How much can I contribute?
CONTRIBUTION LIMIT AMOUNTS Year Amount (under Age 50) Amount (Age 50 or over)
What type of IRA should I choose?
Generally, the closer you are to retirement (over age 59) the Traditional IRA is more suitable. The Roth IRA is better for those that expect to contribute for more than ten years. If you have an adjusted gross income of $110,000, or you and your spouse have adjusted gross income of less than $160,000, you can have a Roth in addition to contributing to a 401(k).
What is the difference between the Roth and the Traditional IRA?
The primary difference is the taxability. Roth contributions are taxed but distributions at retirement are not. If you keep the IRA at least five years, gains and all that you put in are tax free when you take it out. Regular IRA contributions are not taxed going in but distributions are.
What is the difference between the Coverdell Education Savings Account and a 529 Savings Plan?
A comparision may be viewed here.
Who can contribute to an IRA?
The contribution must come from your earned (w2) income. If you qualify, you can put up to $5,000 for yourself and up to $5,000 for your spouse into two separate IRAs ($6,000 if age 50 or older) for 2008. The following charts show the limits based on income:
TRADITIONAL IRA DEDUCTIBILITY SCHEDULE Year Single Married, filing jointly For individuals covered by an employer-sponsored plan
Modified Adjusted Gross Income (determined before any IRA deductions) fully deductible up to lower of income range and phased out within the range.
- Maximum individual contribution is $5,000 ($6,000 if age 50 or older).
- Earned income must be at least equal to contribution amount.
- Tax deductible up to maximum contribution (depending on MAGI) if covered by an employer-sponsored plan.
- Earnings grow tax-deferred and are taxed as ordinary income upon withdrawal.
- Individuals can contribute to a Traditional IRA even if the contributions are not tax deductible.
- Individuals may contribute to both a Traditional and a Roth IRA, but the total contributions cannot exceed $5,000 ($6,000 if age 50 or older) for any given tax year.
ROTH IRA CONTRIBUTION AND ELIGIBILITY SCHEDULE Status AGI Eligible Contribution Amount Single Filers $0 - $94,999 Full $4,000 contribution $95,000 - $109,999 Partial contribution:
= MAGI - $95,000/$15,000 x $4,000$110,000 and above No contribution Married Couples Filing Jointly $0 - $149,999 Full $4,000 contribution $150,000 - $159,999 Partial contribution:
= MAGI - $150,000/$10,000 x $4,000$160,000 and above No contribution
- Maximum individual contribution is $5,000 ($6,000 if age 50 or older).
- Earned income must be a least equal to contribution amount.
- Contributions are not tax deductible.
- Earnings and qualified withdrawals are tax-free.
- Individuals may contribute to both a Traditional and a Roth IRA, but total contributions cannot exceed $5,000 ($6,000 if age 50 or older) for any given tax year.
What can I do with an IRA?
Your paycheck deductions are taxed, but you can take the deduction when you file your 1040. There are substantial penalties for taking the money out of an IRA before retirement. Generally, you must be age 59 1/2 and have held the IRA for 5 years to avoid any tax penalties. There are special situations where you can take the money out prematurely. See your CPA for a detailed explanation. You can rollover your IRA into a qualified retirement plan, and you can rollover a 401(k) distribution to an IRA when you leave work. You can transfer your IRA to another fund company, but you may owe a back-end load charge.
Why do it?
It is your retirement and you are responsible for making that happen. $5,000 a year (2008 limit) may not appear to be significant now, but if you earn an 11% return over forty years you will have $400,000 by the time you quit work. There is no guarantee that your investment selections will earn that return, but over the last thirty years the S&P market index has averaged more than 11% per year. So the smart thing to do is to save all you can afford. The IRA offers you a tax deferred way of maximizing your returns.
What about the mutual funds available?
You pick the fund company, and an IRA account is established in your name. It remains active if you leave work, and you must order fund exchanges or distributions directly at the fund company using their 800 number. The C share fund selections are on the application, and the fund company will send your prospectuses once you have made your choices.
The PEO Advantage in Retirement Plans
The retirement plan of individual employers and employees alike has become a major issue in recent years. The "baby boom" generation is fast approaching the age at which retirement is on the horizon. In addition, the general public realizes that the government provision of today in the form of Social Security and health care likely will not meet their needs in 10 to 20 years. As of January 1, 1998 several new pieces of legislation were enacted to make IRAs and retirement plans easier and more attractive to employees and employers who want to be responsible for their own financial future. Therefore, the PEO industry continues innovations in the area of retirement planning in order to maintain leadership in employee benefits and employer service.
The PEO Brings About Innovation
It is the goal of the Professional Employer Organization (PEO) to provide cutting-edge service and technology to its clients. Nowhere is there a greater challenge than in the area of retirement plans. The PEO, because of its scale of operation and efficiency of administration, can bring to clients a full spectrum of retirement plan vehicles to meet the needs of nearly every employee, highly compensated employee and company owner. The PEO now can offer a new paradigm of retirement plan options that had not been available previously.
SIA and your PEO provide you with a wide variety of retirement plans and vehicles that can be customized to the needs of your company. Slavic, by providing retirement plan services through your PEO, can bring this spectrum of retirement plans to you easily and simply as our administration programs are linked directly to the payroll systems of your PEO. This allows contributions to be processed quickly, efficiently and in compliance with IRS and Department of Labor regulations. The retirement plan options available to your company are greatly expanded because of these advantages.
Retirement Plan Background and Compliance Principles
The basic parameters of retirement plans are governed by a complex series of regulations (ERISA) administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The regulations are essentially intended to protect the employee and limit company owners from abusive practices to their personal benefit. Most retirement plans, such as 401(k) and profit-sharing plans, require specific reporting to the IRS/DOL in the form of a tax return (5500). It is the company that is responsible for this tax return because it is the sponsor of the plan.
Typically, a third party administrator (TPA) tests a retirement plan for compliance and makes recommendations to the plan Trustee as to how to effect corrections if it is found not to meet the requirements for compliance. Generally, individual retirement plans, like IRAs, are reported on an employee's individual tax return and do not require any special reporting from the company. Consequently, the complex reporting requirements of 401(k) and profit-sharing plans are not needed.
The 401(k) Plan
The 401(k) plan is the centerpiece for most large company retirement plans today. Small to medium size companies often do not have a plan because the cost and complexity of administration makes the plan difficult and costly to implement and maintain. The PEO provides a cost-effective turn key 401(k) plan that allows the small to medium-size company to obtain a level of service and sophistication that is normally associated with Fortune 500 companies. (Please refer to our 401(k) company owner or employee enrollment manuals for details).
The Traditional and Roth IRAs
The IRA has historically been the best retirement vehicle if a person could not participate in a company retirement plan. The IRA has become even better as recent legislation has added features to the Traditional IRA and introduced the Roth IRA. Your PEO can now offer payroll-deduction services that can systematically fund these IRA options. If the 401(k) is not appropriate for your company these IRA options are available individually to all company owners and employees. The Roth IRA is a good choice to supplement 401(k) contributions, especially for highly-compensated employees and company owners who might be limited in the amount they can contribute to a 401(k) plan.
Special Situations
In some special situations a profit-sharing plan or simple 401(k) plan might be a good choice. The rules on these plans are usually complex and require the company to make mandatory contributions on behalf of the employees. Although this benefit is more costly in terms of administration, it does allow a highly-compensated employee or company owner to defer more pre-tax money into these types of plans. A deferred compensation plan is also available. The deferred compensation arrangement is used to supplement these other plans in after-tax contributions that grow tax-deferred.
It is our goal to select the appropriate retirement plan option or combination of options that meet your needs and fit the size and participation levels of your company. We have provided some parameters for selecting the right type of plan and a basic description of the features of these plans. The cost of administration as well as limits to contributions are also considered.
Small Company Plans
For the small client company (10 employees or less), the 401(k) plan is likely too costly and cumbersome to administrate ($300 minimum per company), even with the economy of scale achieved by the PEO. The administrative costs can prove untenable when participation is in the single digits per company in a PEO 401(k) plan. Compounding this difficulty, if the overall payroll of the company is relatively small ($250,000 annually), the company owner may actually be limited to lower contribution levels in a 401(k) plan than he or she would be in an IRA.
Some small employers may, by the nature of their businesses, have a larger payroll or have one or two employees who earn disportionately higher salaries, such as in a professional association. In these cases, a profit-sharing plan may be the best fit to maximize the benefit to the employer, while not being unreasonably costly to the company owner in contributions to employee accounts. In still other cases, a combination of the 401(k) and profit-sharing plans may produce the best overall result. Deferred-compensation plans may also have application in some circumstances. Appropriate evaluation of these "special services" to a prospective company allows the appropriate fit of a plan to be proposed.
The IRA Revolution
The introduction of the Roth IRA will likely reshape the nature of retirement plans in the future. The Roth allows participants to receive income "tax-free" for life once certain requirements have been met (see the section regarding features). The Roth IRA is even available to existing plan participants of a 401(k) or other type of qualified plan. This is an excellent addition to the 401(k) plan contributions of highly compensated employees and company owners who are capped at relatively low levels. It is anticipated that the Roth IRA will become the investment choice apart from the 401(k).
The Traditional IRA has also been improved by recent legislation. Tax-free distributions are now permissible for first-time home-buyers, education, unemployment and medical expenses as well as death, disability, etc. (see limitations and conditions in description). The payroll deduction service provided by the PEO through Slavic allows IRA options to become true benefits alongside the main 401(k) plan.
Payroll Deducted IRA
SIA configures most types of retirement plans on an automated basis with the PEO payroll systems. Automatic deferrals for the Traditional IRA, Roth IRA, profit-sharing plans, and deferred compensation plans can take place as easily as 401(k) deferrals. SIA supplies the appropriate administration each category of retirement plan it requires.
An employer may choose to play a limited role in promoting retirement savings (IRAs) for its employees by establishing a payroll deduction program. This is achieved through the PEO. Each employee is allowed to set up an IRA with the sponsoring institution (mutual fund company and custodian). He or she can determine the amount of contributions to the IRA through an after-tax payroll deduction from each paycheck prepared by the PEO.
