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

2009 Tax Strategy III – Types of Retirement Plans

This is my third posting of a daily tax tip about Traditional IRAs. An IRA can be a good vehicle not only to save taxes, but also to save for retirement. With Traditional IRAs, taxability of income is delayed to future years, normally when one retires.

Traditionally it has been assumed that the tax rates will be lower in the future, especially upon retirement. 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. The Taxpayer, with consultation with his/her CPA, should develop a philosophy on this and if it is determined that tax rates will increase in the future, a strategy of speeding up the taxability of income. Please feel free to call me if you have any questions.

Traditional IRAs

(1) Contribution Limit for 2009:
(a) Under Age 50: $5,000
(b) Age 50 to 70 1/2: $6,000
(c) If Taxpayer is an Active Participant, the contributions are phased out at Modified AGI:
 Single: $55,000 to $65,000
 Married Filling Joint [Each spouse if both participating – See (d) bellow)]: $89,000 - $109,000
 Married Filling Joint [With one participating – See (d) bellow)]: $166,0000 to $176,000
 Head of Household: $89,000 to 109,000
 Married Filling Separate: $0.00 to $10,000
 Delta Amount: Single $10,000 / Married $20,000
 Formula: [(“Delta Amt” – “AGI over threshold”)/”Delta Amt”] X Maximum

(d) Definition of Active Participant: When the Taxpayer or his/her spouse is participating in one of the following:
 Qualified Annuity Plan
 Tax-Sheltered Annuity
 Simplified Employee Pension (SEP)
 Government or Tax Exempt Origination Plan [special rule exempt members of the Armed Forces Reserves and Volunteer Firefighters]

(e) Definition of Modified AGI: AGI [Line 37 on 1040] added back
 Saving Bond Proceeds
 Adoption Expense
 Student Loan Interest Deduction
 Higher Education Expense
 Foreign Tax Deduction

(f) Victimized Employees Can contribute additional $3,000
 Victimized employee is -- the Employer matching of the 401(k) was in Employers stock and the Employer either filed bankruptcy or was indicted
(g) Contributions to be made by 4-15-2009
(h) Taxpayers who where in combat has 3 years to make the contribution

(2) Spousal IRA
(a) A spouse who has lower income or none can deduct the full amount of an IRA deduction using the other spouse income