Plan Ahead for the “Golden Years”

There are a number of tax incentive retirement plan options for taxpayers who wish to put aside money for their retirement years.  Many employers provide qualified plans, such as 401(k) plans and the equivalent 403(b) plans, for employees of public schools and tax-exempt organizations.  Generally, the contribution limits to these plans are the same, and the maximum is $15,500 ($20,500 age 50 and over) for 2007.  These plans are generally perceived as tax-sheltered, which means the contribution is not currently included in income, earnings are tax-deferred, and the distributions from the accounts at retirement will be fully taxable.  But did you know that it might be possible to designate those contributions to be Roth-type contributions that are not currently tax-sheltered and will provide tax-free income at retirement?  Not all employers offer the Roth version of 401(k) and 403(b) plans, so you will need to check with your employer.  Which type of plan is best suited for you depends upon whether you can afford to pay the tax on the contribution now and what your tax rate will be when you ultimately retire.
 

If your employer does not provide a retirement plan (or you wish to supplement the existing one), it is up to you to establish your own.  The current maximum contribution for traditional and Roth IRAs is $4,000 ($5,000 if age 50 or older).  However, unlike the employer plans, the tax code imposes income caps that may limit or prevent deductions to deductible traditional IRAs and Roth IRAs.  If the taxpayer also participates in an employer plan, then the deductibility of contributions to traditional IRAs is phased out when income is between $83,000 and $103,000 for joint filers, $52,000 and $62,000 for unmarried taxpayers and $0 to $10,000 for married individuals filing separately.  However, a nondeductible contribution can be made without phase-out limits.  To make the contribution, a taxpayer must have earned income that is at least equivalent to the contribution.  There are three frequently overlooked exceptions to the earned income rule, which allow contributions to be made based on: (1) alimony, (2) non-taxable military combat pay, and (3) a spousal IRA based on the earned income of the other spouse. (If the spouse with income participates in an employer plan, the deductibility phase-out for the spousal IRA is $156,000 to $166,000.)  Roth IRA contributions also require earned income at least equal to the contribution, and the contribution limit phases out between $156,000 and $166,000 for joint filers, $99,000 and $114,000 for single and married separate taxpayers and $0 to $10,000 for a taxpayer who lives with his or her spouse, using the married separate filing status. 

Beginning in 2010, the income limit ($100,000) for traditional IRA to Roth IRA rollovers will be eliminated.  Let’s say that when 2010 rolls around you have money in a nondeductible IRA.  This would allow you to roll the nondeductible portion of the IRA into the Roth IRA tax-free.  That means you can make nondeductible contributions for 2007, 2008 and 2009 and then roll them over into a Roth IRA in 2010.  You would only pay tax on the earnings from those IRAs.  This will allow you to accumulate more than $14,000 ($17,000 if age 50 or over) by 2010 and then convert it into a Roth IRA.    

There are also plans for self-employed individuals that allow contributions of almost 20% of net income from self-employment, but not exceeding $45,000.  When combined with 401(k) plans, the contribution can be as much as 100% of net profits.   In some cases, if you are both an employee of someone else and also self-employed, you can have a combination of employee plans, IRAs and self-employed plans.

Please call this office for assistance in developing retirement strategies to fit your particular situation.