3433-vol. 6 issue 2-3.pmd - iarfc

More documents

Recommendations

Info

56 Journal of Personal Finance mandatory annual contributions, but also has the ability to supplement this required contribution with additional discretionary contributions based upon profit. There are certain restrictions associated with Keoghs. If a business owner wants to set up a Keogh plan for his/her own benefit, then he/she must also establish and fund a retirement program for the non-owner employees. Further complicating the Keogh is the fact that the owner’s contributions to his/her own plan are based upon the net income of the business from which self-employment taxes and contributions to employee retirement plans have already been deducted. As a result, the owner’s allowable contributions are reduced. In effect, the unincorporated business owner is only able to contribute 20% of compensation/net income (instead of 25%) to his/her own retirement fund. When originally enacted in 1963, Keogh plans provided the only option for self-employed individuals to provide for their own tax-deferred retirement savings. Today, other plans like the SEP, SIMPLE, and Individual 401(k) give the self-employed taxpayer many more options from which to choose. Another advantage which the Keogh historically enjoyed was its ability to offer the highest possible contribution limit. Under current tax law, the maximum amount that can be contributed to a Keogh depends on whether it is a defined contribution or a defined benefit plan. If it is a defined contribution plan, annual contributions cannot exceed the lesser of 100% of the compensation actually paid to the participant or $46,000 in 2008, or the same limit that applies to contributions to SEPs and Individual 401(k) plans. On the other hand, if the Keogh is a defined benefit plan, contributions are limited to the lesser of 100% of the participant’s average compensation for his or her highest 3 consecutive years or $185,000 in 2008. Note, however, that while the maximum contribution allowable may be higher, the maximum deductible contribution is still only 25% of eligible compensation. Non-Employer, Or Individual, Sponsored Plans Even if the taxpayer works for an employer who offers a pension plan, there is a general concern that there may still be a short-fall in income during retirement. The gap then must be subsidized by some other retirement plan. This is where Individual Retirement Accounts (IRAs) become an attractive option. Traditional IRA The most widely known of the non-employer plans is the Traditional Individual Retirement Account (IRA). Because the contributions to a Traditional IRA are generally tax deductible, the distributions from this type of IRA ©2008, IARFC All rights of reproduction in any form reserved.
Volume 6, Issue 2 & 3 57 must be included in income. Furthermore, when the taxpayer reaches the age of 70 ½, he/she must begin to take minimum required distributions (MRD) from his/her Traditional IRAs. The deductibility of the IRA contribution depends on the taxpayer’s filing status and whether the taxpayer and/or the taxpayer’s spouse are covered by retirement plans at work. If there is no pension plan coverage, the deduction is the lesser of $4,000 or the taxpayer’s compensation. This increases to $5,000 in 2008 and years thereafter. Additional annual contributions of up to $1,000 are available to taxpayers who are 50 or older. Deductible contributions to a Traditional IRA can continue to be made until the year in which the taxpayer turns 70 ½. If filing a joint return, a taxpayer can use his/her spouse’s compensation in order to satisfy the “lesser of” rule. A taxpayer can also make contributions into a separate Traditional IRA on behalf of his/her non-working spouse. The limits discussed above apply, with the combined contributions for both spouses not exceeding the amount of taxable compensation reported on the joint tax return. If the taxpayer or the taxpayer’s spouse is covered by a retirement plan at work, the deduction is subject to phase-outs based upon the taxpayer’s modified adjusted gross income (MAGI). MAGI is calculated by adding back the Traditional IRA deduction, the foreign earned income exclusion, the foreign housing deduction or exclusion, the U.S. Savings Bond interest exclusion, the student loan interest deduction, and any employer-paid adoption expense exclusion to the adjusted gross income (AGI). If a taxpayer filing as single or head of household is covered by an employer-sponsored plan, the IRA deduction begins being phased out at MAGI of $52,000 ($53,000 in 2008) and is unavailable once MAGI reaches $62,000 ($63,000 in 2008). For joint filers where both individuals are active participants in an employer retirement plan, the phase-out of the deduction begins at $83,000 of MAGI ($85,000 in 2008) and is completely phased out when MAGI reaches $103,000 ($105,000 in 2008). For married taxpayers filing separate returns, the phase-out begins immediately and the deduction is unavailable once MAGI reaches $10,000. If the taxpayer is not covered by an employer plan but his/her spouse is, the IRA deduction is phased out when MAGI is more than $156,000 ($159,000 in 2008) but less than $166,000 ($169,000 in 2008). If MAGI exceeds the annual limit, a deduction is not permitted for contributions to a Traditional IRA. Planning Strategies Roth IRA An increasingly popular alternative to the Traditional IRA is the Roth IRA. Unlike the Traditional IRA, contributions to a Roth IRA are not taxdeductible, meaning it is funded with after-tax dollars. However, because
Page 1 and 2:
Journal of Personal Finance Tools,
Page 3 and 4:
Volume 6, Issue 2 & 3 3 RESEARCH &
Page 5 and 6: Volume 6, Issue 2 & 3 5 A Bull Call
Page 7 and 8: Volume 6, Issue 2 & 3 7 submissions
Page 9 and 10: Volume 6, Issue 2 & 3 9 Postmaster:
Page 11 and 12: Volume 6, Issue 2 & 3 11 simplicity
Page 13 and 14: Volume 6, Issue 2 & 3 13 LIFE FOCUS
Page 15 and 16: Volume 6, Issue 2 & 3 15 understand
Page 17 and 18: Volume 6, Issue 2 & 3 17 True Value
Page 19 and 20: Volume 6, Issue 2 & 3 19 Financial
Page 21 and 22: Volume 6, Issue 2 & 3 21 stream, an
Page 23 and 24: Volume 6, Issue 2 & 3 23 References
Page 25 and 26: Volume 6, Issue 2 & 3 25 These valu
Page 27 and 28: Volume 6, Issue 2 & 3 27 ity. It is
Page 29 and 30: Volume 6, Issue 2 & 3 29 work. Bein
Page 31 and 32: Volume 6, Issue 2 & 3 31 TEN HEALTH
Page 33 and 34: Volume 6, Issue 2 & 3 33 Financial
Page 35 and 36: Volume 6, Issue 2 & 3 35 also subje
Page 37 and 38: Volume 6, Issue 2 & 3 37 Retiree He
Page 39 and 40: Volume 6, Issue 2 & 3 39 Assistance
Page 41 and 42: Volume 6, Issue 2 & 3 41 typical no
Page 43 and 44: Volume 6, Issue 2 & 3 43 eventually
Page 45 and 46: Volume 6, Issue 2 & 3 45 assessment
Page 47 and 48: Volume 6, Issue 2 & 3 47 Merlis, M.
Page 49 and 50: Volume 6, Issue 2 & 3 49 UNDERSTAND
Page 51 and 52: Volume 6, Issue 2 & 3 51 Annual emp
Page 53 and 54: Volume 6, Issue 2 & 3 53 As previou
Page 55: Volume 6, Issue 2 & 3 55 contributi
Page 59 and 60: Volume 6, Issue 2 & 3 59 Act also c
Page 61 and 62: Volume 6, Issue 2 & 3 61 References
Page 63 and 64: Volume 6, Issue 2 & 3 63 These type
Page 65 and 66: Volume 6, Issue 2 & 3 65 ENTER YOUR
Page 67 and 68: Volume 6, Issue 2 & 3 67 total retu
Page 69 and 70: Volume 6, Issue 2 & 3 69 First, at
Page 71 and 72: Volume 6, Issue 2 & 3 71 Figure 4:
Page 73 and 74: Volume 6, Issue 2 & 3 73 The user c
Page 75 and 76: Volume 6, Issue 2 & 3 75 Ibbotson A
Page 77 and 78: Volume 6, Issue 2 & 3 77 Income Rep
Page 79 and 80: Volume 6, Issue 2 & 3 79 asset allo
Page 81 and 82: Volume 6, Issue 2 & 3 81 maintain t
Page 83 and 84: Volume 6, Issue 2 & 3 83 Table 4 Ad
Page 85 and 86: Volume 6, Issue 2 & 3 85 Tezel, A.
Page 87 and 88: Volume 6, Issue 2 & 3 87 the outsta
Page 89 and 90: Volume 6, Issue 2 & 3 89 Table 1 De
Page 91 and 92: Volume 6, Issue 2 & 3 91 1998, prel
Page 93 and 94: Volume 6, Issue 2 & 3 93 Worry and
Page 95 and 96: Volume 6, Issue 2 & 3 95 Table 2 (c
Page 97 and 98: Volume 6, Issue 2 & 3 97 Q1 = 20-27
Page 99 and 100: Volume 6, Issue 2 & 3 99 significan
Page 101 and 102: Volume 6, Issue 2 & 3 101 in Later
Page 103 and 104: Volume 6, Issue 2 & 3 103 Reference
Page 105 and 106: Volume 6, Issue 2 & 3 105 Lee, J.,
Page 107 and 108:
Volume 6, Issue 2 & 3 107 Xiao, J.
Page 109 and 110:
Volume 6, Issue 2 & 3 109 educating
Page 111 and 112:
Volume 6, Issue 2 & 3 111 stock is
Page 113 and 114:
Volume 6, Issue 2 & 3 113 Table 1 i
Page 115 and 116:
Volume 6, Issue 2 & 3 115 Hypothesi
Page 117 and 118:
Volume 6, Issue 2 & 3 117 defined a
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Volume 6, Issue 2 & 3 125 Conclusio
Page 127 and 128:
Volume 6, Issue 2 & 3 127 Fama, E.
Page 129 and 130:
Volume 6, Issue 2 & 3 129 • Marke
Page 131 and 132:
Volume 6, Issue 2 & 3 131 Advertise
show all

3433-vol. 6 issue 2-3.pmd - iarfc

Create successful ePaper yourself

Delete template?

Save as template?