section 1 - The American College Online Learning Center

(a) This requires knowing four factors: 1) marital status, 2) tax filingstatus, 3) adjusted gross income, and 4) the active participantstatus of the client and the spouse(5) What are the client’s expectations about future tax rates?(6) What other types of plans do the participants already participate in andhow much have they accumulated?b. Consider all types of plans when looking to maximize contributions for a client.c. Determine whether other after-tax assets could be used to fund contributions orused to support income needs if additional salary is deferredd. Take advantage of age 50 catch-up(1) $5,500 (2012) in a 401(k), 403(b), 457 plan(2) $2,500 (2012) in a SIMPLE(3) $1,000 (2012) to a traditional IRA or Roth IRAe. Look to develop tax diversification for clients, which for many means contributingmore to Roth accounts.f. Look to convert tax-advantaged plans to Roth accounts when tax rates are low2. Inheritance case studya. Factsb. Solution3. Roth election case studya. Facts(1) Sam, age 55, married to Sally, age 52, inherits $80,000 (income tax-free)from Aunt Martha in March.(2) Sam wants to save much of this for retirement and is comfortable titlingsome in Sally’s name.(3) They each earn $70,000 from work, each contribute 6% to their company’s401(k) plans and Sam earns $20,000 from consulting.(4) AGI is approximately $160,000.(1) Sam and Sally open Roth IRAs April 1 and each contribute $12,000($6,000 for last year and this year).(2) Sam and Sally currently contribute 6% of salary ($4,200). They can eachincrease to $22,500 ($18,300 more for each).(3) Sam opens a SEP and contributes 20% of consulting income reduced bythe SS deduction (approximately $3,700).(4) Contributions to Roth IRAs and SEP total $27,700. The remaining $52,300of inheritance makes up for the loss of income due to $36,600 of additionaldeductible 401(k) contributions.(5) Next January they still have about $25,000 remaining, since the additionaldeductible contributions only reduced their after-tax income by $27,450(assuming a 25 percent tax rate).(6) They can contribute $6,000 more to each Roth IRA, and have enoughremaining for a terrific vacation!3.17