Real Tips and Financial Updates

2007 Traditional IRA and Roth IRAs

Traditional IRAs:
  • Must have earned income
  • Contribution tax deductible
  • Contributions and earnings grow tax deferred until withdrawn. All distributions are taxable.
  • Required minimum distribution (RMD) at 70½
  • 10% Penalty if withdrawn before age 59½ (there are exceptions)
  • IRA Limits:
    • IRA Contribution (under age 50): $4,000
    • IRA Contribution (age 50 and over): $5,000
  • IRA Deduction phase-out (qualified plan participant):
    • Single: $52,000-$62,000
    • Married Filing Jointly $83,000-$103,000 AGI
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Roth IRAs:
  • Must have earned income and may be any age to contribute
  • Contribution is not tax deductible
  • Contributions and earnings grow tax free even after withdrawn.
  • No required minimum distribution (RMD) at 70½
  • Contributions can be withdrawn any time tax free and penalty free
  • Distributions are required only after the death of the participant
  • Phase-out of Roth IRA contribution eligibility:
    • Single: $99,000-$114,000
    • Married,
    • Filing Jointly: $156,000-$166,000 MAGI
    • Filing Separate: $0-$$10,000
*If you cannot contribute to either the Traditional IRA or the Roth IRA, you can still contribute to a non-deductible IRA. Earnings grow tax deferred until withdrawn. Cost basis portion of distribution is tax-free. Earnings portion is taxable.

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The 529 Advantage: How Will You Fund Higher Education Costs?

Recent tuition hikes have left many wondering if they will be able to afford the cost of their children’s education.

Fortunately, many states, including Iowa, have adopted 529 Plans. 529 Plans offer many advantages over traditional college savings vehicles.

Contributions to the Iowa plan are state tax deductible up to $2,595 annually, per student, per individual. To illustrate, a mother and father with three children could receive a $15,576 state tax deduction if they each contributed to each child.

Balances in the plan are allowed to grow on a tax-deferred basis. When withdrawn for the payment of higher education costs, the earnings are tax-free at the state and federal levels.

Accounts remain in the contributor’s name for benefit of the student. If the student elects not to attend school, or if they receive a scholarship and do not need the money, the proceeds may be passed on to a relative of the designated student.

Although the contributions are still in the “control” of the contributor, they are considered outside of their estate. This makes the plan a particularly effective estate planning tool for high net worth individuals.

529 saving options are offered by nearly every state. If you are not a resident of Iowa, feel free to contact us to discuss the plan offered by your state.

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2007 Single Owner 401(k) PSP Plan
  • A 401(k) plan for a self-employed individual. A self-employed individual is considered both an employee and employer of her or his plan.
  • Qualifications - Must be 21 years of age
  • Employee elective deferrals:
    • $15,500 (under 50 years)
    • $20,500 (age 50 and older)
  • Elective deferrals do not reduce wages for purpose of the 25% compensation limit.
  • PSP Employer Contribution Limit – 25% of compensation (not to exceed $45,000 or $50,000 if 50 or over) or (20% of net SE income after SE tax deduction for self-employed.
  • Early Withdrawal Penalty – 10% of distribution. Certain exceptions do apply.
  • Date to establish plan – By December 31st
  • Date to fund plan – Tax return due date for contribution including extensions.
  • Annual contribution not required.
  • Borrowing permitted.
  • Combined employer contributions and employee elective deferrals per employee limited to 100% of wages up to $45,000 or $50,000 if over 50.
  • Employee and employer contributions are deductible and tax deferred along with earnings being tax deferred.
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2007 Savings Incentive Match Plan (SIMPLE)
  • Maximum salary deferral of $10,500 indexed per year (13,000 if 50 or over). Any such deferral will not be taxable to the employee for federal or state income taxes, but are subject to social security taxes. Contributions and earnings grow tax deferred until withdrawn. Taxes are due upon withdrawal.
  • Employer matching contributions to a SIMPLE are generally tax deductible to the employer.
  • Required employer contributions:
    • 100% match on salary deferrals not exceeding 3% of compensation for the employee can be reduced to 1% in any 2 out of 5 years.
      • OR
    • 2% of gross wages for all eligible participants, including non-participants.
The above contribution options can be changed each year by providing the eligible employees a notice at least 60 days before the beginning of the plan year.
  • Plan is not subject to discrimination testing, top heavy or government reporting (5500 form).
  • Employee and employer contribution are immediately vested.
  • Employer contribution must be made by the due date for filing the tax return for the year, including extensions.
  • Time frame for depositing employee contribution: No later than 30 days after the last day of the month in which contributions are withheld from paychecks.
  • No annual contribution required. No borrowing permitted.
  • A 25% early withdrawal penalty will be accessed if money is withdrawn before 2 years participation. After 2 years, the normal 10% early withdrawal penalty will apply.
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2007 Simplified Employee Pensions (SEP IRA)
  • Qualifications – Anyone with self-employed income.
  • Maximum Contributions – 20% of net SE income after SE tax deduction up to a maximum contribution of $45,000.
  • Penalties for early withdrawals (Before 59½) - 10% of distribution
  • Age withdrawals must begin ( 70½) - However, contributions can be made to the plan after age 70½ if there is earned income.
  • No annual reporting requirements and easy to administer.
  • Annual contributions are not required.
  • Vesting – 100%
  • Borrowing not permitted.
  • Date to establish plan and make contributions – Tax return due date, including extensions.
  • Contributions are tax deductible.
  • Contributions and earnings grow tax deferred until withdrawn.
  • If there are employees, non-discrimination rules apply and the same percentage contribution must be made to the accounts of all eligible employees.
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