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  STIFEL                Retirement
  NICOLAUS                 Plans Quarterly

                                                                            First Quarter 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 lesser of:

� 100 percent of earned income or

� $4,000 for 2007 and $5,000 for 2008

Catch-up contributions

Individuals 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.

Spousal contribution

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 separate returns).

� 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.

Single filers


      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).



Roth contributions

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 eligibility:

� 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.

Contribution deadlines

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.


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.

Contribution credit

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 Credit
$0-$30,000 $0-$23,250 $0-15,500 50% of contribution
$31,001-$34,000 $23,251-$25,500 $15.501-17,000 50% of contribution
$34,001-$52,000 $25,501-$39,000 $17,001-$26,000 50% of contribution
Over $52,000 Over $39,000 Over $26,000 50% of contribution

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.


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)).

Eligible employers

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 of:

� 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 low fees

It�s not too late for small business owners to take advantage of a new SEP plan for 2007.



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 asset classes.

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 guaranteed.

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 fiduciary relief.


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 information, daily 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 apply:

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 expense ratio.

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 participant statements.

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.

Fiduciary duty

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


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 protect themselves.

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 income taxes.

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 distributions.

9. Follow the plan�s Investment Policy Statement, which includes the "prudent" selection of investment managers.


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 expertise.


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 funding retirement.

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 business expense.

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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