IRS ANNOUNCES COST-OF-LIVING ADJUSTMENTS FOR 2013
On October 18, the Internal Revenue Service announced cost-of-living adjustments applicable to dollar
limitations for plans and other items for tax year 2013. In general, many of the pension plan limitations will
change because the cost-of-living index met the statutory thresholds that trigger their adjustment. However,
other limitations will remain unchanged.
Annual Limit
2013
2012
Social Security Wage Base
$113,700
$110,100
Annual Compensation Limit
$255,000
$250,000
Key Employee Compensation Limit
$165,000
$165,000
HCE Compensation
$115,000
$115,000
Elective Deferral Limit (401(k) & 403(b) & 457)
$17,500
$17,000
Catch-up Contributions (401(k) & 403(b))
$5,500
$5,500
SEP Minimum Compensation
$550
$550
SIMPLE IRA Deferral Limit
$12,000
$11,500
Catch-Up Contributions (SIMPLE IRA)
$2,500
$2,500
IRA Contribution Limit
$5,500
$5,000
IRA Catch-Up Contributions
$1,000
$1,000
Annual DB Benefit Limit
$205,000
$200,000
Annual DC Contribution Limit
$51,000
$50,000
IRA deductibility and Roth IRA eligibility are as follows:
Traditional IRA Deductibility
Single Filer’s AGI:
Married Filing Jointly AGI:
Full Contribution
< $59,000
< $95,000
Partial Contribution
$59,000–$69,000
$95,000–$115,000
Not Eligible
> $69,000
> $115,000
Income limits if covered by an employer-sponsored plan. Maximum Joint Compensation for deductible
contribution by non-covered spouse: $178,000–$188,000
ROTH Eligibility
Single Filer’s AGI:
Married Filing Jointly AGI:
Full Contribution
< $112,000
< $178,000
Partial Contribution
$112,000–$127,000
$178,000–$188,000
Not Eligible
> $127,000
> $188,000
TAX CREDIT FOR RETIREMENT PLAN STARTUP COSTS
Many small businesses face a unique set of circumstances. Besides competing with other companies in selling
products or services, small businesses strive to provide employee benefits comparable with larger companies in
order to retain quality employees. A retirement plan is usually considered as part of the benefits package, but one
of the main reasons cited by small business owners for not offering retirement plans is the high costs associated
with their establishment and administration. However, small businesses that adopt a new defined contribution,
defined benefit, SIMPLE, or SEP IRA plan are allowed a tax credit of 50% of the expenses paid or incurred for
administration or retirement education. The credit applies to the first $1,000 of these qualifying expenses in each of
its first three plan years, with a maximum credit of $500 for each year.
Return to www.Rollover.net Home                                                      4th Quarter 2012
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pg_0002
Eligibility
To be eligible, an employer must have had no more than 100 employees, with compensation in excess of $5,000 each, in the preceding tax
year. In addition, the plan must cover at least one Non-Highly Compensated Employee. A plan is considered “new" if the employer sponsored
no qualified retirement plan during the three-year period immediately before the first year the credit is available. An employer claiming the
credit is not allowed a business expense deduction for the 50% of the expenses for which the credit is claimed.
Note that many new plans will be established by December 31, 2012, for plan year 2012. Employers will surely want to take advantage of
this savings. For more information, review IRS Form 8881, Credit for Small Employer Pension Startup Costs.
TAX CREDIT FOR RETIREMENT PLAN SAVINGS
During these volatile economic times, employees may be reluctant to make contributions to IRAs and employer-sponsored plans. For lower-
income families, saving for retirement may not be a realistic option. In order to encourage retirement savings, employees should know that
there is some tax help available. The Saver’s Credit is a non-refundable income tax credit that’s available to eligible taxpayers who make
contributions to a traditional IRA, an employer-sponsored 401(k) plan, or certain other eligible retirement plans. This credit is in addition to
any tax benefits received for contributions to the plan.
Depending on their adjusted gross income (AGI) and filing status, an employee could receive a tax credit of up to 50% of the first $2,000
($4,000 for married filing jointly) in retirement contributions made in 2012. Certain retirement plan distributions will, however, reduce the
contribution amount used to calculate the credit.
Adjusted Gross Income
Married Filing Jointly
Head of Household
All Other Filers
Credit
$0–$35,500
$0–$26,625
$0–$17,750
50% of Contribution
$35,501–$38,500
$26,626–$28,875
$17,751–$19,250
20% of Contribution
$38,501–$59,000
$28,876–$44,250
$19,251–$29,500
10% of Contribution
More than $59,000
More than $44,250
More than $29,500
Credit Not Available
The Saver’s Credit is available to all taxpayers who are 18 years old before the beginning of the year, not a full-time student, and not listed
as a dependent on another person’s tax return. For more information, review IRS Form 8880, Credit for Qualified Retirement Savings
Contributions.
TIME IS RUNNING SHORT FOR ROTH CONVERSION INCENTIVE
In January 2010, the adjusted gross income (AGI) eligibility restriction was eliminated for Roth conversions. This essentially opened the
door for taxpayers with AGI of $100,000 or more to convert their Traditional, SEP, SIMPLE (after two years) IRAs, or retirement plan
assets (if the plan allows distributions from the plan) to Roth IRAs. In addition, married couples filing separate returns are eligible for
conversions.* This presents an opportunity that many may want to consider, as the current low income tax brackets are due to expire on
December 31, unless they are extended for 2013. What this means is that from the perspective of ordinary income taxes, it may be an
advantage to those individuals who are considering a conversion to complete the conversion prior to the end of 2012. Is a conversion the
right choice. Let’s look at the basics.
Conversion Taxation and Aggregation
A conversion to a Roth IRA is technically a distribution from a Traditional, SEP, or SIMPLE (after two years) IRA, or retirement plan, and a
rollover to a Roth IRA. Under IRC Section 408(d)(2), the values of all IRAs owned by an individual are aggregated and treated as one IRA
for purposes of determining taxation of distributions. Tax is assessed based on the ratio of pre-tax/after-tax balance for all the accounts. For
example, if an individual has an IRA that consists of pre-tax dollars valued at $100,000 and another “non-deductible IRA" valued at $5,000
(no earnings), $105,000 must be the value used in the pro rata formula (after-tax value divided by total IRA value times the distribution)
to determine taxation. To illustrate, if in our example the individual intends to convert $5,000 to a Roth, $5,000 (after-tax value) divided
by $105,000 (total IRA value) multiplied by $5,000 (amount of distribution/conversion) equals $238.10, which represents the non-taxable
portion of this $5,000 hypothetical withdrawal. The balance of $4,761.90 represents the amount that will be taxed as ordinary income.
Note that this aggregation does not apply to the value of assets held in inherited or Roth IRAs or employer qualified retirement plans. Also, a
conversion from a retirement plan to an IRA does not include the value of assets held in other retirement plans or IRAs.
Tax Considerations
Three key issues should be addressed for those who are considering a conversion. First, as mentioned above, the year 2012 may be the last
year for the current low income tax rates before they expire. Secondly, any pre-tax dollars that are converted in 2012 must be included as
ordinary income on the 2012 Form 1040 tax return. The third key point is how the tax will be paid. Will it be paid from assets outside of the
IRA, or will assets be withdrawn from the IRA to settle the tax due.
Withdrawals to Pay Tax
If an individual intends to execute a 2012 conversion and anticipates a withdrawal of assets from a distributing IRA or the receiving Roth
IRA to pay the tax and is under the age of 59 ½, a 10% premature penalty tax may be due in addition to ordinary income tax.
pg_0003
Observation
Is a conversion the right choice. Each individual’s situation is unique, and the following questions should be considered before steps are taken:
• How long will it be before I need to start withdrawals from my Roth IRA.
• What effects will the additional ordinary income have on my tax return.
• Will I need to take a distribution from my IRA to pay the tax.
• Does the option of not taking Required Minimum Distributions (RMDs) from the Roth outweigh the cost of a conversion.
• What tax bracket will I be in when I retire.
For many IRA owners, a conversion may be the right choice. However, it is highly recommended that the matter is discussed with a
competent tax advisor or tax attorney before making final decisions.
*For contributions to Roth IRAs, AGI restrictions still apply and married couples must file joint returns to qualify.
FINAL NOTICE OF ACCELERATED TAXATION FROM 2010 CONVERSIONS
For conversions completed in the year 2010, taxes could be deferred. A 2010 Roth IRA conversion was taxed “ratably," by reporting 50% of
the taxable amount converted in 2011 and 50% in 2012. Unless a taxpayer affirmatively elected full taxation in 2010, this year they will have
to include part of the Roth IRA conversion from 2010 in ordinary income.
Accelerated taxation for distributions
TIPRA included a provision intended to discourage the withdrawal of converted assets until their 2011 and 2012 tax obligations were
satisfied. Under the provision, if a 2010 converted amount was subsequently withdrawn in 2010 or 2011, the amount of the distribution must
be reported as ordinary income in the year of the distribution. The same amount must have been subtracted from the income that would have
been reported in the individual’s 2012 tax filing.
Accelerated Taxation for Distribution of 2010 Conversions
Year
Action
Income Reportable in
2010
Income Reportable in
2011
Income Reportable in
2012
2010
Converted $100,000
(50/50 Taxation)
$0
$50,000
$50,000
2010
Withdraw $25,000*
(50/50 Taxation)
$25,000
$50,000
$25,000
2011
Withdraw $25,000*
(50/50 Taxation)
$0
$75,000
$25,000
2012
Withdraw $25,000*
(50/50 Taxation)
$0
$50,000
$50,000
*10% premature penalty applies if under 59 ½ years of age
Remember Distribution ordering rules
Assets must be distributed from Roth IRAs in a defined order. Annual contributions must be distributed first, followed by taxable
conversions, non-taxable conversions, and lastly earnings. A distribution from a Roth IRA that originated from a 2010 conversion will be
included as ordinary income for 2012. Note that all Roth IRAs owned by the individual must be taken into consideration.
Non-Roth employer plan conversions
In addition to conversions from Traditional, SEP, or SIMPLE (after two years from the first contribution date) IRAs, the two-year ratable
50/50 taxation option was available for 2010 conversions from non-Roth type employer-sponsored plans. The tax acceleration rules for pre-
2012 distributions will also apply.
DEFINED BENEFIT PLANS
Self-employed individuals who are age 45 or over, have five or fewer employees, can afford required annual contributions, and are looking
to maximize tax deductions and retirement savings should consider a defined benefit plan (DB). In addition to the primary income source, a
spouse with substantial self-employment income which is not needed today can maximize saving on a tax-favored basis with a DB Plan. Also,
substantial sole proprietor income from moonlighting can be the basis of a DB Plan.
DB Plans work exactly as their name indicates; the benefit is defined. Business owners can fund for a maximum benefit of up to the lesser of
100% of their income or $200,000 per year (2012)
1
at age 65. An actuary calculates how much must be contributed each year to fund for the
future benefit. There is no limit to the amount that may be contributed as long as it is actuarially necessary to fund for the benefit. Hence, DB
Plans offer the largest tax deductions of any qualified plan. Whereas a 55-year-old business owner can get a maximum allocation of $55,500 for
2012
2
in a defined contribution plan, he/she can deposit $188,200 toward his/her retirement benefit in a DB Plan. Indeed, DB Plan contributions
often exceed $200,000 or even $300,000 per year for business owners. Whereas DB contributions are generally sizeable and required every
year, the actuary can provide a range of contribution amounts to help the business owner tailor their contributions to best suit their annual
circumstances.
pg_0004
Save Fast…
Baby boomer business owners who are just now beginning to focus
on retirement can save over $2.4 million on a tax-deferred basis in
just ten years via a DB Plan. In addition to these potentially large
DB Plan accumulations, business owners may save even more via
a 401(k) plan. For example, a maximum salary deferral of $17,000
(2012)
3
, a $5,500 catch-up contribution for those aged 50 and over
(2012)
4
, plus a profit sharing contribution can total to an additional
$55,500 in 2012.
2
…and for Multiple Generations
For business owners who may not need their DB Plan accumulation,
the plan’s significant savings can be rolled into a traditional or Roth
IRA, allowing a continuation of tax-deferred or tax-free growth,
respectively, producing income that may be “stretched" over the
lives of children and grandchildren.
Creditor Protection
DB Plans (as with other qualified plans) that cover at least one
employee, other than the business owners, partners, and their
spouses, can offer retirement savings that are guaranteed under
ERISA to be secure from creditors.
Cash Balance Defined Benefit Plans
For some business owners, a Cash Balance type of DB Plan may
be preferable, since it can provide the same tax deductions and
savings as a regular DB Plan but the plan benefits can be more
easily understood and appreciated by the employees. In a Cash
Balance Plan, an employee’s current retirement benefit is shown as
an account balance, whereas a regular DB plan offers an “accrued
benefit"; for example, $1,000 per month at age 65.
Defined Benefit Plan Deadlines
For businesses operating on a calendar year, Qualified Retirement
Plans, including DB Plans, must be established by December 31,
2012, to get a 2012 tax deduction. Deductible contributions for
2012 may be made (with a tax extension) until September 15, 2013.
For business owners not on a calendar year, the deadline is the last
day of the fiscal year to establish the plan and then up to 8 ½ months
(with a tax extension) from the end of the plan year to make the
prior year deductible contribution.
Defined Benefit Plan Administration
Your Financial Advisor, working with Stifel’s Retirement Plan
Services Department, can help identify a suitable third-party
administrator (TPA) and actuary who, after getting your information,
can create illustrations to help determine if a DB Plan is right for you
and your business. If desired, the TPA can also provide documents
to establish and maintain your DB Plan. With its unique features, a
DB Plan can maximize tax deductions, retirement savings, and help
business owners achieve their retirement goals.
1
$205,000 in 2013
2
$56,500 in 2013
3
$17,500 in 2013
4
Remains $5,500 in 2013
The information contained in this newsletter has been carefully compiled from sources believed to be reliable, but the accuracy of the information is not guaranteed.
This newsletter is distributed with the understanding that the publisher is not engaging in any legal or accounting type of work such as practicing law or CPA services.
Member SIPC and New York Stock Exchange, Inc.
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CAUTION ON COVERDELL EDUCATIONAL
SAVINGS ACCOUNTs
Unless Congress acts before the end of 2012, certain features of
Coverdell Educational Savings Accounts (ESA) will expire. The
Coverdell ESA will resume its original identity as a tax-deferred
savings plan for higher education expenses. This means the qualified
educational expenses for grades K through 12 will no longer apply.
Also, the contribution limit of $2,000 per beneficiary will revert
back to $500 per beneficiary. Perhaps the biggest loss, with a lack of
Congressional action, is that withdrawals will not be tax free in any
year in which a Hope Credit, Lifetime Credit, or Lifetime Learning
Credit is claimed for the named beneficiary.
YEAR-END TAX CONSIDERATIONS
Individual tax-filers and employers are actively considering ways to
lower their taxable income for 2012 in order to avoid unnecessary
taxes. While some of the ways to reduce adjustable gross income
(AGI) are obvious, others aren’t. Here are several ways to help
reduce an individual’s AGI:
• If eligible, make deductible Traditional IRA contributions.
• Increase deferrals to employer-sponsored 401(k), 403(b) plans, or
SIMPLE IRAs to the allowable limits, if the plan allows elective
changes at this time.
• Donate Required Minimum Distributions up to $100,000 to
qualified charities to avoid taxation for the distribution, if this
option is extended for 2012.
• If self-employed, establish a retirement plan, such as a Solo
401(k), Solo Defined Benefit Plan, or Profit Sharing Plan by
December 31, or a Simplified Employee Pension (SEP) plan
prior to the tax filing deadline (plus extensions), and maximize
deductible contributions for 2012. Note: SIMPLE IRAs had to
be established by October 1, 2012.
• Review portfolios for paper losses and consider realizing enough
of these losses to offset capital gains.