2009 Tax Strategy V – Roth Plans

This is my fifth posting of a daily tax tip. This is about Roth Plans. There are many rules and exceptions so this blog is only intended as an introduction; you need to consult with your CPA for more detailed and individual advice.

As discussed in my last posting much Tax Planning (as it relates to retirement plans) has been focused on delaying tax to a future date believing tax rates will decrease. However, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. In this case, the goal is to have as much income taxed in the current year. A Roth is a good vehicle to achieve this for contributions by the Taxpayer are not tax deductable, but income earned in the Roth is tax free at the later of the Taxpayer reaches 59 1\2 or the account has been in existence for five years.

Types of Plans: There are several types of Roth plans, an employer sponsored plan [401(k) or Roth 403(b) - known as tax-sheltered annuity] or an individual Roth IRA. There are similarities but a major difference being the employer-sponsored plans have employer matching of all or a portion of an employee contribution. The employer matching is pre tax and taxed when distributed.

Contribution Limits: For 2009, the contribution limits for a Roth IRA is $5,000 for Taxpayers under 50 and $6,000 for Taxpayers 50 or over. For an employer-sponsored plan, the limits are $16,500 for Taxpayers under 50 and $22,000 for Taxpayers 50 or over. Unused employee PTO can be used as a contribution to an employer sponsored plan.

Rollovers: Rollovers are allowed from non-Roth plans to Roth plans, but special rules apply including Adjusted Gross Income [AGI] limitation of $100,000 in 2009 [There is no AGI limitations in 2010]. This is a good feature if a Taxpayer’s goal is to tax as much income as possible in the current year. However, a word of caution is need here. If a retirement account funded by pre-tax dollars is rolled over into a Roth, taxable income will increase and could place the Taxpayer into the Alternative Minimum Tax [AMT] and effect the qualification of some popular tax credits,

AGI limits: Contribution to a Roth IRA are phased out starting at $167,000 for married filling a joint return and $105,000 for all others, except for married filling separate returns. For them the phase out starts at zero income and is eliminated at AGI of $9,999. However, there are no AGI limitations for an employer-sponsored plan.

2009 Tax Strategy IV – Types of Retirement Plans for Self Employed and Small Business

This is my fourth posting of a daily tax tip. This is about Retirement Plans for Self Employed and Small Business. Like a traditional IRA, these retirement plans are a good vehicle to save for retirement. Income is taxed either in the current tax year or in the future. As discussed in my last posting it has been traditionally assumed that the tax rates will be lower in the future thus much Tax Planning (as it relates to retirement plans) has been focused on delaying tax to a future date. However, as discussed, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. Some of the plans listed below delays tax to a future date, but with the ROTH plans, income is taxed in the current year and the revenue generated is tax-free in the future. There are important changes to the ROTH plans for 2010, which will be discussed in a future Blog. Please feel free to call me if you have any questions.

Self Employed and Small Business Retirement Plans

(1) Keogh
(a) Contribution limit for 2009
 The lesser of 25% of compensation [max $245,000] or $49,000
(b) 2 types of plans
 Money Purchase plan [based on compensation and are mandatory]
 Profit-Sharing plans [based on companies profits and are NOT mandatory]
(c) Must be set up prior to 1-1-2010
(d) Contributions are to be made by the extended due date of return
(e) Needs to have an administrator and file From 5500

(2) SEP
(a) Contribution limit for 2009 is the lesser of:
 25% of compensation [max 20% of Net income less SEP ] or $49,000
(b) Can be set up after 12-31-2009, but by the extended due date of return
(c) Contributions are to be made by the extended due date of return
(d) Needs to have an administrator and file From 5500

(3) Traditional 401(k) Plan
(a) Contribution limit for 2009
 Under Age 50: $16,500
 Over Age 50: $22,000
(b) Plan must meet specific qualifications & have employees
(c) Must have 3rd party administrators
(d) Must be set up prior to 1-1-2010
(e) Contributions are to be made by 4-15-2010

(4) Solo (mini) 401(k)
(a) Similar to Traditional 401(k), but relaxed rules to allow for No Full Time Employees
(b) Contribution limit for 2009
 Salary Deferral same as a Traditional 401(k)
PLUS
 Profit Sharing same as SEP or KEOGH
(c) No need for 3rd party administrators
(d) Must be set up prior to 1-1-2010
(e) Contributions are to be made by 4-15-2010

(5) Deferred Compensation Plans – Sec 457
(a) Only for Employees and Independent Contractors of State and Local Governments and tax-exempt organizations [except churches]
(b)Contribution limit for 2009 same as for Traditional 401(k)

(6) Tax-Sheltered Annuities
(a) For all Tax Exempt organizations including [including churches] and public school employees
(b) Must be set up prior to 1-1-2010
(c) Contribution limit is the same s 401(k)
(d) Additional $3,000 annual contribution is allowed for those with 15 years or more of service

(7) ROTH IRAs
(a) Contributions are not deductable, but distributions are tax free
(b) Good if one believes tax rates will increase in future
(c) Can convert Traditional IRA, SEP-IRA, SIMPLE-IRA or rollover IRA into ROTH
 The pre-tax contributions will be taxed.
(d) The AGI ceiling of $100,000 is eliminated in 2010