Monthly Archives: April 2012

A business owner may consider a Simplified Employee Pension IRA (SEP-IRA) for retirement planning purposes, but there are many advantages to placing funds in an individual 401(k) instead.  In general, the individual 401(k) plan has more options and flexibility for a sole proprietor, especially one who might be catching up after years of reinvesting funds into a business instead of putting money away for retirement.  Here is a summary of pros and cons you should consider before choosing either option:

1. In an individual 401(k) plan, salary deferrals can be made on the first 100 percent of compensation up to $17,000 in 2012.  An additional $5,500 can be deferred for those who have reached age 50 as a catch-up contribution.  SEP-IRAs don’t have catch-up contributions. The salary deferrals can be pre-tax, or they can be treated as Roth contributions, or split.
2. For all compensation levels under $200,000, a Section 401(k) plan will always permit higher contribution levels because of the salary deferral feature mentioned above.  Otherwise, both plans permit deductible employer contributions up to 25 percent of pay, not to exceed $50,000 for any one person (or $55,500 with the catch-up contribution).
3. An individual who is the trustee of his plan may invest plan monies in the broadest range of investments possible.  The SEP-IRA investments are limited as permitted by the IRA custodian.
   1. Self-directed IRAs may permit the same investments as the self-trusteed 401(k) plan but come with expensive fees, like setup and transaction charges, which can easily exceed the administration costs of an individual 401(k) plan.
   2. Form 5500-EZ does not need to be filed by a one-participant 401(k) plan until the total asset value exceeds $250,000; SEP-IRAs do not need to file Form 5500
4. The 401(k) plan allows participant loans up to $50,000.  Any borrowing from a SEP-IRA is treated as a taxable distribution subject to potential excise tax for early distribution.
5. Bankruptcy protection applies to both thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA); however, only qualified retirement plans under ERISA are shielded from other types of judgments, such as civil lawsuits.

Piercy Bowler Taylor & Kern has a Pension Plan Services practice to help entrepreneurs and business owners create and manage their tax-qualified retirement programs like the individual 401(k) plan. Contact us today at 702-384-1120 for more information.

Jay H. Beltz is PBTK’s Pension Plan Services Practice Leader. Jay is a pension consultant with more than 25 years designing, administering and consulting on tax-qualified retirement programs like defined benefit plans and Section 401(k) plans. He has been involved in establishing and terminating more than 5,000 plans and continues to advise all sizes of employers about the tax and savings benefit of such programs for their employee’s financial well-being.

From Sandra Block, USA Today:

The three winners of the Mega Millions lottery have probably already figured out that come this time next year, they’ll owe a face-melting tax bill. Lucky for them, they’ll have lots left over after they come clean with the IRS.

Every tax season, though, lots of people who haven’t won the lottery find themselves faced with a tax bill they didn’t expect — and don’t have money to pay. For example, thousands of people whose credit card debts were charged off during the recession are now facing taxes on that forgiven debt. Others are learning that they owe taxes on their unemployment benefits.

A third category of taxpayers grappling with unwelcome tax bills are those who dipped into their 401(k) plans to pay the mortgage or other expenses. Hard times have led to a sharp rise in hardship withdrawals, particularly for African Americans and Hispanics.

Click here to read the full story from USA Today.

There are some key administrative dates and deadlines for defined contribution retirement plans in May to be aware of. Please contact PBTK if you have any questions about these pending deadlines.

May Deadlines:

• May 15: Forms 990 and 8868
• May 15: Quarterly Benefit Statements

Contact us for information on preparing the tax and audit documents necessary for your 401(k) or defined contribution retirement plan at 702-384-1120.

An entrepreneur, a self-employed business owner, or one who earns income from a side business may not be aware of their options for retirement plans that exist outside of large employer-sponsored retirement plans. Individual Section 401(k) plans (also sometimes referred to as a solo 401k) are available to individuals who have no employees, or only part-time employees that don’t work enough hours to qualify for the plan.  Could this be a retirement option for you?

The self-employed individual eligible for this solo plan usually just has one employee (themselves) or may work with a spouse. Examples include real estate agents, an attorney who partners with another attorney or an individual that sits on a board of directors. The income derived from their service as independent contractors, guaranteed payments or directors’ fees can go into the solo plan. The funds are then invested in a tax-preferred environment until distribution at a future period of retirement.

The individual 401(k) plan is a great option for entrepreneurs who have not had access to an employer- sponsored retirement plan, those seeking to catch up on retirement planning or for individuals who have a side source of income in addition to steady employment with an employer that provides a retirement plan option.

It is important to remember a few housekeeping items for these individual plans. Employee salary deferrals are subject to FICA tax, so even though the pension rules permit 100 percent salary deferrals, the FICA tax must be paid first with the remaining dollars eligible to be deferred into the plan.  Profit sharing contributions, however, are considered to be employer contributions and not subject to FICA tax.  As an example, consider an individual who sits on a board of directors and is paid $10,000 for each of four annual meetings for total payments of $40,000 per year.  This person is best advised to make a profit sharing contribution first of $10,000 (25 percent of the total $40,000 compensation) before making salary deferral contributions up to an additional $17,000, if cash flow permits, to limit exposure to FICA tax. If this person has already reached the Social Security taxable wage base only the Medicare tax is saved.

There are additional administrative details to be aware of when considering a solo 401(k) plan, and it is best to consult with a pension plan expert who can help you set up the plan.  Please contact PBTK with any questions – our firm can let you know if an individual plan is right for you, and if so, create and administer the plan.

As you think about your retirement plan options, consider these additional benefits of setting up an individual 401(k) plan:

1. An individual can defer 100 percent of their salary into the plan up to $17,000 for 2012.  An additional salary deferral of $5,500 is available if the person is age 50 or older (catch-up).
2. The salary deferrals can be pre-tax, or they can be treated as Roth contributions, or split.
3. Additional matching or profit sharing contributions can be made and deducted up to 25% of pay not to exceed $50,000 in total contributions in 2012 ($55,500 with the age 50 catch-up).
4. Rollover contributions are permitted from almost all other tax-qualified plans and IRAs (except from Roth accounts) and don’t count against the above limits.  This consolidation simplifies recordkeeping requirements by keeping all retirement monies under one plan name.
5. The investments of the plan can be self-trusteed by the person whose entity adopts the plan allowing for the broadest range of investment options available.
6. The individual who participates in the plan can borrow up to $50,000, or one-half of their vested account balance, whichever is less.
7. The 2005 revisions to the Bankruptcy Code provide a blanket exemption for retirement plan interests if they are not already excludable from creditors within a bankruptcy estate.

Jay H. Beltz is PBTK’s Pension Plan Services Practice Leader. Jay is a pension consultant with more than 25 years designing, administering and consulting on tax-qualified retirement programs like defined benefit plans and Section 401(k) plans. He has been involved in establishing and terminating more than 5,000 plans and continues to advise all sizes of employers about the tax and savings benefit of such programs for their employee’s financial well-being.

(Reuters) – Companies that serve 401(k) plans are asking the Department of Labor to reconsider its stance on mailed notification, so that they can save costs by using email instead of regular mail to send information to plan participants.

Click here to read the full article posted to Employee Benefit News.

(Reuters) – The Department of Labor is not going to let push-back from the financial services industry delay its fiduciary rule for advisers who handle retirement plans — but that does not mean the regulation will be out anytime soon.

DOL withdrew its original proposal after industry groups and members of Congress criticized the agency for not proving that the benefits of making advisers who work with 401(k) plans more accountable for the advice they provide outweighed the costs. Agency officials originally expected the new rule to be released early this year.

Click here for the full article from Employee Benefit News.