Category Archives: RETIREMENT AND SAVINGS INITIATIVES
Are you self-employed? Did you know you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans?
Here are highlights of a few of your retirement plan options.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)
- You can put all your net earnings from self-employment in the plan: up to $11,500 (plus an additional $2,500 if you’re 50 or older) in salary reduction contributions and either a 2% fixed contribution or a 3% matching contribution.
- Establish the plan:
- Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – for Use With a Designated Financial Institution,
- Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use With a Designated Financial Institution, or
- an IRS-approved “prototype SIMPLE IRA plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SIMPLE IRA through a bank or another financial institution.
- Set up a SIMPLE IRA plan at any time January 1 through October 1. If you became self-employed after October 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.
Simplified Employee Pension (SEP)
Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000.
- Establish the plan:
- Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement, or
- an IRS-approved “prototype SEP plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SEP-IRA through a bank or other financial institution.
Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.
- Make salary deferrals up to $16,500 (plus an additional $5,500 if you’re 50 or older) of your compensation from the business either on a pre-tax basis or as a designated Roth contribution.
- Contribute up to an additional 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000 including salary deferrals.
- Tailor the plan to allow you access to the money in the plan through loans and hardship distributions.
- A one-participant 401(k) plan is sometimes referred to as a “solo-401(k),” “individual 401(k)” or “uni-401(k).” It is generally the same as other 401(k) plans, but because there are no other employees, other than the spouse, that work for the business, it is exempt from discrimination testing.
Other Defined Contribution Plans
- Profit-sharing plan: allows you to decide how much to contribute on an annual basis, up to 25% of compensation (not including contributions for yourself) or $49,000.
- Money purchase plan: requires you to contribute a fixed percentage of your income every year, up to 25% of compensation (not including contributions for yourself), according to a formula stated in the plan.
Traditional pension plan with a stated annual benefit you will receive at retirement, usually based on salary and years of service.
Benefit may also be defined based on a cash balance formula in a hypothetical individual account (a cash balance plan).
Maximum annual benefit can be up to $195,000.
Contributions are calculated by an actuary based on the benefit you set and other factors (your age, expected returns on plan investments, etc.); no other annual contribution limit applies.
Retirement plans for self-employed people were formerly referred to as “Keogh plans” after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.
Dollar figures are for 2011 and are subject to annual cost-of-living adjustments.
- Self Directed Brokerage Accounts (401k-plan-blog.com)
- SBO 401K for Partnership Businesses: Easy Method of Making Retirement Contributions (401k-plan-blog.com)
- 100% Contributions with Solo 401k (401k-plan-blog.com)
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit. Here are six things you need to know about the Retirement Savings Contributions Credit:
1. Income Limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:
- Single, married filing separately, or qualifying widow(er), with income up to $27,750
- Head of Household, with income up to $41,625
- Married Filing Jointly, with income up to $55,500
2. Eligibility requirements To be eligible for the credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.
3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date – including extensions – for filing the return for the credit year.
5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.
For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880. Publications and forms can be downloaded at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).
As you get ready to prepare your 2009 tax return, the Internal Revenue Service wants to make sure you have all the details about tax law changes that may impact your tax return.
Here are the top five changes that may show up on your 2009 return.
1. The American Recovery and Reinvestment Act
ARRA provides several tax provisions that affect tax year 2009 individual tax returns due April 15, 2010. The recovery law provides tax incentives for first-time homebuyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.
2. IRA Deduction Expanded
You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income is less than $65,000 or $109,000 if you are married filing a joint return.
3. Standard Deduction Increased for Most Taxpayers
The 2009 basic standard deductions all increased. They are:
- $11,400 for married couples filing a joint return and qualifying widows and widowers
- $5,700 for singles and married individuals filing separate returns
- $8,350 for heads of household
Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.
4. 2009 Standard Mileage Rates
The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:
- 55 cents per mile
The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:
- 24 cents per mile
The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.
5. Kiddie Tax Change
The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900 for 2009.
For more information about these and other changes for tax year 2009, visit IRS.gov.
- FS-2010-4, 2009 Tax Law Changes Provide Saving Opportunities for Nearly Everyone
- The American Recovery and Reinvestment Act of 2009: Information center
- 1040 Central
- Form 1040 instructions (PDF 941K)
IRS YouTube Videos:
- Tax Filing Season 2010 English | Spanish | ASL
- Earned Income Tax Credit English | Spanish | ASL
- Education Credits – Parents English| ASL
- Education Tax Credit-Claim it-Students English | Spanish | ASL
- Energy Tax Credits Claim It English | Spanish | ASL
- Haiti Earthquake Donations English | Spanish | ASL
- Making Work Pay – Claim It English | ASL
- New Homebuyer Credit-Claim It English | Spanish
- New Homebuyer Credit-Military English
- Split Refunds-Savings Bonds English | Spanish
- Unemployment Compensation English | Spanish
- Vehicle Tax Deduction – Claim It English | Spanish | ASL
[Stacie says: This is pretty neat. IRS has a new tool to help employers navigate what type of plan to choose.]
WASHINGTON — The Internal Revenue Service has created a new Web-based tool to help small business owners determine which tax-favored pension plan best suits their needs and how to keep their plans in compliance.
The IRS Retirement Plan Navigator is intended to provide employers with an easy-to-use guide that focuses on three areas: choosing a plan, maintaining a plan and correcting a plan.
By using the navigator, employers may find that choosing and maintaining a pension plan is not as daunting as they thought. Some plan types are less costly and easier to establish than others.
The navigator does not suggest which plan may be best for a specific employer but it does lay out the options to allow them to choose one that best fits their situations. The navigator includes a side-by-side comparison of pension plans and their requirements.
The navigator provides a checklist and suggested resources for maintaining compliance. Pension laws change frequently. Employers can minimize problems by doing a once-a-year review to ensure they maintain compliance.
The IRS also recognizes that mistakes can be made unintentionally, and many errors can be corrected without notifying the agency. The navigator offers suggested options to employers seeking to correct errors and bring their plans back into compliance. Although the Retirement Plan Navigator is aimed at small business owners, it also can help mid-size businesses review their options as well. Individuals who want to better understand their employer’s plan may also find it of use.
The Web-based guide will be kept up to date as pension laws and regulations change.
[Stacie says: The following information is from Retirement Rules For Employers published by the IRS. Pay particular attention to the 25% additional tax on early distributions – the two year period described below is key to understanding the tax consequences of an early distribution.]
Generally, an early distribution from a SIMPLE IRA is treated the same as one from a traditional IRA; the 10% additional tax on early distributions applies. However, if a distribution is made from the SIMPLE IRA within two years of when contributions were first deposited to the participant’s SIMPLE IRA, the additional tax on early distributions, if applicable, is increased from 10% to 25%. Any rollovers or transfers from a SIMPLE IRA within this 2-year period, unless to another SIMPLE IRA, are also subject to the 25% additional tax on early distributions.
Certain distributions are exempt from any additional tax on early distributions and include the following distributions made:
after the participant is 59 ½ years old;
for unreimbursed medical expenses that are more than 7.5% of adjusted gross income;
in an amount not more than the cost of medical insurance;
after the participant is disabled;
in the form of an annuity;
to pay qualified higher education expenses; and
to buy, build or rebuild a first home.
If the employer terminates a SIMPLE IRA plan before the 2-year period, the 25% additional tax on early distributions still applies. Participants who want to avoid this additional tax have the option of:
leaving the money in their SIMPLE IRA until the end of the 2-year period; or
leaving the money in their SIMPLE IRA until they meet an exception to the additional tax.
Participants can roll over the balance in their SIMPLE IRA to another SIMPLE IRA, but the 25% additional tax on early distributions will still apply for distributions from the new SIMPLE IRA within the original 2-year period. After the 2-year period has been met, SIMPLE IRA assets can be rolled over or transferred to other types of retirement plans, including 401(k) plans, 403(b) plans, 457(b) plans, and traditional and Roth IRAs without being subject to the 25% additional tax on early distributions.
Additional Information on SIMPLE IRA Plans:
Publication 4334, SIMPLE IRA Plans for Small Businesses
Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 590, Individual Retirement Arrangements (IRAs)
Retirement Plans FAQs regarding SIMPLE IRA Plans
SIMPLE IRA Plan
[Stacie says: the IRS explains below some rules about penalties and withdrawals from your retirement account.]
If you are under age 59 ½ and plan to withdraw money from your retirement account, you will likely pay both income tax and a 10% early distribution tax on any previously untaxed money that you take out. Withdrawals from a SIMPLE IRA before you are age 59 ½ and during the “2-year period” may be subject to a 25% additional early distribution tax instead of 10%. The 2-year period is measured from the first day that contributions are deposited. So, consider the decrease in your retirement savings and the increase in tax before you withdraw from either your IRA or a retirement plan (for example, 401(k) or 403(b) plans).
There are some different exceptions to the 10% early distribution tax depending on whether you take money from an IRA or a retirement plan.
Exceptions for IRAs Include:
You use the amount withdrawn to pay:
medical insurance premiums while unemployed;
qualified higher education expenses; or
to buy, build or rebuild a first home.
An exception also applies if you receive distributions in the form of an annuity.
See Publication 590, Individual Retirement Arrangements (IRAs), for a complete list and details of the exceptions.
Exceptions for Retirement Plans Include:
you separate from service and are age 55 or older in that year; or
you elect to receive the money in substantially equal periodic payments after separation from service.
See Publication 575, Pension and Annuity Income, for a complete list and details of the exceptions. If you are required to pay the 10% early distribution tax, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, along with your tax return.
The following Employee Plan News is published as part of the e-news for tax professionals.
On September 5, 2009, as part of the Retirement & Savings Initiatives, the IRS and Treasury issued four notices and three revenue rulings to promote retirement plan savings. The notices provide sample amendments to add an automatic enrollment feature (also known as an automatic contribution arrangement) to 401(k) and SIMPLE IRA plans, guidance on using an automatic contribution arrangement (ACA) in SIMPLE IRA plans and two updated safe harbor explanations (§402(f) notices) for eligible rollover distributions (ERDs). The revenue rulings clarify the rules on increasing ACA default contribution percentages and on contributing unused vacation and sick pay to a retirement plan, both annually and upon termination of employment.
The Treasury Department also issued the following statement:
Statement of Treasury Secretary Tim Geithner on the Administration’s New Retirement Security Initiatives “Today, the Administration announced steps we are taking to make it easier for working families to save, particularly for retirement. Working Americans should be able to retire with dignity and security, but nearly half of the nation’s workforce has little or nothing beyond Social Security benefits to get by on in old age. The measures we are announcing today will give more choices to families who want to save, and will complement the Administration’s legislative proposals to expand retirement savings. Just as the Administration is dedicated to reviving the economy and getting people back to work, so too it is dedicated to helping put retirement security within the reach of all Americans.”
Additionally, the IRS issued the following related technical guidance.
Revenue Ruling 2009-30 provides guidance on how automatic enrollment in a § 401(k) plan can work when there is an escalator feature included. An escalator feature means that the amount of an employee’s compensation that is contributed to the plan, without the employee’s affirmative election, is increased periodically according to the terms of the plan. Two situations are described, one involves a basic automatic contribution arrangement and the other involves an eligible automatic contribution arrangement described in § 414(w) of the Code. Revenue Ruling 2009-30 is part of the “Savings Initiative” guidance issued by the Service.
Revenue Ruling 2009-31 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit annual contributions of an employee’s unused paid time off under the employer’s paid time off plan. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a contribution (including a section 401(k) contribution) or cash out of the unused paid time off, determined as of the end of the plan year (December 31). Rev. Rul. 2009-31 is companion guidance to Rev. Rul. 2009-32 and is part of the “Savings Initiative” guidance issued by the Service.
Revenue Ruling 2009-32 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit contributions for an employee’s accumulated and unused paid time off under the employer’s paid time off plan at a participant’s termination of employment. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a post-severance contribution (including a section 401(k) contribution) or cash out of the accumulated and unused paid time off. Rev. Rul. 2009-32 is companion guidance to Rev. Rul. 2009-31 and is part of the “Savings Initiative” guidance issued by the Service.
Notice 2009-65 provides two sample amendments that sponsors of § 401(k) plans can use to add automatic enrollment features to their plans. The first sample amendment can be used to add a basic automatic contribution arrangement with, if elected by an adopting employer, an escalation feature. The second sample amendment can be used to add an eligible automatic contribution arrangement (“EACA”) as described in § 414(w) of the Code with, if elected by an adopting employer, an escalation feature. Final regulations under § 414(w) were published in the Federal Register on February 24, 2009 (74 F.R. 8200). Notice 2009-65, by providing sample amendments, facilitates the use of EACAs in § 401(k) plans. Notice 2009-65 is part of the “Savings Initiative” guidance issued by the Service.
Notice 2009-66 provides guidance to facilitate automatic enrollment in SIMPLE IRA plans, including questions and answers relating to the inclusion in a SIMPLE IRA plan of an automatic contribution arrangement. This notice also requests comments on whether the Department of the Treasury and the Service should issue guidance regarding SIMPLE IRA plans that include eligible automatic contribution arrangements under § 414(w).
Notice 2009-67 provides a sample amendment that can be used by a sponsor of a SIMPLE IRA Plan described in § 408(p) of the Code to add an automatic contribution arrangement to the plan. Only SIMPLE IRA plans that use a designated financial institution described in § 408(p)(7) can use the sample amendment. Notice 2009-67 is companion guidance to Notice 2009-66 and is part of the “Savings Initiative” guidance issued by the Service.
Notice 2009-68 contains two safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy § 402(f) of the Code. The first safe harbor explanation applies to a distribution not from a designated Roth account, as described in § 402A. The second safe harbor explanation applies to a distribution from a designated Roth account. These safe harbor explanations update the safe harbor explanations that were published in Notice 2002-3, 2002-1 C.B. 289, to reflect changes in the law. Notice 2009-68 is part of the “Savings Initiative” guidance issued by the Service.
The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:
Head of Household with income up to $39,750
Married Filing Jointly, with incomes up to $53,000
To be eligible for the credit you must be at least age 18, not a full-time student, and cannot be claimed as a dependent on another person’s return.