Retirement Plans and Limits

RETIREMENT PLANS FOR INDIVIDUALS

A Traditional IRA is an Individual Retirement Account tax-advantaged savings plan set up for your retirement. In order to set up and make contributions to a Traditional IRA you must have received taxable compensation (earned income) during the year and been under age 70 ½ by the end of the year. You can establish a Traditional IRA even if you have other retirement accounts, such as employer-sponsored plans.

You can also set up a spousal Traditional IRA whether or not your spouse has earned income for the year. You can begin taking distributions at age 59 ½.  Distributions must begin by April 1 of the year following the year you turn 70 ½.  There are heavy penalties for early withdrawal, with some exceptions.

You can generally deduct the contributions to your Traditional IRA for the year from your income. Transactions and growth within the IRA are tax-deferred until distribution.  Withdrawals are taxed upon distribution to you.

The contribution limits for a Traditional IRA (which also apply to spousal IRAs are:

Traditional IRAs can be converted to Roth IRAs.  Consult your tax advisor for information about Roth IRA conversions.

For more information, see Internal Revenue Service Publication 590.

A Roth IRA is another type of Individual Retirement Account that is subject to most of the rules that apply to Traditional IRAs.  However, unlike a Traditional IRA, you make contributions to your Roth IRA with after-tax dollars, so contributions to a Roth IRA are not deductible. All transactions and growth within the Roth IRA are tax-free, and withdrawals, which can be made at any time, are usually tax-free, as long as you are 59 ½ and have maintained your Roth IRA for at least 5 years.  As in a Traditional IRA, there are some exceptions to the stiff penalties for early withdrawal.

You can make contributions to a Roth IRA after age 70 ½.  If you have more than one Roth IRA, they are treated as a single account when calculating the tax consequences of distributions from any of them.

Roth IRAs are available to single taxpayers making up to $95,000 a year and to married couples making a combined yearly maximum of $150,000 of adjusted gross income.  If your income is in excess of these limits, your ability to contribute to a Roth IRA is phased out until you reach an income of $110,000 for individuals or $160,000 for married couples, when it is eliminated altogether.  The Roth IRA contribution limits are the lesser of the Traditional IRA annual limits (see above) or 100% of earned income minus contributions to IRAs.

Traditional IRAs can be converted to Roth IRAs.  Consult your tax advisor for information about Roth IRA conversions.

For more information see Internal Revenue Service Publication 590.

Retirement Plans for Employers

In order to qualify for a SEP IRA, an employee must be at least 21, have worked for the company for three of the last five years and have earned at least $500 in the applicable year.  The employer is required to contribute the same percentage to each eligible employee in a particular year, although there are some permitted disparities. Employers are not required to contribute the same overall percentages each year, nor are they required to make contributions each year.

There are limitations on SEP IRA contributions.  For 2007, the maximum contribution by the employer is 25% of your wages (or up to 20% of your Schedule C Income) to a maximum of $45,000.  Also, for 2007, the maximum compensation that can be used for calculation of annual maximums is $225,000.  Maximums will be increased for cost of living in years after 2007.

A SEP IRA must permit employees to withdraw contributions at any time (subject to the tax rules generally applicable to IRA distributions). Thus, distributions that occur before the employee reaches the age of 59 1/2 are subjected to a 10% early-withdrawal penalty, in addition to any income tax, unless one of the permitted early withdrawal exceptions applies.

A SEP IRA can be converted to a Traditional or Roth IRA.  Consult your tax advisor about converting a SEP IRA. 

For more information, see Internal Revenue Service Publication 560.

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is an employer-provided IRA (for employers with no more than 100 employees), provided the employer has no other retirement plans in place.

A SIMPLE IRA is a qualified plan, like a 401(k) plan, but is less complex and less costly in administration.  It is funded by a pre-tax salary reduction elected by the employee.  An employee must have earned at least $5,000 in any two preceding calendar years to be eligible to participate in a SIMPLE IRA, and must reasonably expect to earn $5,000 in the current year.  The employer is allowed to impose less strict eligibility requirements, but cannot make them more stringent.

In 2007, the contribution limit by an employee to a SIMPLE IRA is $10,500.00 in salary deferral (plus $2,500 if you are over 50), plus 3% of your salary matched by your employer. Maximums will be increased for cost of living in years after 2007.  If you do not elect to contribute to a SIMPLE IRA, your employer is permitted to contribute 2% of your earned compensation to the plan.  Distributions are taxed in the same way as distributions from a Traditional IRA.  If a distribution occurs in the first two years of the employee’s participation in the plan, additional penalties may apply and certain permitted exceptions for early withdrawal may not be available.

A SIMPLE IRA cannot be converted to a Traditional or Roth IRA until two years after the date the employee first participated in the plan.  Consult your tax advisor about converting your SIMPLE IRA to a Traditional or Roth IRA. 

For more information, see Internal Revenue Service Publication 560.

A Qualified Retirement Plan is an employer sponsored plan that qualifies for special tax treatment under the Internal Revenue Code.  It does not receive the same tax treatment as an IRA.  These plans can be and usually are offered by large corporate employers, but are available to small businesses as well.  Administration costs can be high, but contribution limits are high and tax advantages are maximized.

There are two types of qualified plans, defined benefit plans and defined contribution plans.  A defined benefit plan is funded entirely by the employer. A defined contribution plan, such as a 401(k) plan, is funded by employer and/or employee contributions. Employees may contribute pre-tax salary to the plan, and employers may match employee contributions on a dollar or percentage basis. 

Although there is no list of approved investments for employee retirement plans there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plans.

A Rollover IRA is an IRA created for the tax free transfer of funds from a tax-deferred plan.  There are two ways to create a rollover IRA.  One way is to transfer funds over from an employer sponsored plan, such as a 401(k).  The other method is to transfer funds to you temporarily so that you can open another IRA with those funds.

There is no limit on the amount of money you can put in your rollover IRA. 

You can transfer assets between plans by the plan custodians, so that you never “receive” the assets.  This transfer is not required to be reported to the IRS.  There is no limit on the number of times per year you can direct transfers.  If you direct a rollover, in which the prior custodian sends you your IRA funds and then you open a new IRA account (which you must do within 60 days of receiving the funds from the first custodian), you may only do so once every 12 months.  Also, if you request the funds from your custodian in this way, you should indicate that the funds are being re-deposited in another IRA account in order to avoid withholding taxes.

Many Capital IRA clients consolidate and fund their self-directed IRAs with rollover funds from prior retirement plans in which they have participated. 

Your Capital IRA representative is ready to help you determine how to best fund your self-directed IRA for maximum wealth building.