The President recently signed the Small Business Jobs Act of 2010 (2010 Small Business Act), which includes a number of provisions to spur business activity and create jobs. Listed below are some of the more important provisions of the 2010 Small Business Act. Please contact us if you have questions about these or other provisions of this recent legislation.
Section 179 First-year Depreciation Deductions Doubled for 2010 and 2011
The Section 179 deduction privilege allows many small and medium-sized businesses to immediately write off most or all of the cost of qualifying new and used assets in the first year instead of having to depreciate the cost over a number of years. The 2010 Small Business Act increases the maximum annual Section 179 deduction to $500,000 for eligible assets placed in service in tax years beginning in 2010 and 2011 (up from the $250,000 maximum that applied for tax years beginning in 2009). Most types of depreciable personal property (including computers, equipment, and furniture) and most purchased software qualify. For the first time, some types of real estate improvement costs also qualify (see the following topic).
However, larger businesses can lose all or part of the Section 179 deduction allowance due to an unfavorable phase-out rule. Under that rule, the allowance is reduced dollar for dollar by the cost of qualifying assets placed in service during the year (those that would otherwise be eligible for the Section 179 privilege) in excess of the applicable threshold. For tax years beginning in 2010 and 2011, the new law greatly increases the phase-out threshold to the quite-generous level of $2 million (way up from the $800,000 threshold for tax years beginning in 2009). Thanks to this change, far fewer businesses will be tripped up by the phase-out rule in 2010 and 2011.
Caution: Watch out if your business already has or is close to a tax loss for the year before considering any Section 179 deduction. You cannot claim a Section 179 write-off that would create or increase an overall business tax loss for the year.
Some Real Property Improvement Costs Now Qualify for Section 179
Until now, real property improvement costs were ineligible for the Section 179 deduction privilege. That is no longer true. For tax years beginning in 2010 and 2011, up to $250,000 of qualified improvement costs for (a) interiors of leased nonresidential buildings, (b) restaurant buildings, (c) and interiors of retail buildings can be deducted immediately under the Section 179 deduction provision. However, the $250,000 Section 179 allowance for real estate improvements is part of the overall $500,000 allowance. Again, watch out if your business already has or is close to tax loss for the year before considering any Section 179 deduction. You cannot claim a Section 179 write-off that would create or increase an overall business tax loss for the year.
50% First-year Bonus Depreciation Retroactively Reinstated
The 2010 Small Business Act retroactively reinstates the 50% first-year bonus depreciation provision for one year to cover qualifying new (not used) personal property assets and purchased software placed in service by December 31, 2010. Before this retroactive change, the bonus depreciation provision had expired on December 31, 2009. It is now back for eligible assets placed in service by the end of this year.
Unlike the Section 179 deduction, bonus depreciation is available to even the largest businesses. However, small and medium-sized businesses that can take advantage of both the Section 179 deduction and bonus depreciation are the biggest winners.
Bigger First-year Depreciation Deductions for New Autos and Light Trucks
If your business buys a new (not used) passenger auto or light truck during 2010 that is subject to the dreaded luxury auto depreciation limitations, the reinstated 50% bonus depreciation write-off increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service by December 31, 2010. Most passenger vehicles qualify except for big SUVs, pickups, and vans. For new cars, bonus depreciation raises to the maximum first-year depreciation write-off for 2010 to $11,060 (assuming 100% business use). For new light trucks, the maximum first-year depreciation deduction for 2010 is raised to $11,160 (assuming 100% business use).
Business Start-up Cost Deduction Rule Liberalized for 2010
For tax years beginning in 2010, the 2010 Small Business Act increases the maximum deduction that can be claimed for start-up costs to $10,000 (up from $5,000) in the year when a new business commences operations. However, the $10,000 deduction allowance is phased out once cumulative start-up costs exceed $60,000. Start-up costs that cannot be deducted in the year business commences can be amortized (written-off) over 180 months, starting with the month business commences.
General Business Credits
Before the 2010 Small Business Act, most general business credits could be used to offset regular income taxes but not AMT. Also, general business credits that could not be used in the current year (unused credits) could be carried back one year or forward 20 years. The 2010 Small Business Act creates an exception that allows general business credits that arise in tax years beginning in 2010 to offset AMT for 2010. Also, unused general business credits from 2010 can be carried back five years or forward 20 years. However, these exceptions are only available to eligible small businesses with average annual gross receipts for the preceding three tax years of $50 million or less.
For more info and questions regarding the Small Business Act and legislation, please call Charles to set an appointment.
Email: Charles@annetahim.com
Tuesday, November 30, 2010
Borrowing from your Retirement Plans
If you are unable (or prefer not) to borrow from a bank or other outside source, your qualified retirement plan may be a good option. IRS guidelines permit a limited amount of borrowing from corporate qualified retirement plans, including 401(k) plans. In general, borrowings are limited to 50% of the participant’s account balance up to a maximum of $50,000 and must be repaid within five years (unless the loan proceeds are used to purchase a principal residence). Hardship withdrawals (different from a loan, which must be repaid to the plan) from 401(k) plans are also permissible in certain circumstances. However, hardship withdrawals are taxable and subject to a 10% penalty if made before age 59½.
Tax law generally prohibits borrowing from IRAs. However, a distribution from an IRA followed by a redeposit of the funds into the same account or another IRA within 60 days of receipt of the funds will qualify as a tax-free rollover transaction. Once you have made such a tax-free rollover, you must wait at least one year from the date of receipt of the amount withdrawn from that particular IRA before becoming eligible to participate in another similar transaction. This once-per-year rule is applied individually to each IRA. Therefore, a person who has more than one IRA may make a rollover once per year on each account. Your use of the funds for the 60-day rollover period is, in effect, a short-term loan. It is recommended that you not implement this strategy without careful planning.
Example: Borrowing from an IRA.
Sue needs $8,000 to pay her income taxes on April 15th. Her only liquid asset is her IRA account with a balance of $63,000. However, she expects to receive an accident settlement of $20,000 around May 15th. Sue can take an $8,000 distribution from her IRA account and use these funds to pay her taxes due April 15th. If she redeposits the funds within 60 days, there are no tax consequences. She can use a portion of her settlement or other available funds for the redeposit to her IRA. If Sue does not receive her insurance settlement within 60 days and has no other source from which to repay the $8,000 distribution, severe tax consequences can result. The distribution becomes taxable and is subject to the 10% penalty if Sue is under age 59½.
Please contact us if you have questions about the tax ramifications of borrowing from retirement accounts.
Tax law generally prohibits borrowing from IRAs. However, a distribution from an IRA followed by a redeposit of the funds into the same account or another IRA within 60 days of receipt of the funds will qualify as a tax-free rollover transaction. Once you have made such a tax-free rollover, you must wait at least one year from the date of receipt of the amount withdrawn from that particular IRA before becoming eligible to participate in another similar transaction. This once-per-year rule is applied individually to each IRA. Therefore, a person who has more than one IRA may make a rollover once per year on each account. Your use of the funds for the 60-day rollover period is, in effect, a short-term loan. It is recommended that you not implement this strategy without careful planning.
Example: Borrowing from an IRA.
Sue needs $8,000 to pay her income taxes on April 15th. Her only liquid asset is her IRA account with a balance of $63,000. However, she expects to receive an accident settlement of $20,000 around May 15th. Sue can take an $8,000 distribution from her IRA account and use these funds to pay her taxes due April 15th. If she redeposits the funds within 60 days, there are no tax consequences. She can use a portion of her settlement or other available funds for the redeposit to her IRA. If Sue does not receive her insurance settlement within 60 days and has no other source from which to repay the $8,000 distribution, severe tax consequences can result. The distribution becomes taxable and is subject to the 10% penalty if Sue is under age 59½.
Please contact us if you have questions about the tax ramifications of borrowing from retirement accounts.
Monday, October 25, 2010
Maximizing Tax Savings from Outright Charitable Gifts
A taxpayer can use either cash or property to make a charitable gift. That choice can affect the taxpayer’s overall tax consequences resulting from the gift. For example, a charitably inclined taxpayer may derive greater tax benefits from gifting property to charity rather than selling the property and gifting the proceeds. In addition, consideration should be given to gifting property with unrealized appreciation to maximize the economic benefit from disposing of the property.
Cash contributions are deductible in the year paid. A contribution generally is considered made at the time of delivery. Thus, contributions paid by check are considered made on the date of delivery or mailing (assuming the check subsequently clears in due course).
Contributions charged to a bank credit card are deductible in the year the charge is incurred, even though paid in a later year. However, interest paid on the credit card balance is not considered a charitable contribution. Charitable contributions made by credit card may be useful for a taxpayer who anticipates a greater benefit from the contribution in the current year, yet needs to defer payment until the next year.
Promissory notes given to charity generally do not constitute a charitable contribution until paid.
Transferring cash is the simplest way to make a tax-deductible donation. Unlike property, the value of a cash donation is not subject to IRS challenge. Costs associated with transferring title to property are avoided. Also, property donations by individuals may be more limited under the percentage-of-AGI limitations than cash donations. Finally, cash is generally a suitable gift for any recipient. Property donations may not always be exactly what the recipient organization needs. In fact, some property donations may cause the donee to incur costs trying to sell them or adapt them to a specific use.
The price for simplicity is giving up cash, which is not possible for all donors. A donor may prefer to donate property that is not producing current income, since he or she suffers no loss of income. A property donation may also be attractive to an owner of illiquid property or low tax basis property.
Please contact us if you have questions concerning charitable deductions and for additional tax-saving guidance.
Cash contributions are deductible in the year paid. A contribution generally is considered made at the time of delivery. Thus, contributions paid by check are considered made on the date of delivery or mailing (assuming the check subsequently clears in due course).
Contributions charged to a bank credit card are deductible in the year the charge is incurred, even though paid in a later year. However, interest paid on the credit card balance is not considered a charitable contribution. Charitable contributions made by credit card may be useful for a taxpayer who anticipates a greater benefit from the contribution in the current year, yet needs to defer payment until the next year.
Promissory notes given to charity generally do not constitute a charitable contribution until paid.
Transferring cash is the simplest way to make a tax-deductible donation. Unlike property, the value of a cash donation is not subject to IRS challenge. Costs associated with transferring title to property are avoided. Also, property donations by individuals may be more limited under the percentage-of-AGI limitations than cash donations. Finally, cash is generally a suitable gift for any recipient. Property donations may not always be exactly what the recipient organization needs. In fact, some property donations may cause the donee to incur costs trying to sell them or adapt them to a specific use.
The price for simplicity is giving up cash, which is not possible for all donors. A donor may prefer to donate property that is not producing current income, since he or she suffers no loss of income. A property donation may also be attractive to an owner of illiquid property or low tax basis property.
Please contact us if you have questions concerning charitable deductions and for additional tax-saving guidance.
529 Plans — College Savings for Your Children
Many parents and grandparents are using 529 Plans to fund their children’s and grandchildren’s education. However, 529 Plans are somewhat confusing because they are subject to Internal Revenue Code qualification requirements, but are operated by the various states or educational institutions under varying policies defined by them. 529 Plans established by the states come in two basic formats: (a) prepaid tuition plans and (b) savings plans. (Eligible educational institutions can only establish prepaid tuition plans; these institutions cannot set up savings plans.) Every state offers at least one 529 Plan.
A prepaid tuition plan is best thought of as a way to lock in the price of covered educational services at today’s prices, thus insuring against college cost inflation. The tax benefits are a nice bonus. In contrast, a savings plan is best thought of as a tax-advantaged way to build up a college fund. Savings plans do not lock in the cost of covered educational services. The federal tax advantages for both types of plans are identical. Each type of plan generally allows both one-time (lump sum) and periodic contributions. Since each state plan is unique, each one must be analyzed in terms of the student’s needs.
Many factors should be considered before opening a 529 Plan account. For many individuals, especially those whose children or grandchildren are years away from college, the savings plans generally will be the better choice. However, the volatility of the stock market, including years of negative returns, has renewed interest in prepaid tuition programs. Prepaid plans might be appropriate in certain circumstances, particularly for those with low risk tolerance or those who want to be guaranteed a certain amount of education credits or units. Whichever route is taken, it is important to review all of the program details, including investment options, fees, and state income tax consequences.
When a state income tax applies, individuals typically should look at their own state program first, as the state income tax consequences might make it more favorable than others. However, many individuals may find that out-of-state programs better meet their needs and objectives. Some families choose to open both a prepaid plan for the cost certainty and a savings plan for the growth potential.
Prepaid tuition plans allow individuals (generally parents) to prepay the education costs of a designated beneficiary (generally their child) at specified institutions and thereby lock in the price. The prepayments are invested by the 529 Plan. In effect, the investment return is guaranteed to keep pace with inflation in the cost of the covered educational services—nothing more; nothing less. Even if the plan’s conservative investments post inadequate returns, there is no obligation to make further payments. However, if the 529 Plan earns more than enough to finance the cost of the covered educational services, the plan gets to keep the excess. In either case, once college time arrives, the covered costs of the designated beneficiary will be paid for by the 529 Plan.
Unlike prepaid tuition plans, 529 savings plans make no promises that contributions will cover a given amount of future college education. As their name implies, savings plans simply provide tax-favored savings accounts for higher education expenses.
The bad news is that savings plans are not a surefire hedge against college cost inflation. The good news is that these plans allow upside potential. If the savings plan’s investment return exceeds the rate of inflation for college costs, less money is needed to fund the account. Basically, the account owner decides how much to contribute to the savings plan, chooses among the plan’s investment options, and then monitors performance. At college time, the account is drawn down to pay some or all of the designated beneficiary’s eligible expenses.
When determining the impact 529 Plans have on a student’s financial aid offer, it is important to recognize that how the 529 Plan is owned (titled) can impact the financial aid computations in two ways. First, it may be an asset that can be assessed in the financial aid computation. Second, withdrawals from the 529 Plan may be treated as a resource that has a direct impact on the student’s financial need (as an outside scholarship would).
Qualified distributions from state-sponsored 529 Plans and institutional programs are completely tax-free. Qualified distributions are distributions for qualified higher education expenses, including tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. A beneficiary with special needs can also include the expenses of special needs services as qualified expenses.
Finally, 529 Plans may be particularly attractive to higher income parents and grandparents because there are no AGI-based limitations on who can contribute to these plans. In addition, the federal income and estate tax aspects generally are favorable with 529 Plans.
A prepaid tuition plan is best thought of as a way to lock in the price of covered educational services at today’s prices, thus insuring against college cost inflation. The tax benefits are a nice bonus. In contrast, a savings plan is best thought of as a tax-advantaged way to build up a college fund. Savings plans do not lock in the cost of covered educational services. The federal tax advantages for both types of plans are identical. Each type of plan generally allows both one-time (lump sum) and periodic contributions. Since each state plan is unique, each one must be analyzed in terms of the student’s needs.
Many factors should be considered before opening a 529 Plan account. For many individuals, especially those whose children or grandchildren are years away from college, the savings plans generally will be the better choice. However, the volatility of the stock market, including years of negative returns, has renewed interest in prepaid tuition programs. Prepaid plans might be appropriate in certain circumstances, particularly for those with low risk tolerance or those who want to be guaranteed a certain amount of education credits or units. Whichever route is taken, it is important to review all of the program details, including investment options, fees, and state income tax consequences.
When a state income tax applies, individuals typically should look at their own state program first, as the state income tax consequences might make it more favorable than others. However, many individuals may find that out-of-state programs better meet their needs and objectives. Some families choose to open both a prepaid plan for the cost certainty and a savings plan for the growth potential.
Prepaid tuition plans allow individuals (generally parents) to prepay the education costs of a designated beneficiary (generally their child) at specified institutions and thereby lock in the price. The prepayments are invested by the 529 Plan. In effect, the investment return is guaranteed to keep pace with inflation in the cost of the covered educational services—nothing more; nothing less. Even if the plan’s conservative investments post inadequate returns, there is no obligation to make further payments. However, if the 529 Plan earns more than enough to finance the cost of the covered educational services, the plan gets to keep the excess. In either case, once college time arrives, the covered costs of the designated beneficiary will be paid for by the 529 Plan.
Unlike prepaid tuition plans, 529 savings plans make no promises that contributions will cover a given amount of future college education. As their name implies, savings plans simply provide tax-favored savings accounts for higher education expenses.
The bad news is that savings plans are not a surefire hedge against college cost inflation. The good news is that these plans allow upside potential. If the savings plan’s investment return exceeds the rate of inflation for college costs, less money is needed to fund the account. Basically, the account owner decides how much to contribute to the savings plan, chooses among the plan’s investment options, and then monitors performance. At college time, the account is drawn down to pay some or all of the designated beneficiary’s eligible expenses.
When determining the impact 529 Plans have on a student’s financial aid offer, it is important to recognize that how the 529 Plan is owned (titled) can impact the financial aid computations in two ways. First, it may be an asset that can be assessed in the financial aid computation. Second, withdrawals from the 529 Plan may be treated as a resource that has a direct impact on the student’s financial need (as an outside scholarship would).
Qualified distributions from state-sponsored 529 Plans and institutional programs are completely tax-free. Qualified distributions are distributions for qualified higher education expenses, including tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. A beneficiary with special needs can also include the expenses of special needs services as qualified expenses.
Finally, 529 Plans may be particularly attractive to higher income parents and grandparents because there are no AGI-based limitations on who can contribute to these plans. In addition, the federal income and estate tax aspects generally are favorable with 529 Plans.
Year-end Tax Planning
There's still time to lower your 2010 tax bill, contribute to your tax-advantaged retirement accounts, and do some tax planning for next year.
Following, are a few ideas to get you started prior to year-end.
Contribute to Your IRA. You can contribute up to $5,000 ($6,000 if you are age 50 or older by year-end) to your IRA in 2010 if certain conditions are met. For married couples, the combined contribution limits are $10,000 ($5,000 each) and $12,000 ($6,000 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income. These limits apply to the cumulative contributions to traditional and Roth IRAs. In addition, contributions to traditional IRAs may be tax deductible, subject to specific conditions and limitations.
Contribute to Your Employer-Sponsored Retirement Plan. The 2010 annual deferral limit for qualified retirement plans is $16,500. If you are at least age 50 by year-end, you can contribute an additional $5,500 to 401(k), 403(b), and 457 plans. These contributions normally decrease your taxable income and the income taxes thereon.
Capital Gains. It may be a good time to consider selling capital assets (e.g., common stock) with a low cost basis. The maximum capital gains tax rate in 2010 is 15% for gains from the sale of qualifying assets held more than one year. In fact, taxpayers in the 10% and 15% ordinary tax brackets can do even better by taking advantage of the 0% capital gains rate in 2010. In addition, qualifying dividends received during 2010 generally will be taxed at the 0% or 15% capital gains rates.
Energy Credit. If you have not taken advantage of the Nonbusiness Energy Property Credit available in 2009 and 2010, it is a great way to cut energy costs and save up to $1,500 (for both years combined) in income taxes by making energy efficiency improvements to your principal residence. Basically, if you install energy-efficient insulation, windows, doors, roofs, heat pumps, hot water heaters or boilers, or advanced main air circulating fans to your home before year-end, you may be entitled to a tax credit of 30% of the purchase price, up to a maximum credit of $1,500.
Please contact us for additional tax-saving ideas or guidance on tax-related questions.
Following, are a few ideas to get you started prior to year-end.
Contribute to Your IRA. You can contribute up to $5,000 ($6,000 if you are age 50 or older by year-end) to your IRA in 2010 if certain conditions are met. For married couples, the combined contribution limits are $10,000 ($5,000 each) and $12,000 ($6,000 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income. These limits apply to the cumulative contributions to traditional and Roth IRAs. In addition, contributions to traditional IRAs may be tax deductible, subject to specific conditions and limitations.
Contribute to Your Employer-Sponsored Retirement Plan. The 2010 annual deferral limit for qualified retirement plans is $16,500. If you are at least age 50 by year-end, you can contribute an additional $5,500 to 401(k), 403(b), and 457 plans. These contributions normally decrease your taxable income and the income taxes thereon.
Capital Gains. It may be a good time to consider selling capital assets (e.g., common stock) with a low cost basis. The maximum capital gains tax rate in 2010 is 15% for gains from the sale of qualifying assets held more than one year. In fact, taxpayers in the 10% and 15% ordinary tax brackets can do even better by taking advantage of the 0% capital gains rate in 2010. In addition, qualifying dividends received during 2010 generally will be taxed at the 0% or 15% capital gains rates.
Energy Credit. If you have not taken advantage of the Nonbusiness Energy Property Credit available in 2009 and 2010, it is a great way to cut energy costs and save up to $1,500 (for both years combined) in income taxes by making energy efficiency improvements to your principal residence. Basically, if you install energy-efficient insulation, windows, doors, roofs, heat pumps, hot water heaters or boilers, or advanced main air circulating fans to your home before year-end, you may be entitled to a tax credit of 30% of the purchase price, up to a maximum credit of $1,500.
Please contact us for additional tax-saving ideas or guidance on tax-related questions.
Monday, October 4, 2010
Revocable Living Trusts
Living trusts remain a popular and affordable estate planning vehicle. A revocable (or living) trust is a trust that is funded with part or all of the property of the creator (grantor) of the trust. By serving as trustee, the grantor retains control of the property and also has the right to revoke the trust and reclaim ownership of the trust’s property. By itself, the trust does not offer any estate tax savings, since the trust assets remain in the donor's taxable estate. However, if it is properly set up and funded, it can provide several advantages, including the following:
Avoiding Probate. In states where executor fees and attorney fees are based on a percentage of a person’s estate that goes through probate, a living trust can cut costs significantly because assets owned by the trust are not subject to the probate process.
Asset Administration. Another benefit of a living trust is that it can help avoid a court-supervised guardianship in the event the trust creator becomes unable to manage his or her own affairs. Of course, if the only reason for creating the trust is to avoid a guardianship proceeding, it may be simpler (and cheaper) to grant a durable power of attorney over all of one’s assets to a trusted relative or friend, rather than to establish the trust.
Multi-state Administration. An ancillary administration (meaning administration of a person’s estate in more than one state) is necessary when individuals own real property outside their state of residence. In some situations, this process is fairly simple; other times it is not. As an alternative to an ancillary administration, a living trust can be established to hold title to the property located in another state.
Privacy. An inventory of assets generally must be filed in a probate administration. This document becomes a matter of public record, subject to inspection by anyone. Thus, individuals who are concerned about the privacy of their financial affairs can use a fully funded living trust to prevent a public record of their assets at death.
Although a revocable living trust can be a valuable planning tool, it’s certainly not for everyone. For example, the benefits of the trust normally are not fully realized unless all of a person’s assets are placed in the trust. Some people will find the inconvenience of having assets such as cars, boats, homes, and checking accounts titled in the name of the trust rather than their own name too much to deal with on a day-to-day basis. Thus, they’ll either not bother to properly fund the trust when it is set up, or as the years go by, they’ll become remiss in maintaining the proper paperwork.
Please do not hesitate to contact us if you have questions concerning a living trust.
Avoiding Probate. In states where executor fees and attorney fees are based on a percentage of a person’s estate that goes through probate, a living trust can cut costs significantly because assets owned by the trust are not subject to the probate process.
Asset Administration. Another benefit of a living trust is that it can help avoid a court-supervised guardianship in the event the trust creator becomes unable to manage his or her own affairs. Of course, if the only reason for creating the trust is to avoid a guardianship proceeding, it may be simpler (and cheaper) to grant a durable power of attorney over all of one’s assets to a trusted relative or friend, rather than to establish the trust.
Multi-state Administration. An ancillary administration (meaning administration of a person’s estate in more than one state) is necessary when individuals own real property outside their state of residence. In some situations, this process is fairly simple; other times it is not. As an alternative to an ancillary administration, a living trust can be established to hold title to the property located in another state.
Privacy. An inventory of assets generally must be filed in a probate administration. This document becomes a matter of public record, subject to inspection by anyone. Thus, individuals who are concerned about the privacy of their financial affairs can use a fully funded living trust to prevent a public record of their assets at death.
Although a revocable living trust can be a valuable planning tool, it’s certainly not for everyone. For example, the benefits of the trust normally are not fully realized unless all of a person’s assets are placed in the trust. Some people will find the inconvenience of having assets such as cars, boats, homes, and checking accounts titled in the name of the trust rather than their own name too much to deal with on a day-to-day basis. Thus, they’ll either not bother to properly fund the trust when it is set up, or as the years go by, they’ll become remiss in maintaining the proper paperwork.
Please do not hesitate to contact us if you have questions concerning a living trust.
Retirement Catch-up Contributions
Tax law changes made back in 2001 established the right to make additional catch-up contributions to certain types of tax-advantaged retirement accounts. For 2010, this opportunity may be available to you if you will be age 50 or older as of year-end. Specifically, you can potentially make additional salary reduction catch-up contributions to a 401(k) plan, 403(b) plan, 457 plan, or SIMPLE plan (assuming you participate in a plan that allows catch-up contributions). These contributions reduce your taxable income and therefore result in lower income tax bills. You can also make catch-up contributions to a traditional IRA (which may or may not be deductible depending on your circumstances) and to a Roth IRA. (Roth IRA contributions are always nondeductible, but they can be a good idea if you expect higher future tax rates.)
These catch-up contributions are above and beyond the “normal” annual contribution limits that otherwise apply to your tax-advantaged retirement accounts. The maximum allowable catch-up contribution for 2010 is $5,500 for 401(k), 403(b), and 457 plans. It is $2,500 for SIMPLE plans and $1,000 for traditional and Roth IRAs. However, depending on your salary level and the terms of your salary reduction plan, maximum allowed catch-up contributions to the plan could be less than the amounts shown here. How much are the catch-up contributions worth? The beneficial long-term impact of making catch-up contributions is illustrated below. Remember, allowable catch-up contributions are now much bigger than back in 2002 when first allowed. For example, the maximum catch-up contribution to a 401(k) account for 2002 was only $1,000 versus $5,500 for 2010. The maximum catch-up contribution to a traditional or Roth IRA for 2002 was only $500 versus $1,000 for 2010. Therefore, you should now give catch-up contributions more respect than you might have earlier.
The following analysis proves the point.
These catch-up contributions are above and beyond the “normal” annual contribution limits that otherwise apply to your tax-advantaged retirement accounts. The maximum allowable catch-up contribution for 2010 is $5,500 for 401(k), 403(b), and 457 plans. It is $2,500 for SIMPLE plans and $1,000 for traditional and Roth IRAs. However, depending on your salary level and the terms of your salary reduction plan, maximum allowed catch-up contributions to the plan could be less than the amounts shown here. How much are the catch-up contributions worth? The beneficial long-term impact of making catch-up contributions is illustrated below. Remember, allowable catch-up contributions are now much bigger than back in 2002 when first allowed. For example, the maximum catch-up contribution to a 401(k) account for 2002 was only $1,000 versus $5,500 for 2010. The maximum catch-up contribution to a traditional or Roth IRA for 2002 was only $500 versus $1,000 for 2010. Therefore, you should now give catch-up contributions more respect than you might have earlier.
The following analysis proves the point.
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