Retirement Plan Update

August 9, 2010
DB(k) retirement plans are new this year
Have you heard about Plan X?

A 2006 tax law added section 414(x) to the Internal Revenue Code, creating a retirement plan you can establish for the first time this year. The IRS calls this new option an "eligible combined plan" because it has aspects of a defined benefit (DB) retirement plan and a 401(k), which is a type of defined contribution plan. For the same reason, the new plan is also called a DB(k).

An overview.

The DB(k) combines two types of retirement plans into one.
The rules for the defined benefit portion require your company to make contributions on behalf of eligible employees and to pay specified benefits after retirement.
Under the rules for the 401(k) defined contribution portion, you and/or your employees contribute specified amounts before retirement. After retirement, the amount received by each employee depends on how the contributions were invested and how well those investments did.
Some details.

You can offer a DB(k) when you employ at least two but no more than 500 workers.
You can set up the plan using a single document and you'll file one Form 5500, Annual Return/Report of Employee Benefit Plan, each year.
The DB(k) is exempt from rules that generally apply to retirement plans when most of the benefits go to highly paid employees.
Your plan must follow certain vesting, contribution, and nondiscrimination rules.
Retirement plans offer benefits to your business and employees. Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com to discuss whether this new option will work for your company.

Questions to ask before retiring

August, 2010
If you're within a stone's throw of retirement — for most folks, that's somewhere between the ages of 55 and 65 — you've probably spent at least a little time dreaming about life after work. But before you turn off the computer and turn in your retirement paperwork, consider three important questions.

What will you do in retirement? If you love golf, and dream of getting up late and hitting the greens every afternoon, retirement may be just the ticket. But your hobby may not hold the same appeal after a few years. That's why it's important to take stock of your interests, hobbies, and activities before retiring. Consider "field testing" activities you intend to pursue in retirement, such as joining a band, volunteering for a nonprofit organization, or taking classes at a community college. Doing "retirement activities" before you retire can be an eye-opening experience, and may help to separate daydreams from reality.
Will you work? Studies show that the number of older Americans either holding jobs or looking for work has been rising for at least 15 years. Of course, some folks seek employment out of necessity: bills need to get paid. But for many people, work also provides needed social interaction and a sense of satisfaction. Consequently, some may decide to work at least part-time during retirement — whether or not they need the money. Another idea that's gaining popularity is called "serial employment." With this strategy, you spend part of your "retirement" years employed in a series of full-time jobs interspersed with periods of travel and leisure. Such a plan can generate a healthy supplemental income for you and benefits for talent-starved employers.
Have you saved enough? This, as they say, is the million-dollar question. But how much money you'll need to comfortably retire depends on many factors, including the status of your mortgage and other loans, your general health, expected rates of return on your investments, the size of your current nest egg, life expectancy, plans during retirement (including travel), pensions and other sources of income, the cost of health care and insurance, and myriad other considerations. One size doesn't fit all. So it's important to confer with a trusted advisor who'll help you take a hard look at the numbers — before you wave goodbye to your employer.
For guidance in your retirement planning, give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com $

Kiddie Tax

July 26, 2010
The kiddie tax: A basic review
Got college-bound kids? Then you might have questions about the kiddie tax, since these federal rules can apply to the unearned income of full-time students up to age 24.

Here's an overview.

The basics. The kiddie tax affects how much you'll pay on part of the investment income your child receives, such as interest or dividends. When the rules come into play, this "unearned income" is taxed using your rates.
How the tax is applied. For 2010, the first $950 of your child's unearned income is tax-free. Tax is calculated on the next $950 using your child's federal tax rate, which can be as low as 5%. Unearned income over $1,900 is taxed at your federal income tax rate, when that rate is higher than your child's.

For an 18-year-old, the kiddie tax applies when your child's earned income — that is, money received from wages, salary, tips, commissions, and bonuses — is less than half the cost of providing necessities such as food, clothing, and shelter.

The same 50% support exception applies when your child is a full-time student and age 19 through 23.
Planning tip. Consider hiring your college student in your family business. Wages are earned income and can lessen or eliminate the kiddie tax.
Still have questions about the kiddie tax? Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com. We have answers, information, and planning strategies.

Follow IRA withdrawal rules

July 19, 2010

Follow IRA withdrawal rules

"You put your money in, and you take your money out." Unfortunately, the rules for taking withdrawals from your IRA are not as simple as those for performing the classic children's dance.

Here are three general guidelines.

Early withdrawals. You'll pay regular income tax as well as a 10% penalty on early withdrawals from your traditional IRA unless an exception applies. Early withdrawals are those you take when you're under age 59½.

Exceptions that let you avoid the penalty include amounts you withdraw to use for the following:

• certain educational or medical expenses

• medical insurance when you're unemployed

• building, buying or rebuilding your first home

You may also qualify for an exception to the early withdrawal penalty if you're a military reservist, or when you inherit an IRA, take nontaxable distributions, or roll over eligible amounts within 60 days of the withdrawal.
Required minimum distributions. For 2010, you're once again required to take distributions from your traditional IRA when you reach age 70½. The penalty for withdrawing less than the required amount is 50% of the shortage.

The required minimum distribution rules also apply when you inherit a traditional or a Roth IRA.
Excess contributions. When you deposit more than the allowable maximum contribution into your IRA, you generally need to withdraw the excess along with any earnings by the due date of your tax return. Otherwise you may owe a 6% penalty, which can be assessed each year for as long as you leave the extra amount in your IRA.

The maximum IRA contribution limit for 2010 is $5,000 (plus an extra $1,000 if you're over age 50) or your earned income, whichever is less.

Homebuyer Tax Credit Extended

July 12, 2010
Homebuyer tax credit extension
If you signed a contract before May 1 to buy a home, but have been unable to close the deal, you still have time to apply for the homebuyer tax credit. The deadline for finalizing the paperwork on your new home has been extended through September 30, 2010.

Here's what you need to know:

The extension applies only if you already had a contract in place by April 30, 2010. The new deadline is available for first-time homebuyers and long-time residents.
The maximum credit remains unchanged ($8,000 for first-time homebuyers and $6,500 for long-time residents), as do other rules for qualifying.
You can claim the credit on your 2009 or 2010 federal income tax return. You'll have to complete Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and attach proof that you meet the requirements.
Not sure if you qualify? We can help. Please call us at (949) 453-1521 or email us at taxalert@maxwellcompany.com for more information.

July 2010
Is it smart to use retirement savings to pay off a mortgage?
In these days of high unemployment and declining home values, people are searching for ways to regain control over their financial lives. For many, that includes paying off debts as quickly as possible. After all, if you no longer have a mortgage, the banker can't foreclose on your house. If your credit card balances are zero, the collection agency will stop calling. If you've retired your auto loan, the repo guy won't be knocking on your front door.

But sometimes paying off debts — especially a mortgage — shouldn't be your first priority. For example, it's wise to establish an emergency fund to keep from going further into debt when you encounter the inevitable bumps on life's journey. Also, if your employer matches contributions to your retirement account, it makes sense to contribute up to the matching amount before paying off debts. That's because an employer match represents a very high return on your investment. And the longer your money is invested, the longer it has to grow. With a relatively conservative return of 6%, your money will double in about 12 years and double again in 24 years.

By withdrawing retirement funds to pay off a low-interest mortgage, you lose the opportunity to earn a return on those withdrawals. Let's say you pull $100,000 from your retirement account to pay off a 5% fixed-rate mortgage. If you plan to retire in 24 years and the return on your investments averages 6%, that $100,000, if left in the account, could have grown to $400,000 by your retirement date. Withdraw the money now and that earning power is lost forever. You're giving up a return of 6% to pay off a debt that costs less than 5% (when tax-deductible interest is factored into the equation). In addition, withdrawals from tax-advantaged retirement accounts can generate enormous tax consequences. If you're under age 59½, expect to pay a 10% penalty (in addition to general income taxes) on that $100,000. That means you'll need to withdraw substantially more than $100,000 to pay off your mortgage today.

Generally speaking, it's prudent to establish an emergency fund, contribute to retirement accounts (at least up to the matching percentage offered by your employer), and pay off high-interest credit cards and loans — before you consider raiding a 401(k) account to pay off the mortgage.

Tax Tip of the Week

Don't overlook the Roth five-year holding requirement
The new, less restrictive rules in effect this year for Roth conversions may have you pondering whether now's a good time to convert your traditional IRA funds to a Roth IRA. While your decision involves many factors, one wrinkle to consider is the five-year holding period for converted assets.
The time limit has nothing to do with distributions of regular contributions from your Roth. As you know, you can withdraw regular contributions at any time, tax- and penalty-free, no matter your age. That's because you deposit those amounts into your Roth using money on which you've already paid income tax.
Rather, the five-year holding period comes into play when you're under age 59½ at the time you make a Roth conversion. In that case, you'll generally have to wait five years (or until you turn 59½, whichever comes first) before you can pull the "conversion assets" out penalty-free.
When you fail to meet the five-year rule, the penalty is the same 10% you'd pay if you took an early withdrawal from your traditional IRA. That's the purpose of the five-year rule — to discourage premature distributions from retirement accounts.
Once you reach age 59½, the 10% penalty disappears, though the five-year holding period for converted assets may still apply. For example, say you use the conversion to fund an initial Roth. During the first five years your new account exists, you'll pay ordinary income tax on withdrawals of the income earned from the converted amounts.
The five-year holding period can also affect your beneficiaries. For instance, if you had no prior Roth account before making a conversion, your beneficiaries will pay ordinary income tax on distributions of earnings. However, they can withdraw converted amounts with no federal income tax or penalty.
Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com to discuss this and other Roth conversion rules. We're ready to help.