First Quarter 2008
IRA CONTRIBUTIONS FOR 2007 AND 2008
Contributions to Traditional and Roth IRAs
for the 2007 tax year can be made until (and including) Tuesday, April
15, 2008. Contributions to Traditional or Roth IRAs are limited to the
• 100 percent of earned income or
• $4,000 for 2007 and $5,000 for 2008
age 50 or older by December 31 in the tax year for which the
contribution is intended may make an additional $1,000 "catch-up"
contribution for 2007 and 2008.
A Spousal IRA contribution may be made for
a spouse with little or no earned income if the following conditions
are met (IRC Sec. 219(c)):
• The couple must be married and filing
a joint tax return (special rules apply to married couples filing
• An IRA is established for the spouse
who has no earned income.
• The spouse receiving the contribution
must be under the age of 70 1/2 for the year in which the
contribution is made (applies to Traditional IRA, not Roth IRA).
If the requirements are met, the annual
combined IRA contribution limit for 2007 is the lesser of $8,000
($10,000 for 2008) or 100 percent of the working spouse’s earned
income. If either spouse is age 50 or older, that spouse will be
entitled to an additional $1,000 catch-up contribution to increase the
combined contribution limit to $10,000 for 2007 and $12,000 for 2008.
Traditional IRA deductibility
The tax deduction for a traditional IRA
contribution is based on whether an individual is an "active
participant" in a qualified retirement plan (QRP), 403(b), SEP, or
SIMPLE IRA. If so, the individual’s tax return filing status and his
or her adjusted gross income (AGI) is also considered (IRC Sec.
219(g)). If a single individual is not an active participant in an
employer-sponsored retirement plan, eligible contributions, regardless
of the individual’s income, are fully deductible. For married couples
filing a joint return, if neither spouse is an active participant in a
plan, contributions for each are tax-deductible.
1st Quarter 2008
For the tax year 2007, if a single
individual is an active participant and has AGI of $52,000 ($53,000
for 2008) or less, their contribution is fully deductible. A partial
deduction is allowed if their AGI is between $52,000 and $62,000
($53,000 - $63,000 for 2008). No deduction is allowed for an
individual with AGI over $62,000 ($63,000 for 2008).
Married filers treated independently
If one spouse is an active participant and
the other is not, both individuals’ deductions are subject to
different joint AGI limits. For the spouse who is an active plan
participant, a fully deductible 2007 contribution is allowed with
joint AGI of $83,000 ($85,000 for 2008) or less.
A partial deduction is available for AGI
between $83,000 and $103,000 ($85,000 - $105,000 for 2008). No
deduction is allowed for a spouse who is an active participant with
AGI over $103,000 ($105,000 for 2008).
The spouse who is not an active
participant may make a fully deductible 2007 contribution if the
couple’s AGI is $156,000 ($159,000 for 2008) or less. A partial
deduction is allowed if their AGI is between $156,000 and $166,000
($159,000 - $169,000 for 2008).
Contributions to Roth IRAs are always
non-deductible, and active participation status in a QRP is not a
consideration. The following income levels apply for contribution
• Single individuals are eligible make
a maximum contribution for 2007 if their AGI does not exceed
$99,000 ($101,000 for 2008). Partial contributions are allowed for
AGI between $99,000 and $114,000 ($101,000 - $116,000 for 2008).
• Married couples filing jointly are
eligible to make a maximum contribution for 2007 if their AGI does
not exceed $156,000 ($159,000 for 2008). A partial contribution
may be made if AGI is between $156,000 and $166,000 ($159,000 -
$169,000 for 2008).
Traditional and Roth aggregate
The aggregate total of all
contributions to both Traditional and Roth IRAs may not exceed
$4,000 per individual for 2007 and $5,000 for 2008, or $8,000
($10,000 for 2008) per married couple, plus catch-up
contributions, if applicable.
Contributions must be made either
during the calendar year for which the contribution is reported or
by the tax return due date of that year, not including extensions
(IRC Sec. 219(f)(3) and 408A(c)(7). The tax return deadline for
the 2007 tax year is Tuesday, April 15, 2008.
2007 SAVER’S CREDIT STILL POSSIBLE
Under the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA), certain individuals
became eligible to receive a federal tax credit for retirement
plan contributions in addition to the tax deduction that may apply
to the contribution.
Eligibility for this credit includes
anyone who is at least 18 years of age (as of the close of the
taxable year), not a dependent of another taxpayer, and not a
full-time student. Eligible individuals are allowed a tax credit
based on a percentage of their deferral into their
employer-sponsored 401K, 403(b), SIMPLE, SAR-SEP, or eligible
governmental 457(b) plan. In addition, a tax credit can be claimed
for contributions to Traditional or Roth IRAs. The credit may be
applied for the 2007 tax-year if the IRA contribution is made by
April 15, 2008.
A contribution credit is a
non-refundable income tax credit for individuals with adjusted
gross income (AGI) under $26,000 ($52,000 for married couples
filing a joint return). Individuals who qualify may receive a tax
credit of up to 50% of what they contribute to a plan, with a
maximum credit of $1,000 a year. For married couples filing a
joint return, the maximum credit is $2,000 per year. The following
chart outlines the maximum AGI allowed and the applicable
contribution credit for 2007.
Adjusted Gross Income
Married Filing Jointly
Head of Household
All other filers
||50% of contribution
50% of contribution
50% of contribution
50% of contribution
For those who qualify, salary
deferrals into employer-sponsored plans, or tax deductible
contributions into IRAs, plus a tax credit offers an excellent tax
SEP IRAs CAN STILL BE ESTABLISHED FOR
An employer must establish a Qualified
Retirement Plan (QRP) by the end of the tax year for which a tax
deduction is taken (Rev. Rul. 76-28). If an employer’s tax year is
based upon the calendar year, December 31, 2007, was the last day
a QRP could be established for 2007. However, employers have until
the due date of their federal income tax return for the business,
including extensions, to establish a Simplified Employee Pension
Plan (SEP) and make SEP contributions (Prop. Treas. Reg.
1.408-7(b): IRC Sec. 404(h)).
Most types of employers are eligible
to establish SEP IRAs, including sole proprietors, partnerships, S
or C corporations, and certain other non-profit and tax-exempt
entities. The SEP may be an attractive alternative to the Profit
Sharing Plan for small business owners.
The maximum amount that can be
contributed for 2007 on behalf of SEP participants is the lesser
• 25 percent of compensation (IRC
Sec. 402(h) limit) up to the compensation cap of $225,000
($230,000 for 2008) or
• $45,000 ($46,000 for 2008) (IRC
Sec. 415(c) dollar limitation)
There are several distinct benefits
associated with SEPs, such as:
1. They may be established and funded
until the business owner’s tax filing deadline (plus extensions)
2. Contributions flow directly into
eligible participants’ SEP IRA accounts
3. No IRS Form 5500 reports required
4. Little administration, resulting in
It’s not too late for small business
owners to take advantage of a new SEP plan for 2007.
PRE-QDIA RELIEF FOR STABLE VALUE
FUNDS, NOT MONEY MARKETS
Qualified plan sponsors continue to
ask whether or not their previous default investment, usually a
stable value fund or money market fund, is grandfathered under the
Qualified Default Investment Alternative (QDIA) regulations that
became effective on December 24, 2007.
The QDIA regulations amended Section
404(c) of ERISA to provide relief, if certain conditions are met,
to fiduciaries that invest participant assets in a QDIA in the
absence of participant investment direction. In order to receive
fiduciary relief, plan sponsors have to use one of the prescribed
safe harbor investments (balanced fund, lifestyle or lifecycle
funds, or managed model portfolio) that offer a diversified mix of
The QDIA regulations do allow for
grandfather relief if the default investment used prior to
December 24, 2007, "guarantees principal and the rate of return
generally consistent with that earned on intermediate investment
grade bonds." Stable value funds fall within the definition for
grandfather relief given that stable value funds invest in
Guaranteed Investment Contracts that provide a guaranteed rate of
return. On the other hand, money market funds would not qualify
for grandfather relief because their rate of return is not
It is important to note that stable
value and money market funds can
still be used as a temporary QDIA for the participant’s first 120
days in the plan. This is intended to simplify
administration if a participant chooses to opt out of a plan that
utilizes automatic enrollment.
Whether your default investment prior
to December 24, 2007, was stable value or
money market, plan sponsors are encouraged to use the prescribed
safe harbor investments to receive ongoing
THE BASICS OF 401K FEES
Most plan sponsors that are performing
a plan review or shopping to change providers are concerned about
plan fees. Get a handle on the various types of fees to help you
understand if your 401K plan’s fees are reasonable.
Plan administration fees. For
day-to-day operations of a 401K plan, fees
are charged for basic administrative services, such as plan record
keeping, accounting, legal, and trustee services. Administrative
services can be billed using a variety of methods. The most common
billing methods are:
• Per person: Expenses are
based on the number of eligible employees or
actual participants in the plan.
• Average participant account
balance: This method provides pricing
discounts as the average participant account balance increases.
• Asset-based: Expenses are
based on the total assets in the plan.
• Flat rate: Fixed charge that
does not vary, regardless of the plan size.
Fees may be calculated using one or
any combination of these methods. Often
included in these fees may be a host of additional services, such
as telephone voice response systems, access to a
customer service representative, educational seminars, retirement
planning software, investment advice, electronic access to plan
valuation, and on-line transactions.
Investment fees. By far, the
largest component of 401K plan fees and expenses is for managing
plan investments. Fees for investment management and other
investment-related services are generally
assessed as a percentage of assets invested and are often called
the fund’s "expense
ratio." The plan participants pay investment fees
in the form of an indirect charge against their
account because they are
deducted directly from their investment returns. For this reason,
these fees, which are not specifically identified on participants’
statements, may not be immediately apparent.
The following investment fees could
• Sales charges.
These are transaction costs for the buying and
selling of shares. Many
mutual fund providers offer an NAV (sales
charge waived) product at certain asset levels or certain number
of participants. Also, many providers have gone to a
class of shares specific to
retirement plans. These share classes have no sales charges, and
the Financial Advisor’s commission is built into the fund’s
• Management fees. Management
fees are the most overlooked fees in 401K plans. They include
the costs to provide the fund with portfolio
management services (e.g., conducting research, maintaining the
trading desk, and managing the investment
portfolio according to the
stated objectives and policies). Most
employers may not understand the consequences of such fees to
their participants because, again, they are not reported on
• Wrap fee. Some 401K
providers charge wrap fees on their 401K products. The fee,
charged as a percentage of assets, helps the
employer subsidize the cost of the plan by putting some or all of
the cost back on the participants.
Individual service fees.
In addition to overall administrative and
investment expenses, there may be individual service fees associated
with optional features offered under a 401K plan. These fees
are charged directly to the accounts of
individuals who choose to take advantage of a particular plan
feature, such as taking a loan
from the plan, investing in a
self-directed brokerage account, or
purchasing investment advice programs.
Plan sponsors have a fiduciary duty to
review, analyze, and understand the expenses
that are paid by the plan and the participants.
The Department of Labor (DOL)
provides resources to assist plan sponsors in evaluating 401K
fees. The resources can be found by going to the DOL’s web site at
SHOULD YOUR PLAN HIRE A CORPORATE
ERISA requires that all plan assets be
held in trust. A trustee — either a fiduciary self-trustee or a
corporate trustee — must be selected for this purpose. As the
number of participants in a retirement plan grows, so does the
complexity and the number of time-consuming administrative
functions that must be handled.
The following is a list of duties and responsibilities associated
with being a plan’s trustee:
1. Assume the fiduciary liability of a
trustee, which should include in-depth knowledge of ERISA’s
extensive rules and regulations. Trustees should consider
purchasing fiduciary liability insurance to
2. Obtain a "fidelity bond" to furnish
protection to the plan against loss from
fraud or dishonesty. This bond is required for
all ERISA plans.
3. Obtain a Taxpayer Identification
Number for the trust and use this number for
all business of the trust, including investment accounts, bank
accounts, income tax withholding, and IRS
Form 5500 filings.
4. Maintain complete and accurate
trust financial records. The records must
track cost basis and market value basis. The trustee should
provide a transaction statement listing all transactions in the
trust for the reporting period and should show the value of
realized and unrealized
gains/losses on a current value basis.
5. If the plan has 100 or more
participants, engage an accountant to perform a plan audit, which
includes the preparation of
financial statements and income statements.
6. Maintain a trust checking account
for the purposes of paying benefits, withholding, and remitting
7. Withhold and remit correct tax
amounts and file Form 945 with the IRS.
8. Prepare and disperse 1099-R to
participants/beneficiaries who made plan
9. Follow the plan’s Investment Policy
Statement, which includes the "prudent" selection of investment
So, should a plan hire a corporate
trustee? This question is difficult to answer, because Third Party
Administrators (TPA) often perform many of the duties that fall
within the trustee’s administrative
functions. However, having a corporate trustee may eliminate a
potential conflict of interest that might exist if the business
owner is the plan’s
trustee. The corporate trustee provides an extra layer of
protection between the fiduciary and plan assets, reducing
potential concern that plan assets won’t be used for the exclusive
benefit of plan participants and their beneficiaries.
Compare the services that your TPA provides to those listed
above. You will need to evaluate
whether the cost of a corporate trustee outweighs the time and
effort required to perform these duties yourself. Many
larger employers find that it is much more cost efficient to hire
a corporate trustee than worry about issues
with which they have no
DEFINED BENEFIT PLAN FOR SOLE
PROPRIETORS MEANS BIG DEDUCTIONS
Sole proprietors have many options
available to them when it comes to setting
up a tax-advantaged retirement plan. But most sole proprietors
have probably never considered a defined benefit
plan as a viable option for
While many large corporations are
terminating their defined benefit plans in favor of
employee-funded 401K plans, there has been a resurgence of
defined benefit plans in the sole proprietor community. Why?
Defined contribution plans limit annual contributions to a maximum
of $46,000 per year, but in a defined benefit plan, the business
owner sets a target retirement benefit, up to a maximum of
$185,000 per year, and then contributions are calculated to
provide that benefit. Calculations are based upon
your current age, your planned
retirement age, and the average of your three highest years
of income (capped at $230,000 per year). Given the right
circumstances, a defined benefit plan can often allow business
owners to contribute in excess of $100,000 per year,
which is deductible as a
A defined benefit plan isn’t for
everyone. The best candidates for a defined benefit plan are
business owners who are at least 45 years of age, earn more than
$75,000, and are able to contribute a significant amount of their
earned income for at least 3 years.
Another consideration is whether or
not the business has employees. Employers
may be required to contribute to the plan on
behalf of their employees. And
if your employees are nearing retirement,
contributions may be significant.
The defined benefit plan’s generous
contribution levels make these
plans worth serious
consideration for sole proprietors who were late to the retirement
savings game and are looking for an opportunity to accumulate a
large amount of savings in a short period of time.
The information contained in this
newsletter has been carefully compiled from sources believed to be
reliable, but the accuracy of the information is not guaranteed.
This newsletter is distributed with the understanding that the
publisher is not engaging in any legal or accounting type of work
such as practicing law or CPA services.
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