Steven L White

In recognition of the financial crisis and the significant loss in value of many individual retirement accounts (“IRAs”) and qualified retirement plans, President Bush signed The Worker, Retiree, and Employer Recovery Act of 2008 (“the Act”) into law on December 23, 2008. 
The Act waives the requirement that a required minimum distribution (“RMD”) be taken for 2009 from the IRAs and employer sponsored qualified retirement plans.  The Act does not impact the requirement for RMDs for 2008.

As a result of the recession and marked downturn of the stock market, many retirees saw their account balances for their IRAs and qualified retirement plans drop precipitously.  Reacting to public sentiment, The Worker, Retiree, and Employer Recovery Act of 2008 was enacted, in part, to try to provide some relief.
Prior to the Act, owners of individual retirement accounts and participants in employer sponsored qualified retirement plans (i.e., 401k, profit sharing, money purchase pension plans, and defined benefit plans) were subject to the “required minimum distribution” (RMD) rules under the Internal Revenue Code (IRC).  These rules generally provide that individuals who have attained age 70 ½ must start to take distributions from these retirement plans.  The RMD is determined based on the value of the IRA or interest in the qualified plan as of December 31st of the previous year, divided by their life expectancy as determined from Internal Revenue Service (IRS) tables.  The RMD is required to be taken by April 1st of the year following the calendar year during which the person attains age 70 ½.
There are penalties for failing to timely take the RMD.  In addition to ordinary income tax, there is a 50% excise tax on the RMD not taken.  These same rules also apply to designated beneficiaries of inherited IRAs, although spousal IRAs and IRAs with charitable beneficiaries are subject to a different special set of rules.  In addition, where there is no “designated beneficiary” eligible for inherited IRA distribution options, the IRA must be distributed no later than December 31st of the 5th year following the year of the IRA owner’s death (the “5-year rule”).
As a result of the economic downturn, it did not seem appropriate to force retirees to take distributions from their distressed retirement accounts or to assess penalties on financially strapped individuals.  Hence, the enactment of the RMD waiver provisions in the Act. 

The Act waives the requirement that an RMD be taken for 2009 from:
(1) defined contribution plans, as described in IRC Code Sections 401(a), 403(a), or 403(b);
(2) IRC Sec. 457(b) eligible deferred compensation plans, but only if the plan is maintained by a state, a political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state; and
(3) individual retirement plans.

The provisions of the Act do not apply to defined benefit plans.
Here’s how the waiver applies:  If someone is age 70 ½ entering 2009 or attains age 70 ½ during 2009, the RMD rules are waived.  That person’s next RMD would be for calendar year 2010 to be paid by April 1, 2011.  If someone is already taking RMDs, there is no requirement to do so in 2009.  In the case of the application of the 5-year rule, 2009 will not count toward the 5 years, so if the 5 years encompasses 2009, the rule, in effect, becomes a 6-year rule.
Clearly, however, despite good intentions, the RMD waiver provision benefits primarily those retirees that have other income sources and do not need to rely on their RMDs for their lifestyle expenses.  These individuals will now have another year to see distressed investments recover, and wealthier but older clients need not take RMDs which would probably be quite large.  This provision may also have the effect of reducing taxable income for 2009.  That may help to avoid or mitigate the effects of various tax breaks based upon adjusted gross income.  Unfortunately, individuals that rely on their RMDs to maintain their lifestyles may have to take withdrawals from their accounts despite the loss in account values.
Institutional Reporting Financial institutions that sponsor IRAs are required by law to report certain contribution and account value information to account owners no later than January 31st following each calendar year on IRS Form 5498.  Since the Act does not waive RMDs for 2008, institutions still have the responsibility to report for 2008 by January 31, 2009.  However, the Act requires that all 5498 forms sent out should indicate that there are no RMDs required for 2009.
Many institutions indicated they could not change their processing programs in time to comply with this new requirement.  Accordingly, the IRS Issued Notice 2009-9, providing that issuers of Form 5498 should not put a check in Box 11, which normally would be checked to indicate that the IRA owner is required to receive an RMD in 2009.  If the box is checked because of the process programming issue, the IRS will not consider the form issued incorrectly, provided that the IRA owner is notified no later than March 31, 2009, that no RMD is required for 2009.
In addition, RMD information for 2009 need not be sent in 2010.  If a financial institution issues a Form 5498 for 2009 in 2010, it must show the RMD for 2009 as -0-.
Please consult with your Guardian Financial Representative if you have any questions concerning this document. The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only.  Neither Guardian, nor its subsidiaries, agents or employees provide tax or legal advice. You should consult with your tax and legal advisor regarding your individual situation.

Steven L White
Wealth Strategies Group

One of the most important financial decisions that many people make involves the distribution of money from company retirement plans. Most companies don’t want the responsibility of administering accounts for workers who have retired or gone to work elsewhere. Today’s trend is toward “portable pensions” that workers can take with them from job-to-job, so that their retirement plan money can keep growing over whole careers, perhaps across many jobs.

However, many plan participants are not prepared to make the decisions about distributions that are necessary, if they are to achieve personal retirement goals. They don’t understand the choices available, and they may not anticipate decisions and seek professional help before deadlines occur. While this article doesn’t attempt to provide all the knowledge required, it does identify important issues to consider if you are about to receive a distribution.

Six Trigger Events: A good place to start is with the concept of a “trigger event.” This is an event at which your plan money can be distributed to you under federal law. The six trigger events are: 1) separation from service (i.e., quitting, being fired, being offered early retirement); 2) reaching retirement age; 3) reaching age 59 ½ in a plan that allows distributions after that age; 4) death; 5) disability; and 6) termination of the plan.

At a trigger event, participants normally are entitled to receive their vested plan balances, less any plan loans outstanding. For many people, this is the “biggest paycheck” they may ever handle, representing years of personal savings, employer contributions and accumulated earnings. Perhaps the most important point to make about handling a distribution involves the need to anticipate and plan for trigger events. If your company is downsizing and laying off workers, don’t wait for “pink slip day” to seek information or advice. Many other pressures may be swirling around you when the trigger event takes place, and you need time to plan for handling your “biggest paycheck” wisely. One of the first steps in planning for a trigger event is to understand all your choices for handling this money, and then select the best one for your future.

You will probably have several of the following choices for handling this money:

• Leave money in the plan and let it compound. In most cases, you can’t be required to take a distribution, unless your balance is fairly small. However, leaving money in the plan means you will be limited to the plan’s investment choices. You probably won’t be allowed to put more of your own money into the plan after you leave work.

• Take an annuity income payout from the plan, if one is offered. This choice converts plan money into a fixed income guaranteed by an insurance company. However, once you accept this choice, you generally can’t change it. The annuity income may provide less purchasing power the longer you live, because of inflation.

• Pay tax on the distribution and invest or spend the after-tax amounts. This is usually not an attractive choice – especially if your biggest paycheck is large. The distribution will be added to your other income and could be taxed in the highest brackets. If you are under age 59 ½, the distribution also could be subject to a 10% federal tax penalty.

• Transfer the money to the plan of a new employer, if this option is offered. Tax law changes encourage transfers between companies and types of plans. To make this choice work, you generally need to have a new job lined up and take steps to make sure your money is transferred from one plan to another. In this case, you won’t owe current income tax, and all your plan money can continue to grow.

• You can transfer the money directly to a Traditional IRA in your own name, You must arrange this transfer between the company you are leaving and your choice of IRA provider. In this case, you do not actually receive money and there is no current income tax consequence.
 
• You can receive the distribution and then “roll it over” to a Traditional IRA in your own name. You must deposit money into the IRA within 60 days of receipt. The employer will withhold 20% of the distribution for federal income tax, so you will have to supply this amount yourself if you want to avoid tax on 100% of your money. It’s best to avoid the withholding issues of a rollover, if you can.

• You may transfer or roll over money to a Traditional IRA and then convert to a Roth IRA, if you qualify. Roth conversions currently are available to taxpayers with modified Adjusted Gross Income of $100,000 or less. Starting in 2010, the income limit on these conversions is scheduled to disappear. In a Roth conversion, you pay current income tax on the converted amount and then can qualify for tax-free distributions later on.

These choices can be complex to evaluate. With so much money at stake, you need to make sure your analysis is thorough and considers your long-term needs. That’s why it usually pays to sit down with a financial professional well before a trigger event. Many professionals are able to help you understand the tax and investment consequences by using retirement distribution software and customized illustrations. They also can explain other choices you may have. When you consider how long and hard you have worked to earn your biggest paycheck, you should then decide that it’s worthwhile to make the most of it with qualified financial professional help.

Steven L White

Wealth Strategies Group

Although Roth IRAs have been in existence for several years, they have not been available to many higher-income people due to restrictions imposed by Congress. Under the Tax Increase Prevention and Reconciliation Act, Roth IRA conversions will be allowed for everyone starting in 2010. This change in the law creates a significant planning opportunity for high-income retired people.

To take advantage of this opportunity, individuals can prepare by consolidating all Traditional IRAs into one. Depending on the taxpayer’s Adjusted Gross Income, it also may be possible to begin making annual contributions to a Roth IRA prior to 2010. For reasons discussed in this article, such contributions can accelerate the tax benefits of assets that will be converted from a Traditional to a Roth IRA later.

 There are two main ways to participate in Roth IRAs – annual contributions or conversions. First, annual contributions – Taxpayers whose adjusted gross incomes (AGIs) do not exceed limits may make an annual contribution to a Roth IRA. Contributions are made with after-tax dollars and earnings compound tax-deferred. Withdrawals of Roth contributions may be taken tax-free at any time. Withdrawals of earnings are tax-free, provided the Roth has been in existence at least five years and withdrawals are taken after age 59 ½. Tax penalties apply on withdrawals of earnings prior to age 59 ½ unless an exception applies such as death, disability, medical expenses, first-time home purchase, or higher education expenses.

Secondly, conversions – Currently, any taxpayer (single or joint filer) with AGI under $100,000 may convert money from a Traditional IRA to a Roth IRA. The amount converted is added to taxable income in the year of the conversion and taxed as ordinary income. Since converted amounts then may qualify for tax-free withdrawals under the same terms as Roth contributions, conversions are a way of pre-paying income taxes in an IRA.

Starting in 2010, the $100,000 AGI limit for conversions will no longer apply, according to current law. For conversions made in 2010 only, half of the converted amount may be included in taxable income in each of 2011 and 2012.  
A Roth IRA conversion can help to accumulate tax-advantaged assets during retirement, simplify tax compliance, and pass on estates. In a Traditional IRA, contributions are not allowed after age 70 ½. However, a Roth owner may continue to make post-tax contributions at any age, and this benefit can increase the IRA account value in older ages. As there are no required minimum distributions from Roth IRAs during the owner’s lifetime, a conversion also avoids the annual calculation of the minimum distribution that is required in most Traditional IRAs after age 70 ½.
Finally, since no income tax is due on qualifying distributions from a Roth IRA during the owner’s life or after death, a Roth can make life easier for heirs by leaving them tax-free assets. Although heirs are subject to minimum distribution requirements from Roths (after the owner’s death), they have some flexibility to “stretch” these distributions over several years, thus continuing tax-deferred growth for some time.
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Tax rates can make a difference! One of the more challenging questions to consider is this one: “Do you think that, on the whole, tax rates will increase or decline during your retirement?” Because Roth contributions and conversions effectively pre-pay income taxes, they may make sense for individuals who believe tax rates will increase during their retirements. Some people think it is a mistake to pre-pay taxes because they will lose the “time value of money” on the taxes paid. However, this is not the case, due to the following rule:

A pre-tax dollar in a tax-deferred investment will have exactly the same after-tax future value as a post-tax dollar in a tax-free investment, if you assume that tax rates stay constant.

For example, suppose you put $1 of pre-tax money into a Traditional IRA and over 10 years it compounds (@ 8% annual return) into $2.16. You then pay federal/state income tax at a hypothetical 30% rate, leaving $1.51 after taking a taxable withdrawal. In comparison, suppose that you put 70 cents of post-tax money ($1 less 30 cents tax) into a Roth and it compounds over ten years at the same 8% to produce $1.51. Since the full amount can be withdrawn tax-free, the amount available for retirement security is exactly the same as in the Traditional IRA.

It is impossible to know whether federal, state and local income tax rates will go up or down in the future. Due to this uncertainty, one strategy is to hedge against tax rate changes by dividing retirement money between Traditional and Roth IRAs.

Even for those who aren’t sure about the wisdom of Roth conversions, it can be useful to contribute or convert a small amount to a Roth now. People over age 59 ½ are allowed to take tax-free withdrawals from Roth IRAs starting five years after the account was opened. Even a small amount put into a Roth now starts the “five-year clock” ticking.

In summary Roth IRAs have become a viable planning tool that can help to increase tax-advantaged asset accumulation and increase simplicity during retirement. Recent changes in the tax law will make Roth conversions “universal” starting in 2010, and that makes this a good time to begin evaluating their pros and cons.

Steven L. White

Wealth Strategies Group

I recently attended a special event sponsored by an organization that supports and mentors emerging business owners and entrpenuers. What made the evening extra special is that I was introduced to an aspiring young man who began  a hobby that turned into a flourishing and very profitable business. I was truly inspired and impressed by this young man who managed to grow a business to such respectable revenues and incredible profitability! He attended the event because he is has maxed out his abilities to keep pace with purchase orders and is unable to expand into additional products due to time constraints. 

After listening to him talk about his situation a group of qualified professionals at the table offered a variety of recommendations as to how he could solve these problems being -how he could locate hire and train additional staff to keep pace with production and roll out new product.  What jumped off of the table as we conversed was what this young man needs to do before he hires anyone.  If you have found yourself in this position consider but do not limit your self to the following steps and take immediate action. “Protect” first! My legal friends may recommend an analysis of your Intellectual property-your trade name, your branding, entity election, anything that identifies your product or service that is not legally protected from some one else to use. An attorney may also suggest a review of your liability insurance and any state and federal equal opportunity guidelines, do’s and don’ts about hiring, corporate by-laws, resolutions and board selection. It may make sense to consult with a human resource company such as a Professional Employment Organization (PEO). An attorney may also suggest
 
A property and casualty insurance person may suggest that you take inventory of your auto, home and umbrella policies. Do you have enough coverage, is it enough and are your personal assets protected from suit?  A life insurance representative may suggest evaluating your personal life insurance portfolio, Your businessKey man  portfolio or any long term disability and medical coverage. These are your first and second lines of asset protection strategies. Remember,  without a qualified sick pay plan the Internal Revenue Code does not allow your company to compensate you if are not able to work due to injury or illness.

Income-The earned income and dividends this persons business is producing may justify setting up a qualified plan for the ownership and qualifying employees. There are several to choose from and a feasibility study would be the proper approach to determine what type of qualified plan is suitable. It may make sense to evaluate a Non-qualified deferred compensation strategy as well for key officers or shareholders of the company. Using post tax dollars as part of an accumulation strategy can help mitigate the future-unknown tax environments. 
Key man insurance and income protection-There are various types of life insurance that this person could evaluate.  My recommendation would be to evaluate a permanent life insurance strategy that may include convertible term.
 Protecting income from a long term disability is paramount! A significant amount of bankruptcies and foreclosures are caused by lack of income due to injury and illness.

 Your income provides you with money to live a life, pay your bills, and create a lifestyle. Without income how would you live? I recommend choosing an “own occupation” long term disability contract with future increase options and cost of living rider to help keep pace with inflation. I may also recommend business overhead protection that pays the bills and payroll for the company as well. These are just a few suggestions of many, that successful business owners can put in play to protect, preserve and grow  his or her company. As always, consult with qualified professionals before implementing any financial or non financial strategy.

Steven L White

Wealth Strategies Group

 

When is the last time you have given your retirement strategy a closer look?

401(k), IRA, SEP, SIMPLE, what does it all mean? Have you maxed out your contributions? Does make sense to max out your contributions? Is the maximum contribution going to provide you with the quality of retirement that you want?

 

When is the last time you used a future value calculator to see what your retirement account might look like in 10, 15, 20 years? In evaluating your future needs, did you take into account inflation and Income or capital gains taxes? Do you really think that you will retire in a lower tax bracket? How about life events? Did you build a model that took into account a long term care event?  How about a full disability that cuts off your gravy-train income? How about an estate with no life insurance? I don’t know what the years ahead of me will look like no more than the next person. What I do know is that I want my financial strategy to work under all foreseeable circumstances. I want it to work today and in the future. In most cases a single strategy of having all of your eggs in the retirement basket underperforms. Now add in being in the wrong retirement plan for a long period of time and you have compounded the problem. We live in a society that dispenses financial information like candy in a candy store. Yet with all of this information the statistics show that most people are in a financial struggle.

I do believe that there are 3 options in life that we choose when making decisions about our money, One-do nothing, two-do what everyone else is doing (herd) and then there is the Third Option. The Third option is the best option because it helps you understand the truth about money. It helps you understand how to become successful with your finances by understanding the hierarchal order of money…protection, savings and growth. The Third option helps you understand your cash flow deployment and how to structure it so that you achieve maximum efficiency that produces maximum benefits. The Third Option teaches you about rate of return in the asset and liability column. The Third Option helps you create and structure a financial strategy that helps protect against market risk, inflation risk, legislative risk and enormous tax liabilities. Wouldn’t you like to know when it makes sense to form an Irrevocable Life Insurance Trust? How about a Charitable Remainder Trust?  How about knowing when to exercise your gifting strategy to help mitigate estate taxes?

The Third Option is about you having a team of advisors that are ALL on the same page when it comes to your personal estate, your business and medical practice. Think of what you can do now!

Steven L. White

Wealth Strategies Group

A couple months ago I introduced you to the Internal Revenue Code 412(i) qualified defined benefit retirement plan. Remember that this retirement strategy allows you to define your retirement benefit with a fully insured plan. This fully insured plan also allows you to defer income significantly above the typical $45,000 plus catch up provisions for defined contribution plans.  Remember these plans are funded with life insurance and annuities and typically tailored for high income wage earners with shorter retirement time horizons. For example, someone in their late 40’s, 50’s or 60’s. (younger folks who qualify must of course be included in these retirement plans). I thought it would be a great idea to show you a “sample” case study so that you can compare and contrast the difference between a Defined Contribution Plan and the fully insured Defined Benefit Plan IRC 412(i) which will become  IRC 412(e)3 effective in 2008. 

First the set up:  The Participant is a family doctor, male, mid 50’s. He has 3 participating employees with ages ranging from 23 to 40 and average compensation of $37,000 per year. The Doctor has an income tax burden of $200,000 for 2007. (He’s not real excited about this.) The doctor’s income is extremely stable and he plans to retire in 12 years.   

Present situation: The doctor is contributing to a Defined Contribution Plan  401(k) account to the maximum of $45,000. In this example the Doctor will have accumulated $1,600,000 by the end of 12 years. Over the same period of time the doctor will pay Uncle Sam $2,400,000 in income taxes. ($200,000 x12 =$2,400,000). He is not happy about that either. Now let’s spend it down at retirement. Let’s pretend the doctor takes $150,000 per year from his 401(k) retirement plan and it continues to grow at a rate of 5% per year. In 9 to 12 years it is possible that he runs out of money if we factor current rates of inflation, current interest rates and existing tax brackets.  

Contrast this to Future situation: The doctor decides to create a Defined Benefit Plan under IRC 412(i). In this example let’s use the same numbers as above however let’s shift the tides a bit. Let’s take the $200,000 and pay $170,000 to “himself” as a contribution into the plan. In this example his tax liability has been reduced by approximately $27,000 from $200,000. Assumption is that the doctor’s taxable income places him in the 28% tax bracket of the current tax code. This results in the doctor recapturing approximately $2,000,000 over the next 12 years and he is extremely happy with this. He is even more excited that his deductible contribution to his retirement plan jumped from $44,000 with the defined contribution /401(k) to $170,000 per year contributions made by him on behalf of his employees would of course also be deductible! In this example the doctor is able to accumulate approximately $3.1 million of guaranteed money inside his plan (subject to some market risk)   which will pay out a guaranteed retirement income of $175,000 (2006 limits) per year until death. This is a much better outcome than running out of income using the 401(k) strategy. 

Remember, IRC 412(i) allows the lesser of 100% or salary or $180,000 for 2007 as retirement benefit.  You can not ignore the possibility of a 412(i) plan as a viable alternative to your current tax and retirement strategy.  As always be sure to consult with your highly qualified, credentialed tax professional when addressing and gaining an understanding of the Internal Revenue Code before making any decisions.   

Steven L White

Wealth Strategies Group

Park Avenue Securities LLC,(PAS) and its representatives do not give tax or legal advice

Interesting enough, many of my clients ask for help with their lack of liquidity in their personal estate or business, sometimes both. These clients come from all levels of the economic scale, not inherent to lower incomes as one might assume. To address the problem, and the solution let’s visit this with macro-economics 101.  Liquidity in this context simply means having enough money for a rainy day, month or year, meet business obligations, taking advantage of an opportunity or simply have a cushion. Might be a good idea to ask ourselves what the consequences are of not having liquidity and savings.  When such liquidity is needed what is the alternative if we don’t have any? Other options might be using credit which means having  to qualify for a loan and pay someone else a fee and interest to use the money, thus transferring your wealth to someone else’s war chest. If you are contributing to a Qualified Retirement Plan and have built up reserves and a nest egg is the use of this money an option? Maybe, but you will pay income taxes and a pay a penalty if you are under age 59 ½. Not to mention the lost opportunity cost of interrupting your accumulation or pulling the money out in a down market. In either case it’s not the most efficient strategy.   Liquidity in this context is principal that you are preserving not looking for rate of return. It is money that is available and relatively safe and usable without negative consequences to your business or estate. When establishing your liquidity war chest, think of “safety” and accessibility. Start off with a basic savings account with smaller deposits and Money Market accounts for larger deposits. Be careful with large accounts. You will get to a point that these accounts generate interest income that is taxable. At this point you will need some advanced strategies to minimize and mitigate income taxes. Not necessarily a bad thing to achieve.  When you achieve adequate liquidity and reserves it is much more comfortable moving into qualified or non-qualified retirement accounts, expanding protection and growth strategies. One of the fatal mistakes that I have made and seen others unknowingly make is to focus entirely on building up qualified retirement accounts and investment portfolios before establishing a liquid savings or other type of liquid account. Believe me when I say this…there is plenty of time for you to begin investing! Smart and efficient strategies begin with building protection and liquidity first.  

Steven L White

PAS and the Representative do not provide legal or tax advice or services

When do you start hunting for tax deductions? If you are like most taxpayers, the answer may be around the IRS tax filing deadline. Often, that’s too late to make a difference. I know that it may be a little early to begin talking about tax deductions however getting an early start never hurts. Business owners have many opportunities to generate tax deductions throughout the year. Whether you are self-employed or run your own corporation, you can plan ahead to slim down your IRS bill by using the deductions described in this article.  

Home office deduction- You may deduct expenses allocated to the portion of your home that you use exclusively and regularly for business. To qualify, your home must be your principal place of business or be used to meet with clients in the normal course of business. If your home office qualifies, you can deduct a pro rata share of your total rent or mortgage interest payments, real estate taxes, depreciation, homeowner’s insurance and utilities. Planning Idea- It’s easier to qualify if you set aside a whole room exclusively for office use (not personal living needs).   

Business Use of Automobile – Business owners commonly use personal cars to run work-related errands, visit clients, or buy supplies. The cost of commuting from your home to a separate office is not deductible. But if you qualify for the home office deduction (above), you can deduct the cost of traveling from a home office to any other work-related location. Two methods are available for calculating the deduction: 1) You may deduct a standard IRS-approved cost per mile; or 2) You may deduct the actual costs of vehicle operation based on the portion of total miles driven for business use. In most cases, mileage is the simpler calculation, but in either case the IRS requires you to document all business miles.  Keep a notebook in your car. For every business trip, log the starting and ending odometer readings, the business purpose and date.  

Gifts – If you give gifts to clients, such as a fruit basket at the holidays, the IRS allows you to deduct only $25 per person annually. However, with smart planning you may be able to increase the deduction. For example, you may deduct costs of wrapping, delivering or insuring gifts above the $25 limit. If a gift is intended to be used by a number of people, not an individual, you may be able to deduct more than the $25 limit. For example, suppose you regularly send a $100 holiday fruit basket to the president of a client firm. Only $25 is deductible. However, if you send the same basket to “all employees” of this firm, the full amount could be deductible (@ $25 per person). Consult a tax advisor for specific guidance.  

Employee Meals – If your business provides free meals for employees and does not include their value as taxable compensation, you generally may deduct only 50% of the cost. However, there is an exception called “meals for the convenience of the employer” that can increase the deduction to 100%. To qualify, you must show that free meals: 1) were consumed at a worksite; 2) were offered to at least half of all employees; and 3) met a business purpose, such as increasing productivity. If you regularly “order in” food for employees and pay for it, document on the receipt how many employees participated, the date and time, and the business purpose.

Business Interest Expense – With the exception of the interest payments on a home mortgage, most personal interest is not deductible. However, 100% of the interest on business-related loans can be deductible. To claim this deduction, you should clearly separate business loans from personal by using a separate consumer credit account, credit card, or bank loan solely for business expenses. Suppose you are a sole proprietor and must take a loan to pay yourself a month’s salary. The interest on this loan will not be deductible. However, suppose that in the same month, you are paying cash for ordinary business expenses. Take a loan from an account earmarked for business and use it to pay ordinary business expenses. This interest will be deductible.For more ideas on deductible business expenses, visit the IRS’ Web site at www.irs.gov and download a copy of Publication 535, Business Expenses. Also, talk to a qualified CPA or tax advisor well before the end of your business tax year, so you will have time to plan ahead for reducing your next tax bill. You will be glad that you did!                                               

Steven L White

Too often, workers in small companies are much less likely to have retirement plan coverage on the job. The reasons are varied and complex, but they boil down to one basic problem. Many small companies don’t think they can afford retirement plans. The U.S. Congress has addressed this attitude head-on by creating federal tax incentives that directly encourage small business retirement plans, while also reducing complexities that made retirement plans costly or difficult to operate. As a result, the gap in retirement plan participation between workers in big companies and small companies is starting to shrink. Whether you own a small company or work as an employee in one, you should know about three basic areas of changes: 1) federal tax credits; 2) enhancements to SIMPLE plans; and 3) other incentives that make small business retirement plans more attractive. 

Federal Tax Credits

Congress has created two federal tax credits related to retirement plans. One is specifically designed for companies with 100 or fewer employees that start new retirement plans. These companies are eligible for a tax credit to offset a portion of administrative and participant education costs during the first three years of the plan’s life. The credit is capped at 50% of the first $1,000 spend on qualifying costs.  The second tax credit is available for low-income and middle-income participants in retirement plans of all types and sizes, including 401(k)s, SIMPLEs, Traditional IRAs and Roth IRAs. Taxpayers can receive a “government matching” credit on up to 50% of the first $2,000 of their own money they contribute to a plan. To qualify for the highest credit (50%), joint filers must have Adjusted Gross Incomes below $30,000 and single filers must fall below $15,000. Lesser credits are available for Adjusted Gross Incomes up to $50,000 joint or $25,000 single. 

Enhancements to SIMPLEsThe SIMPLE, a type of retirement plan created specifically for small companies, was introduced by Congress in 1997.  

The major advantage of SIMPLEs for companies is simplicity. By agreeing to make minimum contributions on behalf of all eligible workers, the company is relieved of responsibility for performing complex non-discrimination testing or complying with cumbersome “top-heavy” rules. When the SIMPLE plan is set up with personal IRAs as funding vehicles, the company also has no ongoing investment responsibility. After the first two years of participation, employees are free to transfer from the SIMPLE’s IRA into another IRA of their choice, if they wish, with no tax consequence or penalty. (A 25% premature distribution penalty applies on transfers in the first two years.)  Other Enhancements 

Several other incentives in

U.S. tax law have encouraged small companies to set up retirement plans. A variety of funding limits have been gradually raised, ranging from 401(k) deferral limits to the formula for calculating defined benefit plan contributions. In general, small business owners will have more freedom to sock money away for their own retirements, with tax advantages. The top-heavy rules that have added red-tape for thousands of small companies in the past have been relaxed, too. Now, any matching contributions made by the company will count toward the minimum contributions required in top-heavy plans. Also, Congress has taken steps to increase the “portability” of retirement benefits among various types of plans. In the future, it will be easier for workers to take their plan money with them from job-to-job, or else transfer it into a personal IRA.

Now is a good time to review the many good reasons to create or participate in a retirement plan with the help of a qualified financial professional. The barriers that have prevented so many small companies from offering plans are falling. The opportunities of all workers to set money aside for the future, with tax advantages, have never been greater. To your success!

Steven L. White 

 

After taking a few weeks off I am back in the saddle with several topics to talk about between now and the end of the year. I am going to mix it up a bit and focus more on protection strategies and Qualified retirement plans such as 401k, IRA, Executive deferred compensation plans. Today’s writing is more fundamental in scope than specific to these subjects however relevant to everyday issues and answers. If today’s topic is successful then parents in my community will have more success with their finances from start to finish. This  an idea came from  one of my recent clients. He told me that he had a new goal to teach his son the things that his dad is learning from me about money decisions and strategies. Wow that is powerful!  So how about getting your kids involved with learning about money and finances? How about getting the kids involved in understanding how to create, protect and manage the family bank accounts?  Ok, I agree that opening this door is a bit dicey but the kids don’t have to know everything. How about beginning the conversation with how and why saving money is a great strategy. Then introduce a strategy or two and see how it goes. Set a goal for 90 days at a time and include a recognition award. Celebrate accomplishment! With older kids that are approaching drivers age, how about a lesson on how expensive it is to buy and run a car. Begin with cost of acquisition, plates and license fees, insurance costs, fuel, maintenance, tires, oil changes; oh man the list goes on.

 

Eventually work the kids up to what mom and dad have to do to pay the mortgage, buy groceries, and pay the light, cable, cell phone, internet, school registration, deferred maintenance and so on. Go as far as how much this cost on a monthly, quarterly and annual basis. Maybe then graduate them to how much you pay in income taxes, capital gains tax, gift and estate taxes. Why you need Home, auto, life insurance and disability insurance. How about taking your children grocery shopping and assigning them to “value shop” for the family this week. Then the big one-Funding qualified and non-qualified retirement plans!

 

Ok, maybe funding qualified retirement plans is a little much for mom and dad so I will think of something to help with this . I bet between all of us we can come up with subject matter and topics that can be discussed at all age levels. Wow, do think we could ease some financial pain families are experiencing? Your thoughts? Any suggestions? Tell your friends, family and colleagues about this and let’s put it together.

Steven L. White