Post by Zoinkers on Dec 1, 2006 0:05:25 GMT -5
Investor's Business Daily
Year-End Tweaks For Retirement Plan
Friday November 24, 7:00 pm ET
Donald Jay Korn
Year-end tax planning can spill over into year-to-come tax planning. Decisions may affect 2007 as well as 2006.
And your workplace's 401(k) plan probably will let you change the size of contributions at any time, up to specified amounts. Even now, you may be able to boost your 2006 deferrals to the $15,000 maximum if you're not already at that level.
If you can't hit the ceiling, increases you make by year-end can trim your tax bill for this year.
At the same time, if your company has an open season for adjusting employee benefits, you can increase next year's contribution to $15,500. That will be the maximum.
Once you reach age 50, you can make an additional catch-up contribution. That amount is $5,000 now. It will be the same in 2007.
Besides traditional 401(k) plans, Roth 401(k) plans made their debut this year. The same contribution limits apply between both types.
Say you are 35. You might put $10,000 into a traditional 401(k) and $5,000 into a Roth 401(k) for 2006.
There are no upfront tax deductions with a Roth 401(k). But you can take tax-free withdrawals after five years and after age 591/2.
Some companies that did not offer Roth 401(k)s this year may offer them for 2007. If you prefer a Roth 401(k), you should avoid making further contributions to a traditional 401(k) for this year or next.
"You can't switch money from a traditional 401(k) to a Roth 401(k) after a contribution has been made," said Elfrena Foord of Foord, Van Bruggen, Ebersole & Pajak, an investment advisory firm in Sacramento, Calif.
Other retirement plans have different caps on contributions. If your company offers a simple IRA, for example, the limit on contributions is $10,000 in 2006. It will be $10,500 in 2007.
Both years, the catch-up contribution for those age 50 or older is $2,500. Again, you might want to optimize 2006 contributions and make any desired adjustment for 2007.
Feed Your Keogh
Keogh plans for self-employment income may require year-end attention, too. You can put up to $44,000 into a defined contribution Keogh, for example, in 2006. Your 2007 cap would be $45,000.
If you want to deduct contributions to a Keogh plan for 2006, you must establish the plan by Dec. 31. That means filling out a simple form from the financial firm where you'll keep the account.
After you meet this deadline, you don't have to put the money in right away. The actual contribution can wait until the due date of the your 2006 tax return.
You can extend your filing deadline and make a contribution to a Keogh plan until Oct. 15. And you can still take a full deduction on your 2006 tax return.
Instead of a defined contribution Keogh plan, you may want to start a defined benefit Keogh. These plans can shelter more because they require you to build up a large fund within a certain time period.
As its name indicates, a defined contribution Keogh regulates how much you can put in to the account -- the contribution. A defined benefit plan dictates how much you'll eventually receive -- the benefit -- from the plan. Defined benefit Keoghs generally work best if you're over 50 years of age and can afford large yearly contributions.
"A self-employed individual starting a plan in his 60s might be able to make deductible contributions over $100,000 for this year," said Lew Alt-fest, a financial planner in New York.
The timetable is the same: Establish the plan by year-end and you'll have until Oct. 15 to fund it.
The same dates also apply to solo 401(k) plans, which are available to any business that employs only the owner and perhaps a spouse.
You must set up the plan this year, and can make a contribution until Oct. 15 for a 2006 tax deduction.
The deadline for establishing and contributing to traditional IRAs and Roth IRAs for 2006 is April 16, 2007. But there is a year-end tactic to consider if you plan to convert a traditional IRA to a Roth IRA.
Withdrawals from a Roth IRA are tax-free after five years and age 591/2. So a year-end conversion cuts the five-year holding period to just over four years.
"A 2006 conversion starts the Roth IRA clock at Jan. 1, 2006, even if the conversion is at year-end," said Ed Slott, a CPA in Rockville Centre, N.Y.
So you should withdraw funds from the traditional IRA and transfer them to a Roth IRA by the end of the year.
Cost Of Converting
You'll owe income tax on the amount you convert to a Roth IRA. That's because tax was deferred while the money was in a regular IRA. And such conversions are allowed only if your income this year is no more than $100,000.
"Even if you're unsure about your income, you can convert anyway," Slott said.
If you wind up over the $100,000 limit for 2006 or if you just change your mind, you can undo the conversion with no penalty as late as Oct. 15.
Year-End Tweaks For Retirement Plan
Friday November 24, 7:00 pm ET
Donald Jay Korn
Year-end tax planning can spill over into year-to-come tax planning. Decisions may affect 2007 as well as 2006.
And your workplace's 401(k) plan probably will let you change the size of contributions at any time, up to specified amounts. Even now, you may be able to boost your 2006 deferrals to the $15,000 maximum if you're not already at that level.
If you can't hit the ceiling, increases you make by year-end can trim your tax bill for this year.
At the same time, if your company has an open season for adjusting employee benefits, you can increase next year's contribution to $15,500. That will be the maximum.
Once you reach age 50, you can make an additional catch-up contribution. That amount is $5,000 now. It will be the same in 2007.
Besides traditional 401(k) plans, Roth 401(k) plans made their debut this year. The same contribution limits apply between both types.
Say you are 35. You might put $10,000 into a traditional 401(k) and $5,000 into a Roth 401(k) for 2006.
There are no upfront tax deductions with a Roth 401(k). But you can take tax-free withdrawals after five years and after age 591/2.
Some companies that did not offer Roth 401(k)s this year may offer them for 2007. If you prefer a Roth 401(k), you should avoid making further contributions to a traditional 401(k) for this year or next.
"You can't switch money from a traditional 401(k) to a Roth 401(k) after a contribution has been made," said Elfrena Foord of Foord, Van Bruggen, Ebersole & Pajak, an investment advisory firm in Sacramento, Calif.
Other retirement plans have different caps on contributions. If your company offers a simple IRA, for example, the limit on contributions is $10,000 in 2006. It will be $10,500 in 2007.
Both years, the catch-up contribution for those age 50 or older is $2,500. Again, you might want to optimize 2006 contributions and make any desired adjustment for 2007.
Feed Your Keogh
Keogh plans for self-employment income may require year-end attention, too. You can put up to $44,000 into a defined contribution Keogh, for example, in 2006. Your 2007 cap would be $45,000.
If you want to deduct contributions to a Keogh plan for 2006, you must establish the plan by Dec. 31. That means filling out a simple form from the financial firm where you'll keep the account.
After you meet this deadline, you don't have to put the money in right away. The actual contribution can wait until the due date of the your 2006 tax return.
You can extend your filing deadline and make a contribution to a Keogh plan until Oct. 15. And you can still take a full deduction on your 2006 tax return.
Instead of a defined contribution Keogh plan, you may want to start a defined benefit Keogh. These plans can shelter more because they require you to build up a large fund within a certain time period.
As its name indicates, a defined contribution Keogh regulates how much you can put in to the account -- the contribution. A defined benefit plan dictates how much you'll eventually receive -- the benefit -- from the plan. Defined benefit Keoghs generally work best if you're over 50 years of age and can afford large yearly contributions.
"A self-employed individual starting a plan in his 60s might be able to make deductible contributions over $100,000 for this year," said Lew Alt-fest, a financial planner in New York.
The timetable is the same: Establish the plan by year-end and you'll have until Oct. 15 to fund it.
The same dates also apply to solo 401(k) plans, which are available to any business that employs only the owner and perhaps a spouse.
You must set up the plan this year, and can make a contribution until Oct. 15 for a 2006 tax deduction.
The deadline for establishing and contributing to traditional IRAs and Roth IRAs for 2006 is April 16, 2007. But there is a year-end tactic to consider if you plan to convert a traditional IRA to a Roth IRA.
Withdrawals from a Roth IRA are tax-free after five years and age 591/2. So a year-end conversion cuts the five-year holding period to just over four years.
"A 2006 conversion starts the Roth IRA clock at Jan. 1, 2006, even if the conversion is at year-end," said Ed Slott, a CPA in Rockville Centre, N.Y.
So you should withdraw funds from the traditional IRA and transfer them to a Roth IRA by the end of the year.
Cost Of Converting
You'll owe income tax on the amount you convert to a Roth IRA. That's because tax was deferred while the money was in a regular IRA. And such conversions are allowed only if your income this year is no more than $100,000.
"Even if you're unsure about your income, you can convert anyway," Slott said.
If you wind up over the $100,000 limit for 2006 or if you just change your mind, you can undo the conversion with no penalty as late as Oct. 15.