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Retirement Incentives

If you will celebrate 50 this year (even if you don't celebrate), now is the time to notify your employer to increase the contributions.
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Most tax professionals cringe at the words “simplification”, “relief” or “reform”. These words are usually linked to a tax bill as an oxymoronic statement rarely indicative of any fact. On June 5, 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 was signed into law. Surprisingly this bill has provided some valuable benefits for taxpayers looking down the road to retirement.

The first benefit is the catch up provision for those over age 50 to increase their elective deferral contributions to their employer’s 401(k) or 457 plans, 403(b) tax sheltered annuity, salary reduction SEP or SIMPLE IRA Plans. If you hit the half-century mark by the end of 2002, you qualified for last year. If you will celebrate 50 this year (even if you don’t celebrate), now is the time to notify your employer to increase the contributions.

For 2003 the annual contribution limits for a Regular IRA is $3,000 ($3,500 for age 50), 401(k), 403(b) and 457 Plans are $12,000 ($14,000 for age 50). The maximum contribution to an employer sponsored SIMPLE IRA is $8,000 ($9,000 for age 50) as a wage reduction. If you are self-employed, a SIMPLE IRA may be a good solution. But we’ll talk more about that later. Rules for the defined contribution plans such as Keoghs or Money Purchase Plans are more complex with contributions indexed to income levels and special regulations.



You still have until April 15th to put money into a Regular IRA or Roth IRA for tax year 2002. Roth IRAs are very popular due to “tax-free” provisions after five years. Unless your overall portfolio is mostly pre-tax, a good tax strategy is to pay yourself first by maximizing the “pre-tax” contributions. The tax savings from these deferrals can actually fund part of your retirement. So that Regular IRA will grow tax deferred and the tax savings from Uncle Sam and Cousin Gray helped you pay for it. Darn! Roth IRA’s are more beneficial as retirement savings when/after all pre-tax avenues have been explored. There are also income level limitations to be considered.

There is a new Retirement Savings Contributions Credit for taxpayers with adjusted gross income (AGI) ranging from $30,000 to $50,000 for Married Filing Jointly; $22,500 to $37,500 for Head of Household; or $15,000 to $25,000 for Single, Married Filing Separately or Qualified Widower filing status. The credit ranges from 10% to 50% of the contributions for taxpayers over age 18 who are neither a full time student or claimed as a dependent on another person’s return. The credit applies to IRA, Roth IRA, 401(k), 403(b), 457, SIMPLE, or SEP plans. Credits are generally a good thing if you can qualify for those pesky income level limitations.




My favorite retirement vehicle for the small business owner remains the SIMPLE IRA. Whether you are a sole proprietor, partnership or S-Corporation, the flexibility of this plan provides great opportunities for tax saving strategies. Plus the look back period for a SIMPLE IRA is similar to a regular IRA, only better. With the regular IRA you have until April 15th of the following year to fund it, right? With this business retirement vehicle, you have the date you file your return, including extensions, up through October 15th. A sole proprietor or partner would have another 8 months to 10 months of opportunity to pay themselves first. The only catch is you have to open the account by October 1st of the applicable calendar year.

What happens if there is a spouse working in the business or you have employees? Hire your spouse and defer all their salary into the SIMPLE up to the maximum contributions. Payroll taxes do apply so planning can be an important issue. Your spouse may contribute 91.45% of their payroll (up to the limit) into the SIMPLE and the business would make a matching contribution within 30 days of the employee’s deferral.

Here is a brief overview of the requirements:

In order to make contributions for tax year 2003, the SIMPLE must be established by October 1, 2003.

Employer must have fewer than 100 employees who earned $5,000 or more during the calendar year.

Eligible employees must earn a minimum of $5,000 during any preceding two years to be eligible for salary deferral that tax year.

Employer may choose to contribute 3% of salary matching for participating employees or 2% of salary for all eligible employees. There is an election for a reduced percentage match of not less than 1% for two out of five years.

Premature distributions before Age 59-1/2 are subject to a 25% penalty.

Employer matches are a direct business expense.

Contact your own tax professional for all the regulations and how they may affect your own unique tax situation. The plan, which provides the most benefit to your business, depends upon multiple factors, not just that type entity of you operate under.


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