QUALIFIED CHARITABLE DONATIONS EXTENDED

On January 2, 2013, President Obama signed into law the “American Taxpayer Relief Act of 2012."

Included in the bill is an extension for qualified charitable distributions (QCDs) and provisions to make

permanent certain changes to Coverdell Education Savings Accounts (ESAs) enacted under the Economic

Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which will be detailed in a following

article. In addition, the Act contains an expansion of in-plan (not IRAs) Roth conversions allowed by

certain employer-sponsored retirement plans that contain Roth contribution arrangements. This provision

will also be discussed in detail later. The remainder of this article will focus on QCDs.

Qualified Charitable Donations

The Pension Protection Act of 2006 allowed certain IRA holders the opportunity to donate assets in their

IRA to qualified charitable organizations. If done correctly, the distributions are tax-free and not included

as ordinary income. Distributions also count toward an individual’s Required Minimum Distribution

(RMD) for the year. This benefit was available until December 31; 2011, however, the Act extends the

charitable donation benefit through December 31, 2013.

Also included in the bill is a special transition rule that allows, at the election of the taxpayer:

•

A QCD made from January 1 through January 31, 2013, to be treated as having been made on

December 31, 2012.

•

Any portion ($100,000 maximum) of a distribution that was paid from an IRA directly to the IRA

holder in December 2012 to be treated as a QCD. Note, however, that the individual had to complete

the transfer of such funds from their personal account to the qualified charitable institution prior to

February 1, 2013. to qualify as a 2012 QCD.

If a taxpayer made the election as prescribed by the IRS, then the distribution may count toward:

• The taxpayer’s $100,000 exclusion limitation for the 2012 calendar year and

• The taxpayer’s RMD for the 2012 calendar year.

Eligibility and Donation Limit

In order to make a QCD for 2013, an IRA holder must be at least 70½ years of age on or before the actual

day of the distribution and the distribution must be completed by December 31, 2013.

For those who do qualify by age, their maximum IRA charitable donation is limited to $100,000 per

tax year. Any distributions in excess of this limit will not qualify for the tax exclusion benefit and

will be treated as ordinary income. The provision applies for Traditional and Roth IRAs and does not

typically apply to distributions from active SEP or SIMPLE IRAs unless an employer contribution was

not made to the SEP or SIMPLE IRA during or for the year the charitable distributions are made. Note

that distributions of base contributions and tax-paid conversions to Roth IRA holders are generally not

considered taxable income.

In conclusion, by not including a charitable donation from an IRA as ordinary income, an individual’s

adjusted gross income is not increased, which could affect the ability to qualify for Roth contributions or

have other possible tax ramifications.

NEED A 2012 TAX DEDUCTION. IT’S NOT TOO LATE FOR A SEP

An employer must establish a Qualified Retirement Plan (QRP) by the end of the tax year for which a

tax deduction is taken (Rev. Rul. 76-28). If an employer’s tax year is based upon the calendar year,

December 31, 2012, was the last day a QRP could be established for 2012. However, employers have

until the due date of their federal income tax return for the business, including extensions, to establish a

Simplified Employee Pension (SEP) Plan and make SEP contributions (Prop. Treas. Reg. 1.408-7(b): IRC

Sec. 404(h)) for 2012.

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Retirement

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1st Quarter 2013

Contributions

The maximum amount that can be contributed for 2012 on behalf of

SEP participants is the lesser of:

•

25 percent of compensation (IRC Sec. 402(h) limit) up to the

compensation cap of $250,000 (increased to $255,000 for 2013)

or

•

$50,000 (increased to $51,000 for 2013) (IRC Sec. 415(c) dollar

limitation)

Closing Comment

A SEP plan is a very attractive plan for small business owners

considering such benefits due to the ease of establishment and

minimal fiduciary responsibility. In addition, it is the only plan that

can be established in 2013 to take advantage of a 2012 tax deduction.

COVERDELL EDUCATION SAVINGS

ACCOUNTS (ESA) DO NOT SUNSET

An ESA is an account used only for the purpose of paying education

expenses of the designated beneficiary of the account. Many of the

ESA provisions were scheduled to “sunset" and revert to pre-2006

levels. However, thanks to the American Taxpayer Relief Act of

2012 (The Act), Coverdell ESAs will continue to operate as they

have in recent years and bypass the sunset provisions. Contribution

limits remain at $2,000, and the qualified education expenses

continue to apply for grades K-12 and higher education purposes.

Taxpayers may claim an American Opportunity or Lifetime Learning

Credit (if eligible) in the same year, and distributions continue to be

tax-free.

The following levels are now current for future ESAs:

Eligibility

Contributions may be made to ESAs by individuals whose AGI does

not exceed these levels:

• Individual Returns (AGI) – $95,000 - $110,000

• Joint Returns (AGI) – $190,000 - $220,000

A partial contribution may be made if AGI falls between these

ranges.

Contributions

• Must be made in cash

• Are non-deductible

• Must be made before the beneficiary reaches age 18

• Cannot exceed $2,000 per beneficiary per year

• Must be made by April 15 of following year

•

Can be made by individuals, corporations, and tax-exempt

organizations

• Do not require a contributor to have earned income

• May not be made from an UGMA or UTMA

Distributions

Distributions are income tax-free if they are not more than the

beneficiary’s adjusted qualified education expenses for the year. A

taxpayer is allowed to claim Hope & Lifetime Learning Credits for

the same year an ESA distribution is made. However, the taxpayer

cannot use the ESA distribution to cover the same educational

expenses claimed for the Hope & Lifetime Learning Credit. A

distribution may be subject to taxes and a 10% penalty if not used

for a qualified expense. If the ESA is not used for higher education,

it must be distributed 30 days after the earlier of the beneficiary

reaching age 30 (unless they are special needs) or their date of death.

Qualified Education Expenses

An ESA may be utilized for the following qualified education

expenses for grades K-12: tuition and fees, books, supplies,

equipment, basic room and board (must be at least half-time student),

tutoring, computer equipment, uniforms, and special needs services.

An ESA may be utilized for the following qualified education

expenses for higher education: tuition and fees, books, supplies,

equipment, and basic room and board (must be at least half-time

student).

Distributions may also be taken from ESAs and rolled into a 529

Plan on behalf of the designated beneficiary.

Rollovers

An ESA may roll over into another ESA for the same beneficiary.

The beneficiary may be changed to another family member (child

or stepchild, sibling, first cousin, in-law, and parent). Also, a 60-

day rollover may be completed with an ESA one time during every

rolling 365 days.

In conclusion, ESAs are now a permanent vehicle available when

saving for grades K-12 and higher education purposes. They remain

a viable tool for educational planning along with custodial accounts

and 529 plans.

COLAs INCREASE IRA CONTRIBUTION LIMITS

FOR 2013

It’s been five years since an increase in the limit for IRA

contributions. According to IR-2012-77, the Traditional and Roth

contribution limit is increased to $5,500 for 2013. Taxpayers may

contribute to either traditional or Roth IRAs up to a combined limit

of $5,500 for tax year 2013.

Annual Limit

2013

2012

IRA/Roth

Contribution Limit

$5,500

$5,000

IRA/Roth Catch-Up

Contributions

$1,000

$1,000

IRA deductibility income limits 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

If one spouse is 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

Solo 401(k)

An employer without employees or eligible employees can establish

a Solo 401(k) Plan. The Solo (k) allows for three contribution types:

Employer, Deferral, and Catch-Up. As shown in the chart below,

a 52-year-old business owner can increase his/her tax deduction,

based on $100,000 of compensation, from $25,000 to $48,000.

Profit Sharing Plan With a Cross-Tested Formula

SEPs allocate the same percentage of salary to each eligible

participant. “Cross-tested" Profit Sharing Plans (which test non-

discrimination based on projected benefits instead of contributions)

can allow business owners to shift a higher percentage of their

contributions to themselves. In the example below, the business

owners get 92.77% of their contribution, or $102,000, compared to

73.89% or $81,243 from the SEP.

Plan

Participants Salary Age SEP

Cross-Tested

Profit

Sharing Plan

Owner A $255,000 54 $46,038.18 $51,000.00

Owner B $195,000 53 $35,205.66 $51,000.00

Employee 1 $64,000 59 $11,554.67 $3,200.00

Employee 2 $45,000 43 $8,124.39 $2,250.00

Employee 3 $28,000 37 $5,055.17 $1,400.00

Employee 4 $22,000 31 $3,971.92 $1,100.00

Totals $609,000.00

$109,950.00 $109,950.00

Owners

73.89%

92.77%

For many business owners, the SEP may be the right plan for 2012

and the foreseeable future. But, for those who can increase their

benefits, a Solo(k) or a “cross-tested" plan can be a great way to

help plan for a secure and successful retirement.

IN-PLAN ROTH CONVERSIONS EXPANDED

In fact, there is no such thing as a Roth 401(k); it is really just a

401(k) plan that offers Roth, after-tax salary deferrals along with

traditional pre-tax deferrals. A 401(k) plan may not offer only Roth

deferrals but can, of course, offer only pre-tax deferrals. Generally,

participant deferrals can be either all Roth or all pre-tax, or

participants may mix their money between the two, using the same or

a different percentage of their deferrals for one or the other.

Whereas Roth deferrals are deposited into a 401(k) plan after-tax,

they can be distributed tax-free (after five years of participation

and the attainment of age 59 ½, death, or disability). Traditional

deferrals are deposited into a 401(k) plan pre-tax, but are taxed when

distributed.

If the Plan allows, participants can make an “in-plan rollover" from

pre-tax to Roth. This will trigger taxes on the amount converted to

Roth but can allow tax-free growth going forward.

In-Plan Roth Conversions Under the New

Legislation

On January 2, 2013, President Obama signed into law H.R. 8, the

“American Taxpayer Relief Act of 2012." Whereas this Act does not

pertain to any qualified retirement plan contribution or compensation

limits, it does affect in-plan Roth conversions.

Prior legislation (H.R. 5297, the Small Business Jobs and Credit

Act of 2010) only permitted in-plan Roth conversions for funds

eligible for distribution (e.g., pre-tax deferrals for a participant over

59 ½). The new legislation permits in-plan Roth conversions of

any funds held for the benefit of the employee, even if the funds

are not eligible for distribution. The new law pertains to any

conversion made after December 31, 2012, and is permanent. Under

H.R. 8, Roth conversions will be taxed in the year the funds are

converted, which is projected to raise $12.2 billion over 10 years.

So Which Is Right, Roth or Pre-tax, or a

Combination.

Well, it’s kind of a bet. How good are you at predicting the future.

If you think income tax rates will go up when your plan funds are

distributed, then Roth may be best, i.e., pay the tax now at the lower

rate. If you think taxes will go down at distribution, then pre-tax can

be the way to go.

For those who lack a crystal ball, and particularly for younger

participants where retirement is farther down the road (and where

tax rates may be harder to predict), a hedging of the bet or a mix

between Roth and pre-tax can be sensible. This is very much like

diversifying investments to help guard against market volatility.

So, is a Roth 401(k) right. Like so many questions in the world of

qualified plans (and the world of investments), the answer may well

be “it depends" on the individual participant’s particular situation,

inclinations, and goals.

A SEP IN THE RIGHT DIRECTION

For business owners who may have best benefitted from establishing

a Solo(k) or a Profit Sharing Plan but missed the December 31, 2012

deadline, they may still establish a Simplified Employee Pension

(SEP) before their 2013 tax filing deadline, including extensions,

and secure a 2012 deduction. Then, the business owners may want

to consider setting up the qualified plan that is better suited for 2013

and beyond!

$50,000

$40,000

$30,000

$20,000

$10,000

$0

SEP Solo(k)

Catch-Up $5,500

Deferral $17,500

Employer $25,000

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.

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THE TIMES, THEY ARE A CHANGING

A 2012 Employee Benefit Research Institute (EBRI) survey focused

on the changing views of people regarding when they will retire as

well as the sources of their retirement income.

Postponing Retirement

The age at which workers expect to retire is slowly rising:

• 1991 – 11% of workers expected to retire after age 65

• 2012 – 37% of workers expect to wait until after age 65 to retire

• 1991 – 50% of workers expected to retire before age 65

• 2012 – 24% of workers expect to retire before age 65

The main reason for the change in expected retirement age was

based on:

• 36% – poor economy

• 16% – lack of faith in Social Security or the government

• 15% – a change in employment situation

Working for pay in retirement

• 27% of retirees report having worked for pay after retirement

• 70% of workers plan to work for pay after they retire

•

92% of retirees who worked in retirement cited wanting to stay

active and involved

• 86% enjoying working

•

However, 72% who worked in retirement name at least one

financial reason for doing so:

.

72% - wanting money to buy extras

.

62% - experienced a decrease in the value of their savings or

investments

.

59% - needing money to make ends meet

.

40% - keeping health insurance or other benefits

•

79% of workers say that employment will provide them (and

their spouse) with a major (23% of workers) or minor (56% of

workers) source of income in retirement.

Confidence in having paid employment for as long as needed in

retirement

• 28% of workers – very confident

• 44 % of workers – somewhat confident

• 9% of retirees – very confident

• 17% of retirees – somewhat confident

• 54% of retirees – not at all confident

Sources of Income in Retirement

Actual sources of income for current retirees:

• 91% of retirees derive income from Social Security

• 56% of retirees get income from traditional pension plans

Workers are expecting to get their retirement income from

several sources:

• 79% of workers expect Social Security to be a source of income

• 79% from employment

• 72% from employer-sponsored retirement savings plans

• 64% from IRAs

• 62% from personal savings

• 56% from traditional pension plans

Defined Benefit Plans

•

Retirees and workers equally expect income from a defined

benefit (DB) plan – 56 %

•

However, the percentage of workers expecting income from a

DB plan remains below the high of 62% in 2005.

Many American workers have begun to question their capacity to

attain a financially secure retirement. The results of the survey

indicate that retiring later, working in retirement, and relying

on multiple sources of income will be the ways by which many

Americans will reach their retirement goals.

Source: 2012 Retirement Confidence Survey, Employee Benefit

Research Institute and Mathew Greenwald & Associates.