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ROLLOVER
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| STIFEL |
Retirement |
| NICOLAUS |
Plans Quarterly |
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Fourth Quarter 2008
TAX-FREE IRA
DISTRIBUTIONS TO CHARITIES EXTENDED
The Pension Protection Act of 2006 allowed certain IRA holders the
opportunity to donate assets in their IRA to qualified charitable
organizations. If it�s done correctly, the distributions are tax-free.
The provision applies for traditional and Roth IRAs and does not
typically apply to distributions from active SEP or SIMPLE IRAs unless
an employer contribution was not made to the SEP or SIMPLE IRA during
or for the year the charitable distributions are made.
Originally, this benefit was available only through December 31, 2007.
However, on October 3, 2008, President Bush signed into law The
Emergency Economic Stabilization Act of 2008, which contains a
provision that extends the charitable
donation benefit through December 31, 2009.
Eligibility and
donation limit
IRA holders must be at least 70� years of age on or
before the actual day of taking the distribution for the donation.
For those who do qualify by
age, their maximum IRA charitable donation is limited to $100,000 per
tax year. Any distributions in excess of this limit will not qualify
for the tax exclusion benefit and will be treated as ordinary income.
Note that only distributions that would otherwise be included in
income by the account holder will be considered as qualified
charitable distributions and distributions of base contributions and
tax-paid conversions to Roth IRA holders are generally not considered
taxable income.
Direct payment
requirement
The IRA holder must instruct the IRA
trustee/custodian to issue the distribution check payable to the
charity (including the charity�s address). The check can be mailed
either to the IRA holder or directly to the charity. If the check is
mailed to the IRA holder, he or she is ultimately responsible for
delivery of the check to the charity. The IRA holder is also
responsible for receiving a receipt from the charity for proof of a
direct donation.
If an individual elects to
receive an IRA distribution directly (payable to the individual) with
the intention of making a future charitable donation, the IRA holder
must report the distribution as ordinary income received. To offset,
the IRA holder would deduct the charitable contribution on their
income tax return through itemized deductions, if eligible. (Contact a
professional tax advisor for eligibility information.)
Traditional
IRA Required Minimum Distributions (RMDs)
Any amount ($100,000 or less) payable to a qualified
charity from an eligible traditional IRA holder
will count toward satisfying that
individual�s RMD for the year. Note that if an individual turns
70 1/2 in 2008 and elects to delay his or her first RMD until April 1,
2009, the delayed distribution will be reported in 2009. In order to
utilize the benefit for 2008, the distribution check must be issued by
December 31, 2008.
Note tat Roth conversions
are only allowed if an individual�s (or married filing a joint return)
adjusted gross income is less than $100,000. |
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4th Quarter 2008 |
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Benefit of excluding income
By not including a charitable donation from an
IRA as ordinary income, an individual�s adjusted gross income is
not increased, which could have widespread benefits, including the
ability to qualify for Roth contributions or conversions.
Qualified charities
For information pertaining to qualified
charities, go to the IRS web site, www.irs.gov/individuals and
review the "Charities and Non-Profits" section.
RECOGNIZING LOSSES ON IRA INVESTMENTS
According to IRS Publication 590, Individual
Retirement Arrangements (IRAs), under certain conditions,
individuals may be eligible to recognize the loss on a traditional
or Roth IRA investment when filing their income tax return.
Conditions for a tax loss
In order for a tax-filer to claim a loss in a
traditional IRA, the following conditions must be met:
1. All amounts in all traditional IRAs (not Roth IRAs)
owned by that individual must be distributed.
2. The total traditional IRA
distributions must be less than the individual�s unrecovered
basis, if any.
The same holds true for Roth IRAs; traditional
IRA assets are not considered when meeting these requirements, but
all Roth accounts for an individual must be distributed.
Determining basis
"Basis" is defined as the total amount of
non-deductible contributions in the
individual�s traditional IRAs that were reported on IRS Form 8606
(Nondeductible IRAs and Coverdell ESAs). "Unrecovered basis" is
created when assets are distributed and the value of the
investments distributed is lower than the amount of all
nondeductible contributions (the basis). Note that distributions
may be taken "in-kind."
For example, an individual has a traditional IRA
and previously reported $4,000 as a non-deductible contribution
(the basis). In 2008, the value of the IRA is now $3,000 and the
individual takes a complete distribution. The individual has a net
unrecovered basis of $1,000 ($4,000 - $3,000) and can claim the
loss as a miscellaneous itemized tax deduction. Note however, a
tax-filer�s miscellaneous expenses must exceed a minimum of 2% of
AGI. For instance, if an individual has AGI of $50,000, a
miscellaneous tax deduction would be allowed for amounts exceeding
$1,000 (2% of $50,000). For the above example, if no other
miscellaneous
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itemized expenses are
reported, the amount does not exceed the minimum and therefore a
deduction is not available.
Given the recent drop in value of most
investments, many IRA holders may be able to take advantage of the
loss at this time with the prospect of improved security value at
a future date.
For additional information, reference IRS
Pub. 590
Individual Retirement Arrangements (IRAs).
2008 SAVER�S CREDIT LIMITS
Under the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Pension
Protection Act of 2006 (PPA �06), 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
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
contribution tax credit based on a percentage of what they defer
into their employer-sponsored 401(k), 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.
Contribution credit
A contribution credit is a
non-refundable income tax credit for individuals with adjusted
gross income (AGI) under $26,500 ($53,000 for married 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.
2008 AGI Limits
| Married
Filing Jointly |
Head of Household |
All other
filers |
Credit |
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$0-$32,000 |
$0-$24,000 |
$0-$16,000 |
50% of contribution |
| $32,001-$34,500 |
$24,001-$25,875 |
$16,001-$17,250 |
20% of contribution |
| $34,501-$53,000 |
$25,876-$39,750 |
$17,251-$26,500 |
10% of Contribution |
| Over $53,000 |
Over $39,750 |
Over $26,500 |
Credit not available |
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Double benefit
For those who qualify, salary deferrals into
employer-sponsored plans, or tax-deductible contributions into
IRAs, plus a tax credit offers an excellent tax savings
opportunity.
SMALL BUSINESS START UP CREDIT
One of the main reasons cited by small business
owners for not offering retirement plans is the high costs
associated with the establishment and administration of retirement
plans. However, small businesses that adopt a new tax-qualified
defined contribution, defined benefit, SIMPLE, or SEP plan are
allowed a nonrefundable credit of 50% of the administrative and
retirement education expenses. The credit is available for
expenses paid or incurred and applies to the first $1,000 of
qualifying expenses of the plan in each of its first three plan
years.
Eligibility
To be eligible, an employer must not have had in
the preceding year more than 100 employees with compensation in
excess of $5,000 each. In addition, the plan must cover at least
one Non-Highly Compensated Employee (HCE).
A plan is considered "new" if the employer
sponsored no qualified retirement plan during the three-year
period immediately before the first year the credit is available.
An employer claiming the credit is not allowed a business expense
deduction for the 50% of the expenses for which the credit is
claimed.
Review IRS Form 8881, Credit for Small Employer
Pension Startup Costs, for detailed information.
IRS CHECKLIST FOR SEP AND SIMPLE IRAs
The IRS has posted employer
"Checklists" for Simplified Employee Pension (SEP), Salary
Reduction Simplified Employee Pension (SAR-SEP) and Savings
Incentive Match Plan for Employees (SIMPLE) IRAs on the internet.
The Checklists are designed to help employers monitor the
operations of their plans and develop a better understanding of
the requirements for their plans. Each Checklist contains
plain-language discussions of troublesome issues for employers and
a "quick tool" 10-question checklist to help an employer keep the
plan in compliance with many tax issues. The "quick tool" includes
questions such as:
� Are all eligible employees participating in
the SEP?
� 50% or more of
eligible employees make employee salary deferrals into the SAR-SEP
plan?
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� Is this SIMPLE IRA plan
your business� only retirement plan?
Complete details for
Checklists and the 10-question checklist can be accessed at the
IRS web site:
�
SEP
�
http://www.irs.gov/pub/irs-tege/sep_checklist.pdf
�
SAR-SEP �
http://www.irs.gov/pub/irs-tege/sarsep_checklist.pdf
�
SIMPLE � http://www.irs.gov/pub/irs-pdf/p4284.pdf
The IRS advises that these
Checklists are a general guide and may not address all possible
compliance concerns and are not required to be filed with the IRS.
The IRS advises, however, that all answers to the questions should
be answered "yes" and any "no" answer may be an indication of
failures in plan operations.
If a business owner finds
an error in the operation of the plan, employers may access IRS
Publication 4224, Retirement Plan Correction Programs, which is
available online at www.irs.gov/ep.
403(b) COMPLIANCE YEAR-END DEADLINE
For the first time in
decades, new 403(b) laws were introduced in July of 2007 that will
significantly affect 403(b) plans. These changes are a result of
the massive Department of Labor audits done over the past several
years which revealed widespread non-compliance to then current
regulations. The new regulations will require increased
administration and oversight on the part of 403(b) plan sponsors,
much like the requirements of 401(k) plans. Most of the new
regulations take effect on January 1, 2009, with a few exceptions
for churches and unions.
In brief, prior to January 1, 2009, employers
should:
� Adopt a written plan
� Identify the vendors that are approved to
receive future contributions
� Notify approved vendors
� Notify any former
approved vendors they have been removed from the list
� Verify that the plan is
in compliance with the Universal Eligibility rule (with few
exceptions, all employees must be given the same opportunity to
make elective deferrals).
� Determine if the plan is subject to ERISA
� Secure an independent auditor, if applicable.
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ERISA or non-ERISA?
Because compliance with the new tax regulations
requires employers to become more involved with the operation and
administration of 403(b) plans, programs that have previously been
assumed to be non-ERISA should be re-examined in light of the
changes. This is particularly important because 403(b) plans
covered by ERISA are subject to extensive new reporting
requirements, including annual filing of Form 5500 and, for plans
covering 100 or more employees, the filing of audited financial
statements.
Previous criteria used to determine ERISA status
remains unchanged with the new regulations, and simply complying
with the new regulations will not necessarily cause a 403(b)
program to become subject to ERISA. Employers should consult DOL
Bulletin 2007-02 to determine their ERISA status:
http://www.dol.gov/ebsa/regs/fab2007-2.html
Plan Documents � The written plan document
will specify terms and conditions for eligibility, contribution
limitations, and benefits under the plan. It may be a stand-alone
document or a collection of contracts and custodial agreements,
but all plan terms must be in writing. The written plan
requirement does not apply to non-ERISA plans that received no
contributions after December 31, 2004.
Many 403(b) plan sponsors are in the dark about
the new rules. Year-end is approaching, so they must act quickly
in order to bring their plan into compliance with the new
regulations. Alternatively, some are choosing to terminate the
plan because they feel compliance will be cost prohibitive. Either
way, employers are encouraged to act now!
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QUALIFIED PLANS ADOPTION
DEADLINE APPROACHING
Year-end is approaching,
and that means time is running out to set up a new plan for 2008.
According to Revenue Ruling 76-28, a qualified plan must be
adopted by the employer by the end of the tax year for which the
tax deduction is being taken. An employer operating a plan on a
calendar-year basis must complete the plan adoption agreement no
later than December 31, 2008.
Although the plan must be
adopted by the end of the tax year, employers can make qualified
plan contributions for a tax year until its tax filing deadline
(March 15 for corporations and April 15 for sole proprietors and
partnerships) plus extensions.
IRS RELEASES 2009
RETIREMENT PLAN LIMITS
On October 16, 2008, the
IRS announced (Release No: IR-2008-118) the retirement plan limits
that are effective on January 1, 2009.
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2009 |
2008 |
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401(k), 403(b)/457 Elective
Deferrals |
$16,500 |
$15,500 |
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401(k) Catch-Up Deferral |
$5,500 |
$5,000 |
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Annual Defined Contribution Limit |
$49,000 |
$46,000 |
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Defined Benefit Annual Benefit
Limit |
$195,000 |
$185,000 |
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Annual Compensation Limit
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$245,000 |
$230,000 |
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Highly Compensated Employees |
$110,000 |
$105,000 |
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SIMPLE Employee Deferrals
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$11,500 |
$10,500 |
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SIMPLE Catch-Up Deferral |
$2,500 |
$2,500 |
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SEP Minimum Compensation
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$550 |
$500 |
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Social Security Wage Base |
$106,800 |
$102,000 |
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IRA Contribution |
$5,000 |
$5,000 |
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IRA Age 50 Catch-up |
$1,000 |
$1,000 |
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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.
S TIFEL,
NICOLAUS &
COMPANY,
INCORPORATED
Member SIPC and New York
Stock Exchange, Inc.
National Headquarters: One
Financial Plaza � 501 North Broadway � St. Louis, Missouri 63102
(800)434-401K �
www.stifel.com
Investment Services Since 1890 |
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