Posts by Paul McEwan, CPA, MT, AIFA, Director of Benefit Plan Services:
5 Tax Savings Strategies You May Have Missed
We already know that making contributions to tax deferred retirement accounts (i.e. deductible IRAs, SEPs, SIMPLEs and 401(k) plans) is the most obvious way to reduce your current year taxes, but with a little planning, you could develop a strategy to avoid paying future taxes as well.
Take a look at these five tax advantage savings ideas and discover how easy it can be to hold on to more of your money.
1. Tax exempt municipal bonds
The interest that accumulates on tax exempt municipal bonds is exempt from federal taxes and, in some cases, state taxes. While the IRS requires you to report this income on your tax return, the agency is only collecting the data for tracking purposes. There are a few exceptions though, so speak with your financial advisor to find out if this strategy will work for you.
2. Cash-value life insurance policies
One strategy that reinforces the claim that a little foresight goes a long way is the option to utilize the perks of a cash-value life insurance option. Doing so can provide you with the assurance of knowing your loved ones will be provided for in your absence while helping you secure an additional source of tax-free funds. This approach, which is also known as permanent life insurance, lets policy holders use their cash value as a tax-sheltered investment while providing them with the means to pay policy premiums later in life. Then, when you pass away, your policy’s death benefit proceeds will transition to your beneficiary tax free.
3. Roth IRAs
Those who are over the age of 59 ½ and who have had active Roth IRAs over the last five years are welcome to withdraw their earnings without the worry of paying pesky income taxes. Do you have a traditional IRA but would like to make the switch to a Roth IRA? This article will help outline the benefits and drawbacks of a conversion.
4. Health Savings Accounts
If you are looking for an effective way to hold on to your money, look no further than a Health Savings Account. Your HSA works kind of works like a deductible Roth IRA – one that allows you to use the funds you invest into the account exclusively for medical expenses. This article provides you with several valuable HSA perks, including triple tax benefits and rapid wealth accumulation.
5. Gift your IRA’s minimum distribution
If you’re at least 70-½ years of age, you can take tax-free distributions from your traditional or Roth IRA and donate up to $100,000 of those funds to a qualified charity. While other statutory requirements apply, this is a great opportunity for you to allocate your retirement funds for good a good cause. You can learn more about making a wise charitable contribution by listening to episode 11 and episode 13 of our podcast, unsuitable on Rea Radio.
Opportunities to keep more money in your pocket do exist, but you may need a financial advisor to help you unearth the savings. Check out Unsuitable on Rea Radio today and subscribe to the podcast on iTunes or SoundCloud to tap into expert financial advice and business insight when it’s convenient for you.
By Paul McEwan, CPA, MTax, AIFA (New Philadelphia office)
Looking for more savings strategies? Check out these great posts:
Do your employees dream of spending their golden years on a sun-drenched beach, sipping tropical drinks from a coconut shell? Or do you think they’re looking forward to taking on a part-time job at age 70 to pay medical bills and their mortgage? Like you, they’re probably expecting an R&R-fueled retirement – but they need your help getting there.
Read Retirement Roulette
An employer-sponsored retirement plan is a great tool for business owners. Not only do retirement plans provide businesses with leverage when it comes to attracting and retaining a skilled workforce, employers that make contributions to their employee’s accounts are entitled to tax incentives – which gives you more control over your company’s cash flow.
From Business Strategy To Retirement Planning
Whether your company presently offers a retirement plan or is planning to beef up its benefits package, work with a retirement plan advisor who can review your options and identify the plan that best addresses your company’s unique challenges. You’ll need to:
- Identify The Primary Purpose Of Your Retirement Plan
Will your retirement plan be used as a recruitment tool or as a tax shelter? While all plans accomplish a little of both, make sure your plan design meets your needs. For example, when a closely held business offers a retirement plan, its primary goal is to provide maximum retirement benefits and income tax deferral to the owners, while minimizing the cost of benefits to the employees. Incorporating a retirement plan into your existing benefit package is also an opportunity to diversify your assets away from the reach of creditors – making you less dependent on the value of your company to provide an income stream in retirement.
- Get To Know Your Team
Does your company hire younger workers? Do you have an established workforce that will retire from your company? Do you have high turnover? What does your projected workforce growth look like? Your plan design should consider your demographic information – and promote the short- and long-term financial wellness of your employees and your business.
- Put Your Own Retirement Goals In Perspective
Your employees aren’t the only ones looking at your employer-sponsored retirement plan as a dependable source of retirement income. You and other key employees will likely use the plan as well. That’s why, during the design phase, your advisor will take a look at the current and projected profitability of your company alongside the ratio of key employees and the company’s other employees.
When all is said and done, your plan design could be the thing that stands between your employees and a comfortable retirement – or it could be what lets them reap the benefits of all their years of hard work.
This is a great time of year to explore your options. Email Rea & Associates to learn more.
By Paul McEwan, CPA, MT, AIFA (New Philadelphia office)
While I don’t really believe David Lee Roth and Van Halen were thinking about SEP or SIMPLE IRA retirement plans when they performed their 1978 classic rock song, “Runnin’ with the Devil,” the connection between the two is an easy one to make.
“I found the SIMPLE life ain’t so simple”
The many small business clients we work with who choose to sponsor these types of retirement plans do so because they are inexpensive to administer and they enable our clients to provide a reasonable retirement benefit for themselves and to their employees. However, these plans are far from simple to operate and, if you’re not on your game, can be full of costly traps. The “Devil” is in the details as they say.
Top 5 SEP and SIMPLE Compliance Failures
Here is a rundown of the top five compliance failures we see. If not identified and corrected in a timely manner, these compliance concerns can result in the loss of favorable tax benefits for you and your employees or potentially large penalties and corrective contributions for your business.
- No Current Plan Document – All retirement plans require a governing document that identifies the plan sponsor (and any related employers) and defines the plan’s terms. The IRS provides a model document for you to use for these types of plans, but you have to complete it and keep it in your plan files.
- All Employees are Not Covered – Both SEPs and SIMPLE plans require that all employees (including employees of related employers) meeting a minimum eligibility requirement be covered and that they receive the same contribution (as a percentage of their compensation). Other than for minimal service and age requirements specified in the plan document, no other employees may be excluded.
- Using the Wrong Definition of Compensation – Compensation used to determine the contributions that need to be made to the plan generally includes all wages, bonuses, tips, commissions and any elective salary deferral contributions, and is limited to a certain dollar amount depending on the year (for 2014 the limit was $260,000).
- Untimely Employee Notices and No Summary Plan Description – Sponsors of SIMPLE IRA plans need to tell employees before the beginning of each year whether they intend to make a match contribution or a profit sharing contribution . Eligible employees must also receive a summary of the basic SEP or SIMPLE plan provisions.
- Untimely Remittance of Employee Salary Deferrals – All employee contributions must be remitted to the IRA of each participant within 30 days after the month in which the employee would have otherwise received the money.
A great time to review your compliance with retirement laws and regulations is during tax time at year end. Whether you need help understanding your plan design options or compliance requirements as a retirement plan sponsor, help is available. Email Rea & Associates for more information.
By Paul McEwan, CPA, MT, AIFA (New Philadelphia office)
If your company offers a retirement plan to its employees, make sure you are familiar with the Employee Retirement Income Security Act’s (ERISA) fidelity bonding requirements and the information you must include on your plan’s annual Form 5500.
Over the years we have noticed that many clients struggle with obtaining and keeping an active and accurate ERISA fidelity bond because of a general lack of understanding. The purpose of the fidelity bond is to protect your plan’s assets from the risk of loss due to fraud or dishonesty by employees handling the plan’s funds, such as when remitting plan contributions.
The required bonding amount is “10 percent of plan assets handled.” Because this is a difficult number to know with certainty, most plan trustee’s make sure the plan is bonded for at least 10 percent of all plan assets. This means that as your plan’s assets grow, so does your required bonding amount. There are two primary exceptions to this rule:
- The maximum required amount is $500,000 – regardless of your plan assets.
- If your plan has more than 5 percent non-qualifying plan assets, then a bond is needed to cover the amount of non-qualifying plan assets.
- “Non-qualifying plan assets” includes anything that is not a marketable security held by a bank, trust company, registered broker-dealer or insurance company.
- If a bond in the correct amount is not established, then an independent plan audit by a certified public accountant is required. These audits cost about $10,000 annually.
Even if your plan only contains qualifying plan assets, not maintaining a fidelity bond in the proper amount can be a red flag to the Department of Labor, which could prompt them to take a closer look at your plan.
NOTE: A fidelity bond is different than fiduciary insurance. Fiduciary insurance is not required, but should be in place to protect your plan fiduciaries from personal risk of loss. Your plan fiduciaries include any employee who serves as a plan trustee or who is on a plan investment committee tasked with ensuring that your plan is free from errors or omissions that could result in loss to your plan. Plan fiduciaries are personally liable for these potential losses, so having fiduciary insurance coverage is prudent (albeit not required).
To learn more about the ERISA fidelity bond requirements, email Rea & Associates.
By Paul McEwan, CPA, MT, AIFA (New Philadelphia office)
As you work to secure your retirement, you may be pleased to find out about changes to several retirement-related items that may allow you to put a little more cash away in 2015. In October, the IRS announced several adjustments to the limitations previously set on retirement planning tools as a result of an increased cost-of-living. So what does that mean to you and your retirement plan(s) of choice? Take a look:
- If you contribute to a 401(k), 403(b), 457 plan or a Thrift Savings Plan, the following changes could impact how you contribute:
- You can now invest up to $18,000 annually – this is an increase up from $17,500.
- If you’re 50 years old or older and are trying to catch-up on your retirement savings, you may now invest $6,000 annually. The previous catch-up contribution limit was $5,500.
- If you contribute to an individual retirement account (IRA), you will see the following changes in 2015:
- The annual limit and additional catch-up contribution limit for an IRA for individuals 50 years old and older will not change in 2015. The annual contribution is $5,500 and the catch-up contribution is $1,000.
- Single filers and heads of household who are covered by a workplace retirement plan and have adjusted gross incomes (AGI) between $61,000 and $71,000 will no longer be eligible to receive a deduction for contributing to their traditional IRA. This has increased from $60,000 and $70,000 in 2014.
- Married couples who file jointly, where one spouse makes an IRA contribution that is covered by a workplace retirement plan, will see an increased income phase-out range for taking the deduction as well. The new range is $98,000-$118,000 – up from $96,000-$116,000.
- If you’re an IRA contributor, not covered by a workplace retirement plan, but are married to someone who is covered, the deduction is phased out if you and your spouse’s income falls between $183,000 and $193,000 – up from $181,000 and $191,000.
- The phase-out range for a married taxpayer who files a separate return and who is covered by a workplace retirement plan will not change in 2015. The range remains $0 to $10,000.
- If you make contributions to a Roth IRA, you will see the following changes:
- The phase-out range for married couples filing jointly is $183,000 to $193,000 – an increase from $181,000 to $191,000.
- The phase-out range for single filers and heads of household is $116,000 to $131,000 – an increase from $114,000 to $129,000.
- The phase-out range for a married individual who files a separate return is unchanged.
As we approach the end of the year, there’s not a better time to evaluate your current retirement plan situation and determine if you need to make any changes for 2015. To learn more about how these retirement plan changes could impact your financial situation, email Rea & Associates.
By Paul McEwan, CPA, MT, AIFA (New Philadelphia office)
You may find that the spotlight isn’t for you. But as the fiduciary of your company’s retirement plan, the spotlight is all on you. The Department of Labor (DOL) has placed a major emphasis on fiduciary responsibility in the past few years and continues to push the matter in its initiatives. So it’s important that you understand what you’re responsible for.
To meet your fiduciary responsibilities as a retirement plan sponsor, you need to understand the fiduciary standards of conduct as adopted by the Employee Retirement Income Security Act (ERISA). With these fiduciary responsibilities, there is also potential liability. Fiduciaries that don’t follow the basic standards of conduct may be personally liable to restore any losses to the plan. Pretty serious, right? To help ease your mind, here’s what you need to know.
Identifying Your Plan Fiduciaries
A plan’s fiduciaries will ordinarily include the named trustee in the document, investment advisors and all individuals exercising discretion in the administration of the plan. Under ERISA regulations, fiduciaries are responsible for:
- Loyalty to the plan participants – acting in their exclusive best interest
- Prudence – documenting expertise and a decision-making process
- Following the plan documents
- Diversifying plan assets
- Paying only reasonable expenses for necessary services
Mitigating Your Risk As A Fiduciary
As a fiduciary of your business’s retirement plan, you should consider these items and answer these questions to ensure that you comply with ERISA regulations:
- If participants in your plan make their own investment decisions, have you provided sufficient information for them to exercise control in making those decisions? Regulations under ERISA list the information and process required to be provided to participants in order to legally shift the responsibility for making investment decisions to the participants. Are you making the required participant fee and fund performance disclosures required annually by ERISA of all plans permitting participant investment direction?
- How frequently do you deposit participants’ contributions in the plan, and have you made sure it complies with the law? Participant contributions, including loan repayments, are required to be remitted on a timely, consistent basis. Not remitting these funds in a timely manner is considered a misuse of plan assets, which is a prohibited transaction. Not meeting this requirement creates penalties for the plan sponsor.
- If you’re hiring third-party service providers, including investment advisors, have you looked at several providers, given each potential provider the same information, and considered whether the fees are reasonable for the services provided? It’s required that you receive fee and service disclosures from all plan service providers, and you should also receive written acknowledgements from service providers serving in a fiduciary capacity. Here are some other items to consider relating to third-party service providers:
1. Have you documented your service provider hiring process?
2. Are you prepared to monitor your plan’s service providers, including investment fund performance?
3. Do you have a process in place to determine that the fees paid to service providers remain reasonable for the services provided?
- Have you reviewed your plan document in light of current plan operations and made necessary updates? Have you provided participants with an updated summary plan description (SPD) or summary of material modifications (SMM)? Plans are required to operate according to the provisions stated in the plan document and these provisions must be communicated to participants. Changes are generally permitted, but again are required to be communicated to participants. If the plan is not operating in accordance with the written plan document, the plan could be disqualified, which would result in negative tax implications for you, the plan sponsor, and the participants.
- Are individuals handling plan assets covered by a fidelity bond as required by ERISA? Have you considered purchasing fiduciary insurance to mitigate the personal risk of loss to those employees you identified that are serving as plan fiduciaries? While a fidelity bond and fiduciary insurance are slightly different, both are a form of coverage to provide protection in regards to plans. The bond insures the assets of the plan in the event of employee misconduct and the fiduciary insurance provides personal protection to fiduciaries in the event of any claims for alleged errors, omissions, or breach of fiduciary duties.
Being a plan fiduciary comes with enormous responsibility. Don’t take your fiduciary responsibilities lightly. If you’re interested in learning more about what you’re responsible for as a retirement plan fiduciary, consider registering for a FREE seminar all about knowing your fiduciary responsibility. Rea & Associates has partnered with the Human Resources Association of Central Ohio (HRACO) to provide an all-day seminar dedicated to helping fiduciaries understand their responsibilities. The seminar will feature speakers from the Internal Revenue Service (IRS) and the DOL. It will be held on Tuesday, August 26 from 8:30 a.m. to 4:30 p.m. at BMI Federal Credit Union Event Center in Dublin, Ohio. More details, including a schedule, can be found here. Click here to register for this free event.
Fiduciary Responsibility Help
Author: Paul McEwan, CPA, MT, AIFA (New Philadelphia office)
Looking for more articles about fiduciary responsibility? Check out these articles!
“If it’s not broken, don’t fix it.” A lot of people adhere to this philosophy, but in some cases, a review of how something works is not only helpful, it is required. If a business’s retirement plan seems to be working fine, and there doesn’t appear to be anything out of place, many employers believe there is no reason to review the provisions of the plan. This may be the case for a plan that was recently established, but it is always a good idea to review provisions every few years to ensure the plan is still meeting the goals of both the employer and its’ employees. Read the rest of this entry “
No one likes to hear from the IRS. But for the roughly 4,000 plan sponsors who have recently received erroneous notices, it’s extremely frustrating. Chances are if you have received a notice telling you that the IRS is assessing a penalty due to your “filing a late or incomplete” Form 5500 or 8955-SSA, it may very well be a mistake. Read the rest of this entry “
Let’s face it. You like to be prepared when it comes to your finances. So do participants of your benefit plans. That need for preparation is what has driven the recent changes in regards to fee disclosure. As a plan sponsor, you need to comply with these new requirements. Are you sure you’re keeping up with your role in the process? Read the rest of this entry “
In the last issue of Illuminations, you read about some initial consequences you may face if you find that your 401(k) plan is out of compliance with an IRS or DOL rule. In this week’s issue, check out the second part of the article that explains the statute of limitations and how you can work to rectify any issues you may have with your business’s retirement plan. To refresh your memory, you can read the first part of the article here. Read the rest of this entry “