Backdoor Roth

• A backdoor Roth IRA is not an official type of retirement account. Instead, it is an informal name for an, IRS-sanctioned method for high-income taxpayers to fund a Roth, even if their income is higher than the maximum the IRS allows for regular Roth contributions. The annual Roth IRA limit is $6,000 in both 2020 and 2019, up from $5,500 in 2018 (if you’re 50 or older, you can add $1,000 to those amounts).
• TY2019 Traditional IRA phaseout (MAGI):
• Single: 64,000 - 74,000
• Married: 103,000 - 123,000
• TY2019 Roth IRA phaseout (MAGI):
• Single: 122,000 - 137,000
• Married: $193,000 to $203,000
• Backdoor Roth IRAs are not a special type of account; rather, they are usually traditional IRA accounts or 401-K's which have been converted to Roth IRAs. A backdoor Roth IRA is a legal way to get around the income limits that normally restrict high-earners from contributing to Roths. A backdoor Roth IRA is not a tax dodge—in fact, you might incur a small amount of tax when it's established—but it does provide investors with future tax savings.
• Traditional IRAs don't have income limits. And since 2010, the IRS has not had income limits restricting who can convert a traditional IRA to Roth IRA. As a result, the backdoor Roth has become an option for higher-income taxpayers who ordinarily weren't able to contribute to a Roth.
• The funds you put into the Roth are considered converted funds, not contributions. This means you have to wait five years to have penalty-free access to your funds if you’re under age 59½. In this sense, they differ from regular Roth IRA contributions, which you can withdraw at any time without tax or penalty.
• You can do a backdoor Roth IRA in one of several ways:
• The first method is to contribute money to an existing traditional IRA and then roll over the funds to a Roth IRA account. Or, you can roll over existing traditional IRA money into a Roth—as much as you want at one time, even if it's more than the annual contribution amount.
• Second way is to convert your entire traditional IRA account to a Roth IRA account.
• Third way to make a backdoor Roth contribution is by making an after-tax contribution to a 401-K plan and then roll it over into a Roth IRA.
• Backdoor Roth is not a tax dodge. You still need to pay taxes on any money in your traditional IRA that hasn’t already been taxed.
• 10% Penalty and Roth IRA Conversions
• While funds you convert to a Roth IRA are taxable no matter your age, the 10% penalty doesn't apply to conversions. Be careful here. Withholding funds to pay tax on the conversion results in a 10% penalty to the amount withheld. (Any amount not converted is a regular distribution).
• For example, if you contribute $6,000 to a Traditional IRA and then convert that money to a Roth IRA, you’ll owe taxes on the $6,000, or whatever portion of your existing Traditional IRA basis ratio is to your rollover. IRS Form 8606 is used to help determine the taxable portion of a distribution or conversion and must be filed in the distribution year.) If you're non-deductible Traditional IRA contribution is immediately converted (rolled-over) into your Roth, (1099-R Box 7, Code "2" - Roth Exception),
• You’ll owe taxes on whatever money it earns between the time you contributed to the Traditional IRA and when you converted it to a Roth IRA. (1099-R Codes for Box 7. ... Use Code 2 only if the participant has not reached age 59 1/2 and you know the distribution is: A Roth IRA conversion (an IRA converted to a Roth IRA) or a distribution made from a qualified retirement plan, or IRA, because of an IRS levy under §6331.

myRA

myRA

President Barack Obama signed a presidential memorandum in January 2014 directing US Dept of Treasury to create "myRA".  myRA is to be a "a new simple, safe and affordable “starter” retirement savings account that will be initially offered through employers and will ultimately help low and moderate income Americans save for retirement".

• Beginning in late 2014, with this retirement savings account  individuals will be able to open accounts and begin contributing to them every payday. 
• myRAs will be initially offered through employers, balances will never go down, and there will be no fees. 
• myRAs will hold a new retirement savings bond that will be backed by the US Treasury.

The key features of myRA include:

• No cost to open an account.
• Contribute to savings through regular payroll direct deposit.
• Individual decides how much to contribute every payday ($50, $25, $5 – any amount!)
• No fees.
• myRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees.
• myRAs will not be limited to one employer  – the account will be portable.
• myRA contributions can be withdrawn tax free.
• Earnings can be withdrawn tax free after five years and the saver is 59½.
• Account holders can build savings for 30 years or until their myRA reaches $15,000 – whichever comes first. 
• After that, myRA balances will transfer to private-sector Roth IRAs.

References:

myra.treasury.gov/

IRS Announces 2015 Pension Plan Limitations

IRS Announces 2015 Pension Plan Limitations
The Internal Revenue Service recently announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment. Highlights include the following:

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $17,500 to $18,000.
• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $5,500 to $6,000.
• The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
• The AGI limit for the saver's credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,000 for married couples filing jointly, up from $60,000 in 2014; $45,750 for heads of household, up from $45,000; and $30,500 for married individuals filing separately and for singles, up from $30,000. 
• Breaking News: 2015 Pension Contribution Limits As the end of the year rolls around, if you have not already done so, now is the time to plan for contributions into your retirement accounts in 2015. While Traditional IRA and Roth IRA plan limits are unchanged versus 2014, please note the contribution increases in 401(k), 403(b), 457 and SIMPLE IRAs.

Retirement Program	Year 2015	Year 2014	Change	Catch-up Age 50+
IRA Traditional	5,500	5,500	None	Add 1,000
IRA Roth	5,500	5,500	None	Add 1,000
IRA Simple	12,500	12,000	+500	Add 3,000 (Up 500)
401K, 403B, 457 Plans	18,000	17,500	+500	Add 6,000 (Up 500)

• 2014 Planning Note: Remember you have until April 15th, 2015 to make contributions to your Roth or Traditional IRA for the 2014 tax year.
• Don't forget to take advantage of any matching programs offered by your employer as you review your various funding levels.
• For more information click here.

Lump Sum Distributions

Lump Sum Distributions
Tax-saving strategies for Retirement Account Withdrawals
Regarding the issue of lump sum distributions, there are several points that you should be aware of when considering withdrawal of retirement funds. Listed below are some of the pitfalls and some tax-saving strategies that can be explored to maximize your after tax net from the withdrawal, using today's federal tax code.

First, lump sum distributions from IRA's, Keogh plans, 401(k) plans, most company plans, and tax-sheltered annuities, made to persons under 59½, are subject to a 10% penalty (with some exceptions).  The 10% penalty tax on premature retirement-account withdrawals is over and above the regular income tax hit, and it applies unless:

• you are age 59 1/2, disabled, dead, or
• you are 55 and retired, quit, were terminated, or
• you take the money in annuity-like payments over your life expectancy, or
• the money goes for medical bills in excess of 7.5% of your adjusted gross income (AGI), or
• the money is going to your spouse or ex-spouse in a divorce or separation under a qualified domestic-relations order (QDRO) (in which case that person will owe the resulting income tax but no 10% penalty). 

Lump sum distributions are subject to income tax in the year of distribution. Your actual federal marginal tax rate on this distribution could be as high as 35% plus any state income tax that would be due. Because of these severe penalties, care must be taken to plan the best way to withdraw the money.

Some of the ways that you may be able to limit your tax liability on the distribution are:

Rollover distributions
When withdrawing money from any of the retirement plans listed above, you have a window of 60 days from the date of distribution to roll the money over into a new plan. This allows you to avoid the 10% premature distribution penalty, and continue to defer tax on the money.

There are several options available which suit different situations:
1) In the case of someone leaving one employer for another, your company plan must generally be distributed. In this case, the proceeds of the distribution can be rolled into the plan that you are covered under with your new employer (provided the plan accepts rollover contributions). This option allows you to continue to qualify for special tax averaging on the retirement plan upon final distribution.

2) If you haven't found a new job before the 60 day deadline for rollovers, you can set up a separate IRA account specifically for this distribution. Provided you don't co-mingle the original distribution funds with any other contributions, this "conduit" account will allow you to roll these funds later into another qualified plan and still retain special tax-averaging options on this money.

3) Roll all the money into an existing IRA account. If the money is co-mingled with other IRA funds, or if the money isn't rolled into a new qualified plan, you lose the option of special tax averaging, but still retain the tax deferred status on the account.

4) Do a partial rollover. If you need to use some of the money from the distribution, and you are unable to replace all of it before the 60 day deadline, you can still do a partial rollover. This strategy allows you to defer tax and avoid the 10% penalty on at least some of the distribution. Again, because of the severe tax implications, other avenues of borrowing should be exhausted before this option is considered.

However, the manner of the rollover is critical. In the case of lump sum distributions from a company plan, (vs. IRAs, Keoghs, SEPs), employers are required to subtract a 20% backup withholding tax from distributions paid directly to the employee (i.e. you receive a check paid to you). This 20% tax is considered a taxable distribution to you, unless you make it up from other sources and roll it into the new plan. To avoid this problem, you can elect to have the whole distribution transferred directly to the new plan instead of to you.

Annuity Distributions
If you are under 59½ and elect to take the money from the plan, not as a lump sum, but as an annuity, you may be able to avoid the 10% premature distribution penalty.  The IRS permits early retirees to access their retirement funds prior to age 59 1/2 without penalty as long as they take distributions under a plan of substantially equally periodic payments (rule 72t).  Once started, these payments must continue for the longer of 5 years of their attainment of age 59 1/2.  Therefore, once a 72t distribution plan is started, these become required mandatory distributions subject to the early withdrawal penalty if ceased.   Under this arrangement, payments from the plan must be made at least once a year in a series of equal payments over your lifetime, or that of you and your beneficiary. The payments must continue for at least five years or until you reach 59½, whichever comes later. After this time limit has been met, you can elect to withdraw the balance any way you like, including a lump sum of the balance. Note that the payments received are subject to income tax in the year that they are received.

Because annuities require a projected life span, calculations to determine the amount of each payment must be done on an individual basis.

Hardship Cases
There are some circumstances where the 10% penalty may not be assessed on distributions from retirement plans. These are:
1)  Distributions to support you in the case that you become permanently disabled.
2)  Distributions made to settle a qualified domestic relations court order (QDRO)– for example, property settlements in a divorce.
3)  Distributions made to pay for medical expenses exceeding 7.5% of your Adjusted Gross Income.
4)  Distribution for qualified educational expenses or 
5)  Distribution for purchase of a primary residence (you can withdraw up to $10,000 from a traditional IRA or simplified employee pension (SEP IRA) to fund a down payment for a first-time home purchase without incurring the standard 10% early withdrawal penalty, you will still have to pay income tax on the distribution.)

If You were Born After 1935
To compute your tax, you must simply include your lump-sum distribution as ordinary income on page 1 of Form 1040 (on the line for pensions and annuities). The tax impact will be much more acceptable if your overall taxable income would otherwise be negative -- due to personal exemptions, itemized deductions, alimony payments, capital losses, business losses, deductible passive losses, etc. These deductions and losses can offset your income from the lump-sum distribution and may result in a surprisingly low overall tax bill. But this favorable scenario is not very likely. The usual outcome is that the lump-sum distribution gets piled on top of all your other income. This may push you into higher tax brackets.  Plus, the additional income may increase your AGI to the point where the personal-exemption and itemized-deduction phase-out rules kick in.  You may also lose other AGI-sensitive tax breaks. Once again, you may want to consider rolling over your lump-sum into an IRA.

If You were Born Before 1936

Here is where the good news starts. Taxpayers in this age bracket have several options:
• You can report all or part of the lump-sum distribution as ordinary income on page 1 of your 1040. Generally, this is not the best choice for the reasons already mentioned.
• You can use 10-year averaging for all or part of the lump-sum distribution using the 1986 tax rates for single taxpayers.
• For the part of your distribution attributable to pre-1974 plan participation (if any), you can pay a 20% capital gains tax and use either of the preceding methods for the balance. If you have pre-1974 participation, the amount eligible for the 20% tax should be included on the Form 1099-R received from the plan administrator. (Note: The 20% rate on capital gains from lump-sum distributions is in effect under these circumstances regardless of the current capital gains tax rate.)

For the second and third options listed above, you make your choice and the resulting tax calculations on Form 4972 (Tax on Lump-Sum Distributions from Qualified Retirement Plans).

This is a key point: Your AGI does not include amounts for which you pay the 20% capital gains tax or amounts for which you use 10-year averaging. So AGI-sensitive tax breaks are not adversely affected by the income from the lump-sum distribution, if you choose either of these methods.

Reference: Practice Enhancers, Able & Co.

Retirement Plan Options

Retirement Plan Options
Qualified Retirement Plans
For business owners, the funding of a qualified retirement plan is possibly the best deduction that exists.   You get immediate tax savings benefits since the dollar amount funded can be written off against your other income. Also, any income made while in the retirement plan is not subject to current taxes, so the tax-deferral effect on the compounding of this money over the years can be quite significant compared to saving outside the retirement plan.

There are approximately 25 million businesses in the United States, but only one out of 12 of these businesses have set up a company retirement savings plan.  If you are one of the business owners without a retirement plan, you should probably consider creating one.  Business owners are often reluctant to set aside money for retirement because they make investing in their business their first priority.  However, investing solely in one of anything – even your own business – can be a risky strategy.  It may be wise to strike a balance between setting aside capital for personal and retirement goals and fueling the business.

Researchers using a 1992-2010 Health and Retirement Study found that small-business owners expect to retire later than employees.  In 2010, small-business owners reported an expected retirement age that averaged 72.6;, compared to 68.4 for employees.  Older small-business owners also reported thinking about retirement less frequently than employees.

The secret is to view a retirement plan as a required business expense (like rent, insurance, supplies) instead of an optional one. Otherwise, the tendency is to "put it off" until the cash flow situation improves. The problem with this thinking is that it seems to be inherent in human nature to put most optional decisions off forever!

In any event, it's important for a business owner to have a working knowledge of the qualified retirement plan options that may be available. Note that we are discussing "Qualified" plans as opposed to non-qualified plans. A qualified plan is one that has met a series of IRS guidelines so as not to be discriminatory in favor of certain employees/employers.

What Is A Qualified Plan?
This is a written plan which allows contributions for you and your qualified employees to be deducted when funded, and not taxable until they are distributed according to IRS definitions of taxable distributions. 

There are numerous qualification rules within this general guideline, some of which are:

• How the contributions and benefits must be calculated
• Investment guidelines within the plan
• Who must be covered under the plan
• The nature of the vesting requirements
• Non-discrimination rules within the plan and involving related, controlled companies

Prototype Plans:  The rules to ensure a qualified plan can be quite complex–and ever changing. However, you may elect to use a prototype plan to make it easier. This is a pre-approved plan by the IRS.  These are available through a number of financial service establishments such as banks, brokerage houses, trade organizations, insurance companies, mutual funds, etc.  In effect, these "off the shelf" plans have already been qualified under IRS rules and regulations. As long as you follow the plan rules, you have a qualified retirement plan to use. Setting one up is merely a matter of filling out a few documents.

You have a right to set up your own "customized" plan as well. There are specialists in this field who can advise you on the advantages and disadvantages of using a customized plan instead of a prototype. Two of the main reasons for going to a customized plan are: First, it may allow for a bigger retirement plan deduction, hence larger current tax savings; Second, it may create more benefits for the highly compensated individuals than the other employees.

Types of Qualified Plans
According to IRS classification, qualified plans fall into two main categories: 

defined contribution plans, and 

defined benefit plans.

A defined benefit plan is more complicated, especially for the firm.  In this type of plan, an employer will pledge to make periodic payments to the employee during retirement.  These payments can be based on a number of factors, including time  spent with the company and salary received over a given period.  Since the firm is responsible for delivering a set pension amount to its employees during their retirement, the entirety of the investment risk falls squarely with the firm.

The contributions to the plan must equal a certain amount in order to achieve that future benefit goal. This is based on IRS approved actuarial calculations. Normally, the defined benefit plan can result in larger contributions on behalf of the recipients, especially if the recipients are closer to retirement age. In addition, these plans usually require the continuing services of professionals such as actuarial consultants and attorneys.

Because defined benefit plans are usually quite complex, involve customization, and are not used by the vast majority of small businesses, we will focus on the more commonly used options under the defined contribution plan guidelines.

Defined contribution plans base the benefits to the recipients on the amount contributed in their individual behalf. In effect, you end up getting a retirement distribution which depends on the amount of contributions and accumulated earnings made within the plan over the pertinent time frame. The more contributions and accumulated earnings, the more you'll get. The less contributions and accumulated earnings, the less you'll eventually get. In effect, the exact dollar amount of your future retirement benefit is not guaranteed in advance.

There are three basic types of defined contribution plans: 

profit sharing; 

money purchase; and 

stock bonus plans.

Profit Sharing:  This is the most common type from a statistical standpoint.  The contributions to the plan are based on a percentage of the profits of the business. You can set the profit percentage within allowable guidelines.   If there are no profits for any given year, there are no retirement fund contributions.  In fact, for most profit-sharing plans, even if there are profits, you can usually "elect out" of making retirement plan contributions anyhow.  So this type of plan affords the small business owner more flexibility than most others.  In effect, you can fund the plan or not in any given year at your discretion.

Money Purchase:  With this plan, the contribution is a stated amount, or a stated formula amount that is not so discretionary as the profit sharing.  It is not based on profits so much as it is on compensation or earnings.  Therefore, retirement plan contributions must usually be made on a regular basis whenever any qualified earnings and compensation occur for the given year.  In short, this type of plan locks you in much more so than the profit sharing plan.

Stock Bonus Plan:  This is similar to a profit sharing plan except that company stock is used to fund the retirement plan instead of money.  This option is primarily only available to corporations.

The Most Common Retirement Plans
Once you have established the kind of qualified plan–defined contribution vs defined benefit–you select the particular retirement plan vehicle to implement the plan. This choice depends in part on the type of business you have (unincorporated vs incorporated), and how complicated you elect the plan to be. Listed below is an overview of the three most commonly-used qualified retirement plan choices.

Keogh Plan (H.R. 10)
This is available to sole proprietorships (unincorporated businesses) and partnerships.  Corporations cannot use a Keogh plan. You do not have to have employees to set this up. In the eyes of the IRS a sole proprietor is both an employer AND an employee, so the Keogh can be used whether or not you have employees.

Basically you can put a percentage of the net earnings from the business into the plan for yourself, and a matching percentage of your employees taxable compensation.  This contribution becomes a tax deduction for you, and the money earned from the contributions to the Keogh plan escapes current income taxes. What are these "net earnings" that are used in the calculation? According to the IRS definition, net earnings are the gross income minus allowable deductions from a business in which your personal services are a "material income producing factor." Thus, in the case of a partnership, to take a Keogh deduction you must be a "working partner" as opposed to a limited partner.

Keogh Contribution Amounts: The amount you can contribute for each plan participant varies according to the type of plan–defined contribution vs defined benefit. For a defined contribution (the most common type) the maximum deferral amount per year (employer/employee combined) you can fund is $50,000 in 2012 (see Employee Benefits Legal Resource Site Maximum Benefits).  This is subject to further limitations depending on if the plan is a profit sharing or money purchase and depending on the compensation/net earnings for the year.

In 2012 a profit sharing Keogh allows for a maximum of 15% (before adjustments) of up to $250,000 in compensation adjusted for inflation.  A money purchase allows for a maximum contribution of 25% of up to $250,000 in compensation.

A defined benefit plan may allow for higher retirement plan contributions depending on the actuarial calculations set forth within the plan and the other customized features. However, the contribution is usually limited to a calculation based on a maximum defined benefit, per year, of $200,000 in 2012.

A Keogh plan usually requires an annual filing of the details of the plan and its activities with the IRS. This is a 5500 series filing, and it can be quite simple or quite complex depending on the type of plan, and the participants covered.

SEP: Simplified Employee Pension (Previous to the "SIMPLE" Plan)
As the name indicates, this is a simpler plan than the Keogh in several ways.  First, it is usually simpler to set-up.  Second, you do not have to file complicated annual IRS returns similar to the 5500 return required for a Keogh.  In addition, a SEP is available for corporations as well as unincorporated businesses.

The drawbacks to this plan center around three main issues compared to a Keogh: The SEP has a more limited allowable contribution amount per employee; it has stricter rules on which employees can be excluded from the plan, and how much must be contributed on behalf of the qualifying ones; and, certain lump-sum income tax averaging methods are not available like they are in a Keogh. Like the Keogh, you contribute a percentage of the net compensation/earnings from the business on behalf of each participant. In this case, however, the maximum amount you can contribute is limited to the smaller of either 15% (before adjustments) of the employee compensation/earnings amount.  Like the Keogh, this annual compensation amount is further limited to a maximum of $250,000. The net result is that the maximum SEP contribution per year is $50,000.

Similar to a Keogh profit sharing plan, employer contributions are not required each year; they can be at the discretion of the business owner.  So this gives some flexibility from a cash flow standpoint.

SAR-SEP: Salary Reduction Plan (Previous to the 1997 enacted "SIMPLE" Plan) 
This is an interesting feature that is not available with a Keogh plan.  This is a form of salary reduction or elective income deferral in which employees can have a part of their pay contributed to the SEP–and not pay income tax on the amount contributed.  This is a voluntary contribution on their part–not yours as the business owner–and it can be a significant tax deduction for them. There are restrictions on this type of arrangement, most notably three: 

1) The business can have no more than 25 eligible employees; 

2) At least 50% of the employees make the election; and, 

3) highly compensated employees may be limited in this election depending on various calculations.

401(k) Plans
This is a form of a qualified profit-sharing plan that allows participants to make salary reduction or elective income deferral contributions of up to a maximum of 15% of their qualified compensation, subject to a cap of $17,000 (plus $5,500 catch-up for age 50 and older) in 2012.

The employer can then contribute as well, or not, depending on the plan. Your employer 401(k) contribution limit is entirely up to them – but the max on total contributions (employee plus employer) to your 401(k) in 2012 is $50,000 (or 100% of your salary, whichever is less).  This gives the employee a nice tax deduction in that the money contributed from the employee's compensation comes "off the top" for income tax purposes.   If the employee makes $50,000 for the year, and has $5,500 put into the 401(k) plan, then only $44,500 is subject to federal income tax for that year.

Some advantages:  The business is not restricted to 25 or fewer qualified employees for this plan.   Participants may be able to borrow a portion of their designated plan contributions and earnings for specific purposes such as buying a house, education, medical bills, etc.  They then pay themselves back at stated interest rates and stated time tables to avoid paying tax on this type of distribution.  It is available to nearly all forms of business organizations. Special 5 year and 10 year lump sum tax averaging methods may apply to distributions, saving taxes.

Some disadvantages: It is usually complicated to set up, and administer.  IRS reporting requirements can be quite complex. Highly compensated employees must meet strict non-discriminatory tests to participate equally.

"SIMPLE" Plan 
Effective from January 1, 1997, and on, this new option combines some of the features of a SEP with a 401(k) to provide what is supposed to be a simpler plan to set-up and administer, hence the acronym "SIMPLE".

Basically, it is available to a business with 100 or fewer employees. The employee can elect to defer from taxes up to $11,500 in compensation (plus $2,500 catch-up for age 50 and older) in 2012.  For the matching provision, the plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% of the employee's compensation (subject to certain rules that allow for lower contributions -- 
(see IRC §408 - Individual retirement accounts) 
or the employer may contribute a flat 2% of compensation for each 
employee with at least $5,000 in compensation for the year, regardless 
of the amount the employee contributes.

Supposedly, this SIMPLE plan is easier to set-up and administer than a 401(k) plan. It is supposed to have more selectivity for the employer as to which employees must be covered. Also, the "top-heavy" rules as to contributions and deferral amounts of owners and/or controlling shareholders/officers are supposed to be much more lenient than a 401(k) plan. This would be quite an advantage for owners of small businesses. 

Advantages and Disadvantages of Qualified Retirement Plans
As you can see, there may be a number of choices when you consider a retirement plan for your business. The goal is to try to match the plan choice to your individual business requirements and your cash flow, both current, and projected down the road.

First, some potential disadvantages, or caveats. The cash flow of the business is not always predictable, especially years down the road. Thus, the types of plans where you must commit a certain amount each year can become burdensome if your business hits some snags. The money put in retirement in not always available to withdraw for emergencies or unplanned cash flow problems without some heavy consequences. Premature withdrawals(if it is even possible) may create a stiff tax bill and/or tax penalties. Thus, it requires some serious "crystal ball" analysis, especially if you are young.  In addition, if your eventual tax bracket when you withdraw the retirement money is higher than when you made the tax deductible contributions, the tax saving benefits disappear.

However, a retirement plan can have tremendous advantages. It can create significant tax write-offs for you, thus reducing your tax liability. The earnings from the contributions once they are in the plan can accumulate tax deferred, which accelerates the compounding effects–and helps you to reach your retirement goal faster.

If you have employees, it is a fringe benefit that can keep you competitive with other employers, thus reducing your employee turnover which can be quite a drain on a business.

Finally, if it is handled with a certain attitude, it becomes a form of "forced savings" thus helping to insure you will have a retirement nest egg to fall back on. In fact, it is very rare that a business owner will look back at retirement and say "I wish I hadn't set up that retirement plan." It's usually just the opposite. Most retiring business owners lament the fact that they never set up an adequate retirement plan. After all, it can make a difference between very happy golden years, and frightening ones.

Reference: Practice Enhancers, Able & Co.

IRA as an Inheritance

IRA as an Inheritance
A Spouse Inherits

If you are a spouse who inherits an IRA from your husband or wife, you can put the IRA in your own name ("re-title" it) -- this is the simplest way -- or roll the money, tax-free, into a new IRA, in your name.  

If it's a Traditional IRA, you can leave the money alone until you reach 70 1/2, at which time required minimum distributions begin.  With a Roth IRA, any money you don't need can stay in the Roth for the next generation.

There is a "tax wrinkle" for younger spouses.  If you need the IRA money, you can potentially owe a 10% penalty, if you withdraw money and are under 59 1/2.  You can avoid the penalty by re-titling the account as an "inherited IRA."

The rules on re-titling are very specific.  As an example, say John Jones dies, leaving his IRA to his young wife, Mary Jones.  The account should be re-titled "John Jones IRA (deceased August 01, 2012) for the benefit of Mary Jones, Beneficiary."  Once this is done, Mary Jones can take the money penalty-free.  There is one more step -- younger wives, please note.  When Mary reaches 59 1/2, she should re-title the account again, this time in her name alone.  This lets her defer any further withdrawals until she reaches 70 1/2.  If she doesn't do this, withdrawals must start when her late husband would have reached 70 1/2.

A Child or Non-spouse Inherits
If a child receives an IRA from a parent, the child cannot roll the money into an IRA in the child's own name.  If the child decides to cash out, two things happen:
1)  if it's a Traditional IRA, the child will owe income tax,
2)  the multi-year (even multi-decade) tax shelter that an inherited IRA provides would be lost. 

So, the child should re-title the account as an "inherited IRA."  For example, say John Jones leaves his IRA to his daughter, Joan.  Joan should re-title the IRA "John Jones IRA (deceased August 01, 2012) for the benefit of Joan Jones, Beneficiary."  If the money is to be divided among heirs, each recipient should re-title his or her share.  Every year, the child is required to take a minimum withdrawal, based upon the child's age, but the child can take more if they want.  Remember, withdrawals are taxed, the remainder accumulates tax-deferred.

Now, if Joan dies, naming her son, Jack, as beneficiary, Jack can re-title the account as an "inherited IRA" and complete the withdrawals on the same schedule that Joan began.  The family deferrals could last for decades.

What if you inherit a 401-K?  That too can be re-titled as an "inherited IRA."

If re-titling is wrong, the recipient will be taxed immediately, on the whole amount.  A lawyer who handles the will can assist heirs in re-titling IRA's.  Or, send a letter to the mutual fund group that holds the IRA, specifically asking that a separate "inherited IRA" for each beneficiary be created.

Anyone holding an IRA or 401-K should leave a "note" explaining re-titling so their heirs can get as much tax deferral as possible from the money you leave them.

Synopsis:
Rollover to beneficiary
Distributions of benefits from a deceased employee's eligible retirement plan may be rolled over directly to an IRA of a beneficiary who is not the surviving spouse of the employee [IRC §402(c)(11)].  The IRA is treated an an inherited IRA of the beneficiary.  Distributions from the inherited IRA are subject to the distribution rules applicable to beneficiaries.  A non-spouse beneficiary who inherits an IRA cannot treat it as his or her own account but must take RMDs determined under the rules applicable to beneficiaries receiving distributions from a qualified plan.  

When an individual other than the decedent's spouse receives a lump sum distribution from an IRA, in general, the individual may not roll over that distribution into another IRA, it must be distributed within a certain period [IRC §401(a)(9) 408(d)(3)].  The distribution, minus aggregate amount of non-deductible IRA contributions, is taxed as ordinary income in the year the distribution is received (Rev. Rul. 92-47).

This law does not change the rule that allows a surviving spouse to treat an inherited IRA as his or her own IRA, or to roll funds from a deceased spouse's employer-sponsored pension plan or IRA over to his or her own IRA or employer-sponsored pension plan. [IRC §402(c)(9)]

Beneficiaries of a Traditional IRA generally must receive a RMD from the inherited account for each year after the year of the IRA owner's death.  "Designated beneficiaries" (named by the IRA account owner or designated under the plan as of the date of death) as a beneficiary, may spread distributions over their life expectancy.

If you inherit your spouse's Traditional IRA and you are under 70 1/2, you may delay the start of RMDs by treating the IRA as your own.

Required Withdrawals From Your IRA

courtesy: IRS Videos

IRAs

ROTH or Traditional; Making the Smart IRA Choice
Planning for and individual retirement account (IRA) can be quite complicated. Taxpayers have several types of IRAs to choose from, all with different eligibility requirements and tax treatments to consider. In choosing the IRA that will produce the best tax and financial results for you, you should start by reviewing some IRA basics

Review traditional IRAs
Deductible: With a traditional deductible IRA, you take a tax deduction for the year that you make your contribution. Contributions and earnings grow tax-free until withdrawn, at which time they are subject to regular income tax.

Withdrawals must begin after you reach age 70 1/2, and withdrawals before age 59 1/2 are generally subject to a penalty.

If you have a company retirement plan at work and your income exceeds certain levels, you may not be eligible for a traditional deductible IRA.

Nondeductible: Contributions to a traditional nondeductible IRA do not generate a tax deduction. But once a contribution is made, nondeductible IRAs are treated much like deductible IRAs. Because contributions were not deductible, they are not taxed when eligible for withdrawal. Earnings in a nondeductible IRA grow tax free until withdrawn, and withdrawals must begin after you reach age 70 1/2.

Spousal: Nonworking spouses are allowed to contribute up to $3,000 a year to a spousal IRA. A joint return must be filed, and total IRA contributions for both spouses cannot exceed their combined earnings.

Roth IRA
With a Roth IRA, contributions are not deductible, but there is an important, offsetting benefit: principal and earnings in a Roth IRA are never again subject to tax if you meet certain requirements.

Example: You contribute $2,000 annually to a Roth IRA. Although you receive no tax deduction, this IRA can grow to any amount and it will never again be subject to tax. And for the rest of your life, withdrawals may be as large or small as desired, provided the IRA has been in existence for at least five years and you are at least 59 1/2 years old.

A Roth IRA is not subject to mandatory distribution requirements. Also, spousal Roth IRAs are permitted. Eligibility for a Roth IRA is phased out at income levels of $95,000 to $110,000 for singles and at $150,000 to $160,000 for couples.

Deductible, nondeductible, or Roth?
If you are eligible to contribute to all three types of IRAs -- deductible, nondeductible, and Roth -- you can safely ignore the nondeductible IRA, since it is clearly less attractive than the other two. But deciding between a deductible IRA and a Roth IRA can be very difficult.

If you expect your tax bracket to increase during retirement, or stay the same as it is now, a Roth IRA is probably a better choice than a deductible IRA.

But if you expect your tax bracket to be lower during retirement, or you simply do not know, you might want to opt for a deductible IRA.

When making the IRA decision, you also may need to consider other factors, such as length of time until retirement, expected rate of return on investments, and the relative amount of your IRA and non-IRA assets.

Comparison of Traditional and Roth IRAs
Assume you have decided to put $2,000 away every year for the next 20 years. You expect the account will earn an annual average rate of return of 10%, and your tax rate will be 28% before and after retirement.

Comparison: Traditional & Roth IRA's

Description                                            Traditional    Roth

Total Contribution to IRA	40,000	40,000
Accumulation in IRA ($40,000 plus 10% earnings) before taxes	126,005	126,005
Tax on IRA withdrawals	(35,281)	- 0 -
Value of IRA account  after tax	90,724	126,005
Future Value of Tax Savings Invested  [$560/year = ($2,000 x 28% tax rate) @ 7.2% yield after tax rate {10% x (1 - .28)}]	+25,155	- 0 -
Value at retirement	115,879	126,005

Conclusion: A Roth IRA may be worth $10,126 ($126,005 - $115,879)
more than a Traditional IRA.

How was this calculated?
Step 1: First we found the value of a Roth IRA if you contributed $2,000 per year for 20 years earning an assumed 10.00% per year. This equaled $126,005. Since withdrawals from a Roth IRA are not taxed, the total value remains $126,005.

Step 2: We then computed the totals for a Traditional IRA. Again we determined the value of $2,000 per year for 20 years earning an assumed 10.00% per year. This is the same amount as the Roth IRA total, $126,005. However, tax deductible contributions and all earnings in a Traditional IRA are taxable when they are withdrawn. After taxes, the value of your Traditional IRA account would be $90,724. The Roth Account value at retirement assumes you take a qualified distribution from your account. This account distribution, including any investment earnings, may be tax-free if you meet the following criteria: you are at least 59 ½ , deceased or disabled; and your first contribution to the Roth account was made at least five tax years earlier than the date of the distribution.

Step 3: Finally, if you had any tax deductible Traditional IRA contributions we need to determine the value of investing this tax savings and add this amount to the Traditional IRA total. If we forget this step, our comparison will not be equal (we would in effect be contributing more to our Roth IRA than the Traditional IRA). If your tax savings was invested for 20 years at an assumed rate of 7.2% after tax rate, this returns a total of $25,155 after taxes.

Estate Tax on Income In Respect of a Decedent

This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax. Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $45,000 to the estate-tax bill.

You get to deduct that $45,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $22,500 itemized deduction on Schedule A. That would save you $6,300 in the 28% bracket.