If you're self-employed, you can choose a Simplified Employee Pension (SEP) instead of a Keogh.  Employers may also choose to offer a SEP.  These plans provide the benefits of formal pension plans without all the record-keeping, actuarial expense and IRS paperwork required for Keoghs and other qualified plans.

A SEP is like an Individual Retirement Account (IRA), but contributions may be greater.  The maximum deductible contribution for a SEP is 20% of earned income or $53,000 in 2015, whichever is less, (If you're self-employed, the usual limit of 25% of compensation is effectively equal to 20% of "earned income")

Unlike other types of retirement plans, which require detailed reports to the IRS, a SEP generally requires only that you fill out IRS Form 5305-SEP when you start the plan.  Also, SEPs are handy, last-minute planning tools.  you can open up a SEP as late as the due date on your tax return and make a look-back contribution that's deductible for the previous year.


In addition to SEP's, you might consider SIMPLEs (Saving Incentive Match Plans for Employees), which were created in the 1996 tax law.  A SIMPLE IRA may be an ideal retirement plan for a truly small business, although firms with up to 100 employees may have them. (There also are SIMPLE 401(k) plans, but they seem to have little appeal.)  With a SIMPLE IRA, employees in 2015 can contribute up to $12,500 worth of compensation (up from $12,000 in 2014), reducing current taxable income.  Those age 50 and older can make larger contributions.  
Once the money is contributed to a SIMPLE IRA, it's self-directed: You can invest in just about anything. Nondiscrimination rules don't apply to SIMPLE plans, so they may appeal to many employees.  No matter how many (or how few) employees choose to participate, key executives can participate in full.

With SIMPLE plans, the company is required to match employee contribution.  Most companies will choose a 3% match.  That is, if you make $50,000 per year and you participate in a SIMPLE IRA, your company will contribute $1,500 to your account.  Other matching formulas permit 1% and 2% matches.  However, most these because they would trim the contributions for key executives.

Self-employed individuals can have SIMPLE IRAs, too.  If your self-employment income is $50,000 or less, a SIMPLE IRA may be an excellent choice because it lets you contribute $12,500 as an employee plus a 3% match as an employer.  However, if your self-employment income is greater, you're better off with a SEP, which permits larger contributions.


For years, workers had been allowed to contribute only up to $2,000 annually to an IRA, while one-income couples could contribute up to $4,000 each year.  But now the IRA limit for 2015 is $5,500 (the same as in 2014) while the limit for one-income couples is $11,000 (the same as in 2014).  Again, those over 50 can make slightly higher contributions.

Money inside the IRA compounds, tax free, until withdrawal.  However, not all IRA contributions are tax deductible.  Here are the rules for deducting your IRA contributions:

If neither you nor your spouse (if you file jointly) is covered by a qualified plan, you both can take can take the full $5,500 IRA deduction, no matter how much money you earn.
If you're covered by a Keogh, 401(k), SEP or other qualified corporate retirement plan and if your AGI exceeds $71,000 in 2015 ($118,000 on a joint return), you can make IRA contributions but not deduct them.
If your AGI is below these $71,000/$118,000 limits, you are eligible to deduct at least some IRA contributions.
If your AGI is below $61,000 ($98,000 on a joint return), you are eligible for full IRA deductions.
If only one spouse is covered by an employer's retirement plan,the other spouse may deduct a $5,500 IRA contribution, provided their AGI is under $183,000.  Smaller deductions are permitted up to $193,000 in AGI.

​Caution: If your company sponsors a qualified plan and you're eligible to participate in it, the IRS considers you covered even if you opt out of the plan.  So you can make tax-deductible contributions to an IRA only if your AGI falls below the IRS limits.

The net result: You can contribute the annual maximum to an IRA, yet your tax deduction may be limited to some of your contribution, or nothing at all.

But even though the contribution may not be deductible, your earnings can grow, tax free, until you take out the money.  Some financial advisers say nondeductible IRAs make sense because the tax-free compounding is a valuable benefit.  Moreover, many people need the discipline of putting aside a certain amount each year.


Although the standard nondeductible IRAs seem unattractive  they may be worth while. Even though the contributions are nondedcutible, all the withdrawals my be tax free if you follow simple rules.. You can contribute up to $5,500 per year per spouse to a Roth IRA for 2015, reduced by any contributions to traditional IRAs. To qualify for tax free withdrawals, you cannot draw out earning from a Roth IRA until you reach age 591/2. If you start your Roth IRA when you older the 541/2 you must wait at least five years  withdrawing earnings up to $10,000 may be withdrawn after five years to pay for a first time home purchase.  

What's more, when you take money out of a Roth IRA, you're considered to be taking out tax-free contributions first, then taxable earnings.

Unfortunately, Roth IRAs are not for everyone.  To contribute the maximum amount permitted each year to a Roth IRA, your adjusted gross income for 2015 can't exceed $116,000 on a single return, or $183,000 on a joint return,  Partial contributions are allowed up to $131,000(single) or $193,000 (joint).  Taxpayers with greater incomes are shut out of Roth IRAs.  If you qualify for a deductible IRA contribution, should you forgo a Roth IRA?  Maybe not.  The more years you have until retirement and the higher your anticipated retirement tax bracket, the greater the advantage of a Roth IRA.

In addition, you can convert a regular IRA to a Roth IRA.  You'll have to pay the deferred income tax.  After converting, if you hold onto a Roth IRA at least five years, until age 591/2, you'll owe no tax on the withdrawals.  
Prior to 2010, you could convert a traditional IRA into a Roth IRA only in a tax year in which your AGI didn't exceed $100,000.  However, a recent tax law change now provides more flexibility to high-income earners.

Beginning in 2010, you can convert from a traditional IRA to a Roth regardless of your income level.  In other words, the $100,000 cap has been eliminated.

Special tax break: For a conversation taking place in 2010, you could elect to pay the resulting tax over the following two years (2011 and 2012).​

1. You can withdraw the funds from your regular IRA and transfer them to a Roth IRA within 60 days, just like a regular rollover.

2. You can arrange a trustee-to-trustee transfer.  (Your hands never touch the funds.)

3. You can redesignate the traditional IRA as a Roth IRA if you're using the same trustee.

As we've said, you must pay tax on the income resulting from the conversion; in other words, the amount that represents earlier deductible contributions and all account earnings.  That amount is taxable in the conversation year.  However, you don't need to pay the 10% tax penalty for early withdrawals if you're under age 591/2.


Sometimes, people convert their IRA into a Roth IRA, but then have second thoughts.

If it meets your needs, you can undo(or "recharacterize") a Roth conversion back to a traditional IRA.  In effect, it's like you never made the conversion in the first place,

You have until the tax-return due date for the conversion year, plus the six-month extension allowed by law, to recharacterize your IRA.  The deadline for conversions made in 2015 is Oct. 17, 2016.  This extended deadline for Roth IRA recharacterizations will apply whether or not you actually extend filing your 2015 return.

Similarly, you can recharacterize a contribution to a Roth IRA as a traditional IRA contribution-or vice versa.

So, why would you want to recharacterize your Roth IRA? One possible reason is you discover at year-end that the assets in your new Roth IRA have declined since you converted them.  You still must pay income tax on the value of the assets at the time of the conversion unless you rechracterize the IRA.

Say you're in the 25% tax bracket and you converted a taxable IRA worth $150,000 to a Roth IRA.  That means you paid $12,500 in income tax at the time you made the conversion.

But then those $50,000 worth of stocks in new Roth IRA hit the skids, making them worth only $30,000.  If you recharacterize the Roth IRA in time, the $12,500 tax bill is wiped off the books.

And, if you convert the IRA back into a Roth IRA at a future date when the assets are still worth $30,000, you pay only $7,500 tax.

That's a $5,000 tax savings!


Since 2006, employees participating in 401(k) and 403(b) plans have had the option of having some or all of their contributions treated the same as Roth IRAs.  Previously, amounts could be rolled over to designated Roth 401(k) and 403(b) plans from regular plan accounts, but were generally subject to qualifying  events (e.g., retirement) or age restrictions.  But now, under ATRA, beginning in 2013, plan participants can make an in-plan Roth conversion at virtually any time.

This enhanced Roth 401(k) option likely appeals to the same people who prefer Roth IRAs rather than traditional IRAs.  If you expect to be in a higher tax bracket when you retire or if you are decades away form retirement, put this on your list of possibilities.


Following a one-year repeal of the federal estate tax in 2010, Congress passed the 2010 Tax Relief Act, which created some favorable changes for a two-year period.  For 2011 and 2012, the federal estate tax exemption was increased to $5 million (inflation-indexed to $5.12 million in 2012), while the top estate tax rate was decreased to 35%.  Also, the 2010 Tax Relief Act reunified the estate and gift tax systems and allowed "portability" of exemptions between spouses.  Then, among other provisions, ATRA permanently extended the %5 million exemptions (indexed to $5.43 million in 2015) and the portability of exemption, while bumping up the top estate tax rate to 40%.  These changes provide greater certainty in estate planning for retirement assets.

In any event, if you have any type of tax-deferred retirement plan, you have to name a beneficiary.  At your death, the plan assets go to the beneficiary, who can take a lump-sum distribution or periodic payouts.  Who should be your plan's beneficiary? Normally, you would name your spouse.  This will give you peace of mind and win you points at home.  That choice, however, does not always make the best sense for your situation.

Under prior law, a bypass trust would often be used as a means to pass retirement plan assets in a way to maximize the estate tax exemptions available to both spouses, as well as passing assets to non-spouse beneficiaries.  But this is not as much a concern for most couples anymore due to the "portability" of estate tax exemptions.  Initially, the portability provision was allowed by the 2010 Tax Relief Act only through 2012, but then ATRA permanently extended it for 2013 and thereafter.

With the portability provision, if one spouse dies without using up his or her federal estate tax exemption, the unused portion may be transferred to the surviving spouse.  Previously, a bypass trust may have been used to take full advantage of the exemption for the first spouse to die.  Otherwise, part of the exemption would have been wasted,  Although there are plenty of other non-tax reasons to use a bypass trust, a married couple can now pass up to $10 million in assets (indexed to $10.86 million in 2015) completely free of estate tax, regardless of which spouse dies first.

Note that naming  your spouse as beneficiary of retirement plan assets may save income taxes, particularly if he or she is older than you are.  That's because a surviving spouse can spread retirement  plan distributions over his or her life expectancy and thus defer income tax.  If you die before starting distributions, your surviving spouse can wait until age 701/2 to begin receiving income from your plan.  However, if your surviving spouse is older than you, he or she can wait until the date you would have reached 701/2 to begin distributions.  This extends tax-free buildup and retards income tax payments.

What happens if your spouse dies and you can't name him or her as the plan beneficiary?  Or you're been divorced and you don't want your retirement plan to go to your ex-spouse?

Your first impulse may be to name your estate as plan beneficiary.  This often seems like the best idea: The money in your estate as plan beneficiary.  This often seems like the best idea: The money in your plan goes into your estate, to be divided according to the terms of your will.  In truth, this strategy can wind up in disaster.  If you name your estate as your retirement  plan beneficiary, your creditors can get at it.  In addition, your plan proceeds will have to go through the time and expense of probate,

Instead of naming your estate, name one or more of your grown children or other adults as the beneficiaries.  As long as you name specific beneficiaries, money in the plan  isn't exposed to creditors or probate.  Moreover, naming your child as beneficiary can prolong the tax-free compounding.  Your child can choose to spread the withdrawals-and the tax-over his or her life expectancy. (Alternatively, the child may roll over assets to his or her own IRA, thanks to the Pension Protection Act of 2006.)

Retirement plan distributions must begin after age 701/2 unless you are still working.  You can take distributions over your joint life expectancy with your child, but you must act as if your child is only 10 years younger than you are, for the purpose of this calculation.  After your death, your child can recalculate the withdrawal schedule based on his or her own life expectancy.

Recommendation: No matter what your situation, don't name your estate as plan beneficiary.  Also, even if you are widowed or divorced, don't name a minor child as beneficiary.  If you do, your retirement plan proceeds will have to go through probate.  You're better off naming a trust as beneficiary, with your minor children as  the beneficiaries of the trust.


For all the plans described above-IRAs, Keoghs, SEPs and 401(k)s- you have to make the investment decisions.  Naturally, you'll want to avoid speculating with retirement funds.  Most of your money should go into mutual funds, proven stocks and high-grade bonds.  That still leaves you with a lot of territory to cover.  To make your life easier, here are two guidelines to follow:

1. If virtually all your savings are held inside your retirement plan, your investments should be diversified.  Hold a mix of stocks, bonds and short-term savings instruments.  The more years you have until retirement, the more you should emphasize individual stocks and stock funds.  These are volatile, but they're likely to provide the highest long-term results.

2. If you have other savings outside a retirement plan, put the vehicles with the least tax protection inside your plan.  Look upon all your holdings as one portfolio.  Then allocate your investments for the greatest overall advantage.

Put tax-exempt and tax-deferred vehicles outside the plan because they're already sheltered.  Inside the plan, put investments that are heavily taxed, to utilize the tax deferral.  

Investors with managed accounts (where a money manager makes the decisions) should hold that money inside a retirement plan.  Frequent trading and portfolio rebalancing can trigger taxes.  Inside a plan, gains will be sheltered.

Note: The 2013 tax act created a maximum 15% rate on dividends paid to investors. (This tax break was permanently extended  by ATRA, but certain high-income taxpayers must pay tax at a maximum 20% rate.)  However, if you hold the dividend-paying stocks inside a tax-deferred retirement plan, the dividends will be taxed at ordinary income rates up to 39.6% upon withdrawal.  Therefore, to take advantage of this tax break, you should hold dividend-paying stocks outside a plan.

Tax-advantaged investments, such as annuities, permanent life insurance policies and municipal bonds, should be held outside qualified plans.  The same for growth stocks  and stock funds, which will be largely untaxed until you take profits.  If you're a buy-and-hold investor, there will be little or no current income taxes, so the retirement plan tax shelter isn't necessary. 

Observation: With a maximum 15% tax rate on long-term capital gains under current law (20% for certain high-income taxpayers), it's generally a good idea to hold growth stocks and stock funds outside a qualified plan because appreciation will be lightly taxed.

As you near retirement, you may want to restructure your portfolio so it relies less on growth stocks and more on income-paying stocks and bonds.  Inside a plan, you can sell your investments whenever you want, without owing tax until withdrawal.  Outside a plan, though, you will owe tax on realized gains even if all you do is switch from a stock fund to a bond fund within the same fund family.  To reduce the tax bite, try to sell the securities on which you have the smallest paper profit, or even a loss.  Hold onto your big winners as long as you can.

You can also reduce your tax obligation by selling losers from your portfolio when you sell winners.  The losses will offset the taxable gains.  Just make sure you don't wind up with more than $3,000 in net capital losses in any given year.  Up to $3,000, capital losses are deductible; over that threshold, excess losses must be carried forward and deducted in future years.


When you put money into a qualified plan, the trade-off you have to accept, in return for the tax breaks, is a lack of liquidity.  You may not be able to get at your money until you retire or change jobs.  If your plan permits early withdrawals, you'll generally owe income tax plus a 10% penalty tax if you're under age 591/2.

Some employer plans, though, permit you to borrow from your retirement plan.  If your plan does, you can access your money, tax free, at any age and avoid a penalty tax provided you follow all the rules.  As long as you repay  the loans, borrowing from your retirement plan won't reduce your future income.  Whether borrowing is allowed is up to your employer.

Some employers don't want to hassle with the paperwork and don't make provisions for plan loans.  Moreover, if your employer doesn't follow IRS rules, the company will be penalized for making loans to you,  and you will have to pay income taxes and possible penalties.


You cannot borrow tax-free from an IRA - all withdrawals are taxable.  You can however get your hands on IRA money before age 591/2 without paying the 10% penalty that applies unless wihdrawals are used for higher education expenses or a first-time home purchase.  The IRS has an annuity exception if you take substantially equal amounts over your life expectancy  There will not be tax as long as you Make at least one withdrawal per year continue withdrawing for at least 5 years or until you reach 591/2 which ever comes later

A third approach - the most aggressive - permits you to anticipate future IRA growth and thereby maximize your penalty free withdrawals. You can withdraw enough to deplete your IRA fully over your life expectancy assuming the current earnings rate continues 


With the exception of plan loans, you will owe income tax when you take money out of your employer's qualified retirement plan. If you make these withdrawals before age 591/2 you will owe a 10% penalty.

Ideally, you will stay with one qualified plan until you retire, or at least until you are older than 591/2. However, you probably will not be able to take account with you if you leave your employer. In that situation, it would be best for you to rollover your retirement plan over into a new IRA, one specially created for the rollover. This preserves your tax deferral. It also preserves your ability to roll thee account into a new employer's retirement plan, if you choose to do so.


When the need for cash arises, the money in your retirement plan may look tempting. Fortunately, there are ways to tap those funds without paying the 10% penalty for withdrawals before age 591/2. In fact you may be able to get your hands on your money without paying any tax at all. Many 401k and similar plans allow participants to borrow up to $50,000 tax free, with relatively little paperwork, You have to repay the loan, but those payments go back to your own account. 

While interest rated vary, the rate often used for 401k loans is the prime rate plus 1 percent. This may  be higher than the rate you can earn putting the 401k  you can earn putting the 401k in certain investments like Treasury Bonds. Although 401k loans may make sense in some situations, there are drawbacks. Long term you will probably  get higher returns investing 401k money in stocks than in in any types of loans. Moreover, if you leave your company for any reason, you will have to repay the loan right away. Otherwise, the loan will recast as a taxable withdrawal and the 10% penalty may apply if you are under 591/2. 401k loan repayments are made with after tax dollars. You will pay tax again when you withdraw money from your account, so such loans expose you to double taxaion 

If a loan is not a practical choice, you will have to pay tax on a retirement withdrawal, but you may be able to dodge the 10% penalty, The following loophole apply to withdrawals from all tax-deferred retirement plans

  • Death: If you inherit a retirement plan you can withdraw the funds and avoid the 10% penalty no matter what your age​
  • Disability: If you are unable to work, the 10% penalty will not be assessed . In practice if you are receiving a disability check from Social Security or from a disability insurance insurance policy, you can probably avoid incurring the penalty
  • Substantially equal periodic payments (SEPPS) To avoid the penalty, SEPPs must be based on your life expectancy. Once started they must continue for at least 5 years or until age 591/2 which ever comes later
  • Medical expenses The 10% percent penalty will be waived in the case of withdrawals up to the amount of deductible medical expenses.


There are some exceptions that apply to IRAs, but not to employer-sponsored retirement plans

  • Higher education Distributions from IRAs to pay post high school expenses will not trigger the 10% penalty. Eligible expenses include tuition, room and board, fees, books, supplies and required equipment. Qualifying expenses can be for yourself, your spouse, your children or even your grandchildren.
  • Health insurance. If you are out of work for at least 12 consecutive weeks, you can take enough money from an IRA to keep your health insurance in force, penalty free and continue doing so until you are back to work for 60 days.

First time home purchase. You may also take penalty free withdrawals up to $10,000 for a first time home purchase. To qualify you cannot have had an ownership interest in a residence the previous two years.

The exceptions that apply to traditional IRAs also apply to Roth IRAs. If you withdraw money from a Roth IRA before 591/2 for other reasons, you will owe the penalty on the amount that is attributable to your earnings in side the Roth IRA but not to your original contributions.

Among theses exceptions , there is one technique that most people can use: SEPPs. SEPPs rules can be massaged so that you can take out virtually any amount you need, penalty - free. To receive SEPPs, calulalte the amount you need penalty free. . Once you determine what you need to withdraw, the bank, brokerage firm or mutual fund company that acts as the plan custodian can make the necessary calculations and determine the method

Under current law profit sharing contributions may be anywhere from 0 to 20% of self earned income. There fore you no longer need a money purchase plan. A profit sharing plane by itself gives you the opportunity to contribute the maximum 53,000 in 2015 yet allows you to cut back if necessary. Plan sponsors who already have paired plans should check with a tax pro about freezing their money purchase plans so there will not be an on going commitment. 

Standardized Keogh plans offered by many financial institutions and mutual fund families may be appealing if you want to avoid some expense and aggravation. Many mutual fund companies such a T Rowe Price offer prototype Keogh plans to sole proprietors, partnerships, and corporations with 5 or fewer employees.

One sure way to begin retirement tax planning is to contribute to a qualified retirement plan. such plans conform to IRS rules and thus qualify for two tax breaks

Contributions are deductible. Contributing $1,000 to a qualified plan reduces taxable income by $1,000
Earnings compound without being taxed. The money you invest can build up free of current taxation

Qualified retirement plans are deferrals.  Eventually , you will owe tax on the money you contribute and the compound earnings.but it is much better to wait to pay the tax in 10,20,30 years than to pay tax every year between now and then

401 K Contribution Limits

Often your employer will provie you with a qualified retirement plan.  In some cases, the matter is entirely out of your hands. Your employer makes the contribution, makes the investment decisions and takes the tax deduction. You receive what ever amount is in the account when you retire or change jobs.

Increasingly, though the trend has been toward another type of qualified plan: the 401K. According to a recent estimate by the Investment Company Institute 3 trillion is being held in 401K plans on behalf of more than 52 million participants. If your employer offer a 401k plan you make the decisions. You must decide how much of your salary to defer up to 25% of your wages, up to a maximum amount of $18,000 in 2015. This figure is indexed annually

​The annual contribution limit for nonprofit groups 403B plans also increased from $17,500 to $18,000 Similarly, the contribution limit for Section 457 plans used by state and local government employees, increased to $18,000 in 2015

The 2001 tax law included a catch up provision as a matter of fairness to women who may have taken time off from the work force to raise children. although the provision applies to male workers as well It permits those age 50 and older to make larger contributions to their plans. They can elect to defer an extra $6,000 in 2015.  The catch up figure is indexed to inflation

Since 2002 employees in 401 ks are more quickly earning full rights to matching contributions made ty their employers. Matching funds will be fully vested after the employee conpletes three years of service instead of five years under previous rules. Alternatively employers can provide gradual vesting beginning with the employee's second year of service and ending  after six years. The shorter vesting period will help workers who change jobs  and may foster greater participation by employees who do not expect ro remain more than a few years with their current employer.

In practice most companies limit employees' deferrals to no more than 15% of earnigs. However the catchup provisions are limited only by the amount of earned income.

If you are 50 or older you could contribute and extra $6,000 in 2015 bring the deferral to $21,000. Such contributions are not ruled by the plan's percentage limits. After deciding how much to contribute to your 401k you have to choose among various investment alternatives offered by the plan.


Self employed individuals can set up a Keogh retirement plan. Employees with income fro a part time or sideline business can also save for their retirement  with a Keogh plan, even though they may participate in a qualified plan at their full time job. Like all qualified plans, Keoghs allow you to make tax deductible contributions, those contributions compound tax deferred, until you withdraw funds. In essence there are two major types of Keogh plans and defined contribution plans.

Defined benefit plans provide a specific pension for participants. They may be ideal for older taxpayer who can make large tax deductible contributions however, they are expensive to administer and they require that you make sizable contributions in both good years and bad

Defined contributions plans are increasingly popular because they are less complicatedd and less costly than defined benefit Keoghs, Instead of a specific pension, the participants retirement  income will depend on the earnings on their contributions. There are two kinds of plans

Profit sharing plans These plans offer flexibility. A self employed person can choose to contribute nothing to the fund in a poor year or as much as 20% of earned income. up to a maximum of %53,000
Money purchase plans  Under these plans a self employed person can contribute as much as 20% of earned income ,  up to $53,000 The tax code however ,requires that you contribute the same percentage of your each year, which could pose a problem in lean years


               DANIEL CULLINANE CPA                                                              Phone:          732-516-1648

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