• Don’t Have a Retirement Plan? Maybe a SEP Is the Answer.

    12 March 2016
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    In a crunch? The year-end period is probably a very busy time if you are like many small business owners. You can’t close your books and determine your business’s profit until after the close of the year, and if this has been a good year, you may want to establish a retirement plan and make a contribution for 2015.

    There are a number of retirement plan options available, including Keogh plans and 401(k)s. However, a simplified employee pension plan (SEP) may be your best option. Unlike with a Keogh plan, you don’t have to scramble to get a SEP established before year-end.

    The reason a SEP is “simplified” is that its retirement contributions are deposited into an IRA account under the control of the SEP participant, thus eliminating most of the employer’s administrative duties. That is why these plans are sometimes referred to as SEP-IRAs.

    SEPs function much like Keogh plans, and they allow tax-deductible contributions for both employees and self-employed individuals. For an employee, the maximum contribution for 2015 is the lesser of 25% of that employee’s compensation or $53,000. These contributions are excluded from the employees’ wages and are not subject to withholding for income tax or FICA. A self-employed person can contribute 25% of his or her compensation after deducting the employer’s contribution, which boils down to the smallest of 20% of the business’ net profit or $53,000. Each year, the employer can specify a compensation amount between zero and 25% (not exceeding the maximums for the year).

    SEPs are a great option for startups and other small businesses that have unpredictable income and that may be leery of the long-term contribution matches required with other types of retirement plans. SEPs are also a great option for self-employed individuals with no employees, as the contributions are based upon net profits, allowing the business owner to select the maximum percentage while knowing that the required contribution will be small in low-income years.

    Except for when employees are covered by collective bargaining agreements, an employer that elects to make a SEP contribution for the year must contribute to an employee’s retirement account if the employee is at least 21 years of age, has worked for the employer in at least three of the prior five calendar years, and has compensation for the year of at least $600.

    Another advantage of SEP plans is that contributions are allowed after the account owner has reached the age of 70½—the age limit for traditional, non-SEP IRA contributions. This is true even though individuals must begin the required minimum distributions (RMDs) from the SEP once age 70½ is reached.

    As with all traditional IRAs and qualified plans, distributions from a SEP are taxable and subject to a 10% early withdrawal penalty if withdrawn before age 59½.

    To set up a SEP plan, you can adopt the IRS model plan by using Form 5305-SEP. This form is completed and retained for your records (not filed with the IRS). You can also open one with a financial institution. It may be prudent to adopt whatever plan is offered by the financial institution you’ll be dealing with to ensure that all plan requirements are met. If using a financial institution’s plan, be sure to discuss the plan’s fees.

    A SEP may be the best option for your business’s retirement fund. Please call Dagley & Co. for more information on how a SEP plan might work for your particular business structure or to determine whether other options should be considered.

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  • Are You Ignoring Retirement?

    24 January 2016
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    The time is now. If you’re still young, working 9 to 5, and caring for children or elders, retirement is something you need to be aware of and not put off for the last minute. Some people ignore the issue until late in life and then have to scramble at the last minute to fund their retirement. Others even ignore the issue altogether, thinking their Social Security income (assuming they qualify for it) will take care of their retirement needs.

    By current government standards, a single individual with $11,770 or a married couple with $15,930 of annual household income is at the 100% poverty level. If you compare those levels with potential Social Security income, you may find that expecting to retire on just Social Security income may result in a bleak retirement.

    You can predict your future Social Security income by visiting the Social Security Administration’s Retirement Estimator. With the Retirement Estimator, you can plug in some basic information to get an instant, personalized estimate of your future benefits. Different life choices can alter the course of your future, so try out different scenarios – such as higher and lower future earnings amounts and various retirement dates – to get a good idea of how these scenarios can change your future benefit amounts. Once you’ve done this, consider what your retirement would be like with only Social Security income.

    If you are fortunate enough to have an employer-, union- or government-funded retirement plan, determine how much you can expect to receive when you retire. Add that amount to any Social Security benefits you are entitled to and then consider what retirement would be like with that combined income. If this result portends an austere retirement, know that the sooner you start saving for retirement, the better off you will be.

    With today’s relatively low interest rates and up-and-down stock market, it is much more difficult to grow a retirement plan with earnings than it was 10 or 20 years ago. With current interest rates barely mirroring inflation rates, there is little or no effective growth. That means one must set aside more of one’s current earnings for retirement to prepare for a comfortable retirement.

    Because the government wants you to save and prepare for your own retirement, tax laws offer a variety of tax incentives for retirement savings plans, both for wage earners and for self-employed individuals and their employees. These plans include:

    Traditional IRA – This plan allows up to $5,500 (or $6,500 for individuals age 50 and over) of tax-deductible contributions each year until reaching age 70½. However, the amount that can be deducted phases out for higher-income taxpayers who also have retirement plans through their employer.

    Roth IRA – This plan also allows up to $5,500 (or $6,500 for individuals age 50 and over) of contributions each year. Like the Traditional IRA, the amount that can be contributed phases out for higher-income taxpayers; unlike the Traditional IRA, these amounts phase out even for those who do not have an employer-related retirement plan.

    myRA Accounts – This relatively new retirement vehicle is designed to be a starter retirement plan for individuals with limited financial resources and those whose employers do not offer a retirement plan. The minimum amount required to establish one of these government-administered plans is $25, with monthly contributions as little as $2. Once the total value of the account reaches $15,000 or after 30 years, the account must be converted to a commercial Roth IRA account.

    Employer 401(k) Plans – An employer 401(k) plan generally enables employees to contribute up to $18,000 per year, before taxes. In addition, taxpayers who are age 50 and over can contribute an extra $6,000 annually, for a total of $24,000. Many employers also match a percentage of the employee’s contribution, and this can amount to a significant sum for those who stay in the plan for many years.

    Health Savings Accounts – Although established to help individuals with high-deductible health insurance plans pay medical expenses, these accounts can also be used as supplemental retirement plans if an individual has already maxed out his or her contributions to other types of plans. Annual contributions for these plans can be as much as $3,350 for individuals and $6,750 for families.

    Tax Sheltered Annuities – These retirement accounts are for employees of public schools and certain tax-exempt organizations; they enable employees to make annual tax-deferred contributions of up to $18,000 (or $24,000 for those age 50 and over).

    Self-Employed Retirement Plans – These plans, also referred to as Keogh plans, allow self-employed individuals to contribute 25% of their net business profits to their retirement plans. The contributions are pre-tax (which means that they reduce the individual’s taxable net profits), so the actual amount that can be contributed is 20% of the net profits.

    Simplified Employee Pension (SEP) – This type of plan allows contributions in the same amounts as allowed for self-employed retirement plans, except that the retirement contributions are held in an IRA account under the control of the employee or self-employed individual. These accounts can be established after the end of the year, and contributions can be made for the prior year.

    Each individual’s financial resources, family obligations, health, life expectancy, and retirement expectations will vary greatly, and there is no one-size-fits-all retirement savings strategy for everyone. Purchasing a home and putting children through college are examples of events that can limit an individual’s or family’s ability to make retirement contributions; these events must be accounted for in any retirement planning.

    If you have questions about any of the retirement vehicles discussed above, please give Dagley & Co. a call.


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  • Only One IRA Rollover Is Allowed Every 12 Months

    13 August 2015
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    We’ve discussed this subject once before — and yes, we are harping on it because of the profound tax consequences — this is a reminder that, beginning this year, individuals are only allowed one IRA rollover in any 12-month period (this includes SEP and Simple accounts, traditional and Roth IRAs). Twelve months must have elapsed from the date a rollover is completed before another rollover can be made. Failure to abide by this rule can be expensive, and the rule applies no matter how many IRAs an individual owns.

    Example – Joe makes an IRA rollover on March 1, 2015. He cannot roll over another IRA distribution, without penalties, until March 2, 2016.

    If Joe, in the example, were to make another IRA rollover before March 2, 2016, that entire distribution would be treated as a taxable distribution and would also be subject to the 10% early distribution penalty if Joe is under the age of 59.5 at the time of the distribution. Additionally, if Joe deposited the distributed amount into another IRA, or redeposited the funds into the same IRA, those funds are treated as an excess contribution and are subject to a 6% penalty per year for as long as they remain in the IRA.

    That doesn’t mean you can’t transfer funds between IRA trustees multiple times during the year. In a rollover, a taxpayer takes possession of the funds and then must redeposit them within 60 days to avoid being taxed on the distribution. In contrast, a transfer moves the funds directly from one trustee to another with the taxpayer never taking possession of the funds. Unlimited direct transfers are allowed, including moving traditional IRA funds to a Roth IRA (called a conversion).

    If, through no fault of yours, a trustee does not follow your instructions to make a transfer and instead distributes the funds to you, procedures are available to obtain relief.

    If you are planning an IRA rollover, before taking the distribution, please check with your IRA trustee or get in touch with us at Dagley & Co. to ensure you are not violating the 12-month rule.

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  • Small Business Owners: Remember To Plan For Your Retirement!

    10 August 2015
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    Though your retirement may be years away, and it may not be the most pressing issue on your mind these days, don’t forget your retirement contributions, especially because there are often some generous government incentives to take advantage of.

    There are a variety of retirement plans available to small businesses that allow the employer and employee a tax-favored way to save for retirement. Contributions made by the owner on his or her own behalf and for employees can be tax-deductible. Furthermore, the earnings on the contributions grow tax-free until the money is distributed from the plan. Here are some retirement plan options:

    • Simplified Employee Pension Plan (SEP). This plan was designed to avoid the complications of a qualified plan. Contributions to the plan are held in the beneficiaries’ IRA accounts; hence, the title “simplified.” Deductible contributions for 2015 are limited to the lesser of 25% of the participant’s compensation (up to $265,000) or $53,000. A SEP can be established and funded after the close of the year.
    • Qualified Plan (Keogh). Generally, the rules surrounding a Keogh are more complex. This type of plan may include a discretionary contribution profit sharing plan or a mandatory contribution money purchase plan, or a combination of these. SEP plans are favored over Keogh plans by most self-employed individuals. For 2015, deductible contributions are limited to the lesser of 25% of the participant’s compensation (up to $265,000) or $53,000. These plans must be established before the end of the tax year, but contributions can be made afterwards.
    • Savings Incentive Match Plan for Employees (SIMPLE Plan). Under this plan, the business owner takes a deduction, and employees receive a salary deferral. For 2015, the contribution limit is $12,500 (per employer or employee), with an additional catch-up contribution limit of $3,000 for participants aged 50 or older. The employer can match the contribution up to 3% of compensation or make a non-elective contribution of 2% of compensation.
    • Individual 401(k) Plan. The individual 401(k) plan is similar to the traditional 401(k) plan with added benefits for the small business owner. For 2015, the owner can contribute and deduct up to 25% of compensation plus an additional $18,000 salary deferral, up to a $53,000 maximum $59,000 for those who are age 50 and over). For employees, the contribution and salary deferral limit is $18,000, with an additional $6,000 catch-up contribution available to those aged 50 or over. Employers can match employee contributions.

    If you choose to establish a new qualified pension plan for your business, you may be entitled to the “small employer pension startup credit.” The credit is equal to 50% of administrative and retirement-related education expenses for the plan for each of the first three plan years, with a maximum credit of $500 for each year. Plan-related expenses in excess of the amount of the credit claimed are generally deductible as ordinary expenses of the business.

    The first credit year is the tax year that includes the date the plan becomes effective, or, electively, the preceding tax year. Examples of qualifying expenses include the costs related to changing the employer’s payroll system, consulting fees, and set-up fees for investment vehicles.

    If you would like assistance in selecting a retirement plan for your business or to explore all of the tax benefits relevant to your particular situation, please get in touch with Dagley & Co.

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  • Turning 70½ This Year? Your Taxes Are About To Change

    20 March 2015
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    Your golden years come with new #tax rules. If you are turning 70½ this year, you may face a number of special tax issues. Not addressing these issues properly could result in significant penalties and filing hassles.

    Traditional IRA Contributions – You cannot make a traditional IRA contribution in the year you reach the age of 70½. Contributions made in the year you turn 70½ (and from then on) are treated as excess contributions and are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned.

    You can avoid the penalty by removing the excess and the interest earned on the excess from the IRA prior to April 15 of the subsequent year and including the interest earned on the excess in your taxable income.

    Even though you can no longer make contributions to a traditional IRA in the year you reach age 70½, you can continue to make contributions to a Roth IRA, not to exceed the annual IRA contribution limits, provided you still have earned income, such as wages or self-employment income, at least equal to the amount of the contribution.

    If you are married to a non-working or low-earning spouse who has not yet reached age 70½ and you have earned income, your earnings can still be used to qualify your spouse for a contribution to a spousal IRA, even if you are 70½ or older and can’t contribute to your traditional IRA.

    Required Minimum Distributions (RMDs) – You must begin taking required minimum distributions from your qualified retirement plans and IRA accounts in the year you turn 70½. The distribution for the year in which you turned 70½ can be delayed to the subsequent year without penalty if the distribution is made by April 1 of the subsequent year. That means two distributions must be made in the subsequent year: the delayed distribution and the distribution for that year. In the following years, your annual RMD must be taken by December 31 of each year.

    Still Working Exception – If you participate in a qualified employer plan, generally you need to start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 70½. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the “still working exception,” your RBD is postponed to April 1 of the year following the year you retire.

    Example: You reached age 70½ in 2015, but chose to continue working and did not retire until June of 2017. Provided your employer’s plan includes the option, you can make the “still working election” and delay your RBD until no later than April 1, 2018.

    Caution: This exception does not apply to an employee who owns more than 5% of the company. There is no “still working exception” for IRAs, Simple IRAs, or SEP IRAs.

    Excess Accumulation Penalty – When you fail to take an RMD, you are subject to a draconian penalty called the excess accumulation penalty. This penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year.

    Example: Your RMD for the year is $35,000, but you only take $10,000. Your excess accumulation penalty for failing to take the full amount of the distribution for the year would be $12,500 (50% of $25,000).

    The IRS will generally waive the penalty for non-willful failures to take your RMD, provided you have a valid excuse and the under-distribution is corrected.

    As you can see, turning 70½ can complicate your tax situation. If you need assistance with any of the issues discussed here, or need assistance computing your RMD for the year, please get in touch with us at Dagley & Co. You’ll find our information at the bottom of this page.

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  • Retirement Savings: the Earlier One Starts, the Better

    16 February 2015
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    We know, we know: Most teenagers and young adults do not consider the long-term benefits of retirement savings. Their priorities for their earnings are more for today than that distant, and rarely considered, retirement. Yet contributions to a retirement plan early in life can enjoy years of growth and provide a substantial nest egg at retirement.

    Due to its long-term benefits of tax-free accumulation, a nondeductible Roth IRA may be the best option. During most individuals’ early working years, their income is usually at its lowest, allowing them to qualify for a Roth IRA at a time where the need for a tax deduction offered by other retirement plans is not important.

    Because retirement may not be their focus at that age, young adults may balk at having to give up their earnings. Parents, grandparents, or other individuals might consider funding all or part of the child’s Roth contribution. It could even be in the form of a birthday or holiday gift. Take, for example, a 17-year-old who has a summer job and earns $1,500. Although the child is not likely to make the contribution from his or her earnings, a parent could contribute any amount up to $1,500 to a Roth IRA for the child.*

    But keep in mind that young adults, like anyone else, must have earned income to establish a Roth IRA. Generally, earned income is income received from working, not through an investment vehicle. It can include income from full-time employment, income from a part-time job while attending school, summer employment, or even babysitting or yard work. The amount that can be contributed annually to an IRA is limited to the lesser of earned income or the current maximum of $5,500.

    Parents or other individuals who contribute the funds need to keep in mind that once the funds are in the child’s IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability.

    Consider what the value of a Roth IRA at age 65 would be for a 17-year-old who has funds contributed to his or her IRA every year through age 26 (a period of 10 years). The table below shows what the value will be at age 65 at various investment rates of return.

    Value of a Roth IRA
    Annual Contributions of $1,000 for 10 years beginning at age 17

    Investment Rate of Return 2%           4%           6%         8%
    Value at Age 65     $23,703  $55,449  $127,900  $291,401

    What may seem insignificant now can mean a lot at retirement. Individuals who are financially able to do so should consider making a gift that will last a lifetime. It could mean a comfortable retirement for your child, grandchild, favorite niece or nephew, or even an unrelated person who deserves the kind gesture.

    *Amounts contributed to an IRA on behalf of another person are nondeductible gifts by the donor and are counted toward the donor’s annual $14,000 (2014 and 2015 gift exclusion per done).

    If you would like more information about Roth IRAs or gifting contributions to a Roth on behalf of someone else, please contact us at Dagley & Co.

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  • One-per-12-Month IRA Rollover Limitation Begins 2015

    20 January 2015
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    The IRS allows an individual to take a distribution from his or her IRA account and avoid the tax and early distribution penalties if the distribution is redeposited to an IRA account owned by the taxpayer within 60 days of receiving the distribution.

    Early in 2014, in a tax court case, the court ruled that taxpayers could only have one IRA rollover per 12-month period. This was contrary to the IRS’s long-standing one rollover per every IRA account every 12 months. This far more liberal position was also included in published IRS guidance. However, contrary to general public opinion, guidance provided by the IRS in their publications is not citable, carries no weight in audit or court, and only represents the IRS’ interpretation of tax law.

    As a result, the IRS has adopted the Court’s more restrictive position, but will not apply the new interpretation until 2015, giving taxpayers time to become aware of the new restrictions. The IRS is modifying its published 2015 guidance to reflect this new position.

    The IRS announced in November that the one-per-12-month-period rollover rule also applies to Simplified Employer Pension Plans (SEPs) and SIMPLE plans. Included in the November announcement, the IRS indicated it would not count a distribution taken in 2014 and rolled over in 2015 (within the 60-day limit) as a 2015 rollover.

    Not counted towards the one-per-12-month rule are traditional to Roth IRA conversions or trustee-to-trustee IRA transfers where the funds are directly transferred from one IRA trustee to another.

    Please get in touch with Dagley & Co. if you are planning an IRA distribution and subsequent rollover and are not positive it falls within the one-per-12-month limit.

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  • The Social Security Fund Could Be Exhausted By 2033. Here’s How to Prepare Yourself For The Worst.

    18 November 2014
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    The United States’ Social Security system not only provides retirement benefits, but also provides disability and survivor benefits to covered workers and their families. The Social Security system receives funding from numerous sources, including the Social Security payroll tax (FICA) on wages, self-employment tax on the income of self-employed individuals, income tax on the taxable part of Social Security benefits, and interest on current trust fund assets.

    The subject of Social Security funds running out comes up over and over again, and Congress keeps kicking it down the road. It’s all politics; lawmakers do not want to deal with the political fallout that will result if taxes are increased or benefits are reduced to fund future Social Security benefits. The last change Congress made was to gradually extend the full retirement age from the age of 65 to the age of 67 between 2002 and 2025 – but more needs to be done if future Americans want the same benefits as previous generations.

    In the Social Security Administration’s 2013 Annual Report, the Board of Trustees projected trust fund exhaustion by the year 2033. It also projected that in 2033, the first year of projected insolvency, the program would only have enough tax revenues to pay about 77% of scheduled benefits. That percentage would decline to 72% in 2087. If that happens, the monthly payment of benefits could be delayed, disrupting the predictability of the current payment schedule.

    A recent study by the Congressional Research Service (CRS) concluded that the sooner Congress acts, the smaller the changes to Social Security need to be. Making changes now would spread the costs over a larger number of workers, and over a longer period of time. Changes could be slowly phased in, rather than making abrupt cuts in benefits and/or increases in taxes, thus allowing workers to plan in advance for their retirements. However, the average life span keeps increasing as technology and medicine advances, so people are retired and living longer and longer on Social Security.

    All of this means relying solely on government benefits for retirement is risky. Proactive retirement plans may be a better option for those golden years. The current tax code provides for numerous retirement incentives including Traditional IRAs, Roth IRAs, 401(k) plans, self-employed retirement plans, and a Saver’s Tax credit for lower income individuals. A little saved each year can become a significant retirement income source in the future. If you would like assistance planning for your retirement, or explain the various tax-favored retirement plans available, please contact Dagley & Co.

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