved institution (usually an insurance company or bank) must hold the account, whose earnings are tax-free, and generally you may use the funds only for family medical expenses. If you sign up for the policy during 2002, you must prorate this year's MSA contribution on a monthly basis.

Participation in an Archer MSA won't bar you from claiming the self-employed health insurance deduction—70 percent of the premium cost this year. Remember, the 70 percent deduction would offset part of your extra expense.

Determining how soon you can tap a Roth IRA

QIn November 1998, I opened a Roth IRA. Last year I withdrew $50,000 from a regular IRA and rolled it into the Roth account. Since I'm older than 591Ž2, can I withdraw the entire fund next January without owing any tax?

A Yes. By then, the account will be five years old, because you're considered to have opened it as of Jan. 1 of the year you made your first contribution. Accordingly, the entire distribution will be tax-free, since you meet both the holding period and age requirements. It's wise to leave some money in the account, however. If you do, no future withdrawals from any Roth IRA you own will be taxed.

Whether student employees are subject to FICA

QI've been told I must pay Social Security and Medicare ("FICA") taxes on my salary from a teaching hospital. Aren't student employees of a school or other educational organization exempt from these taxes?

A Generally yes, but the IRS says the exemption doesn't apply if you work at a teaching hospital that's not part of a medical school, because the hospital's primary purpose is patient care, not education.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management.

Medical Economics

2002;12:77.