section 1 - The American College Online Learning Center

. Solution(1) Li and Lin Lin are both age 58, married and have AGI of $300,000. Bothare employed and maximize contributions to their companies’ 401(k) plans.They do not currently have any IRA accounts. They want to know if theycan contribute more to tax-advantaged retirement plans?(1) They are good candidates to establish nondeductible IRA accounts,contribute the maximum amount and then immediately convert thoseamounts into a Roth IRA.(2) Since they do not have other IRAs, the conversion will be tax-free(assuming no earnings accrue before the conversion occurs). The situationis more complicated with other IRA accounts because if this is the case,there are tax consequences to doing the conversion.7. Self-employed plans case studya. Factsb. Solution(1) Sandra Sanders, age 63, is married and files a joint tax return. Thecouple’s AGI is $300,000 for the year.(2) She has started a training business operating as an unincorporated entityand she has no employees.(3) Her schedule C earnings are $65,000 and her deduction for 1/2 ofself-employment taxes is $5,000. She is in the position of being able tosave as much of her income as possible for retirement. What are heroptions in 2012?(1) Sandra should establish a retirement plan for her business—afterdetermining first that her company is not required to be aggregated withany business owned by her husband.(2) With a SEP she could contribute $12,000 (20 percent of $60,000).(3) With a 401(k) she could contribute $34,500 ($12,000 (the 20 percent limit)+ $17,000 (in salary deferrals) + $5,500 (in catch-up contributions)). Shecould also make salary deferrals on a Roth basis.(4) With a defined benefit plan she could shelter most of her income but it’scomplicated!(5) She could make $6,000 of nondeductible IRA contributions as well andthen convert to a Roth IRA.(6) Note that at age 70½ she can no longer contribute to an IRA but cancontinue contributions to the retirement plan.8. Roth conversion case studya. Facts(1) Alex and Alicia are married, each age 63, and retired. They are taking$80,000 of withdrawals from their taxable investment account to pay forliving expenses.(2) They have made some good choices, deferring Social Security and holdingonto their substantial 401(k) accounts until later. They do not have anyRoth IRAs at this point.3.19