Retirement: The Accumulation Years

Traditional IRA

Used by

	Wage earners
	Non-employed spouses who file a joint tax return

Features

	Contributions may be tax-deductible
	Can be used with any retirement plan with limitations if deductions are to be taken

Eligibility

	Must have compensation during the year or be married to a wage earner
	No additional contributions may be made beginning in the year the individual becomes 70 ½

Contribution Limits
Year Over 50* Other
2006 $5,000 $4,000
2007 $5,000 $4,000
2008 $6,000 $5,000
2009+ indexed for inflation
*Over 50 by the end of the year

Deadline to Set Up/Contribute
Tax-filing deadline not including extensions
(usually April 15)

Distributions
Minimum distributions must begin at age 70 ½

Unless rolled over within 60 days, distributions taken prior to age 59 ½ may be subject to a 10% federal penalty in addition to ordinary income taxes.
Exceptions:
1- A timely withdrawal of an excess contribution
2- Due to death or permanent disability
3- If taken as substantially equal payments over single or joint life expectancy
4- Used for a first home purchase, cap is $10,000
5- Post-secondary education for the investor or a dependent
6- Deductible medical expenses
7- For certain unemployed individuals, medical insurance payments

Roth IRA

Used by

	Wage earners
	Non-employed spouses who file a joint tax return

Features

	Direct rollovers from other retirement plans enable the individual to avoid the 20% federal withholding
	Tax-free distributions

Eligibility

	AGI (adjusted gross income) can be up to or below $99,000 (single) and $156,000 (joint)
	Reduced contribution allowed when AGI is $99,000 - $114,000 for single filers and $156,000 - $166,000 for joint filers

Contribution Limits
Same as IRA

Deadline to Set Up/Contribute

	Tax filing deadline not including extensions (usually April 15)
	Contributions only allowed for 1998 and later

Distributions

Tax-free distribution events for accounts established at least five calendar years and
	Attainment of age 59 ½
	Permanent disability
	First time home purchase ($10,000 lifetime cap)
	Death
No minimum distributions required at age 70 ½
Distributions taken before the end of the four-year spread, which is available for and ensuing from 1998 Roth conversions, may increase the payment of conversion taxes.
Distributions of amounts that were previously taxed at conversion are also subject to the 10% federal penalty if taken within five years of the conversion.

Rollover IRA

Used by

	Distributions from other tax-qualified plans
	Retirement plan distributions received by a surviving spouse

Features

	A direct rollover from a 401(k) or other retirement plan, enables the investor to avoid the 20% federal withholding
	Distributions may be rolled over within 60 days

Eligibility
None

Contribution Limits
None

Deadline to Set Up/Contribute

	If the distribution is received by the participant (or surviving beneficiary), it must be rolled over within 60 days of receipt
	If the failure to meet this requirement is beyond the reasonable control of the recipient, the IRS may be petitioned for a waiver of the 60-day rule

Distributions
Same as IRA

Roth Conversion IRA

Used by
Individuals with Traditional IRAs, SEPs or SIMPLE-IRAs who do not expect to take withdrawals for at least five years. SEP IRAs & SIMPLE IRAs may be converted after two years

Features

	Tax-free growth and distribution of assets (provided certain conditions are met)
	Current income taxes must be paid on the amount converted to a Roth

Eligibility

	Currently must have AGI below $100,000 to convert from a traditional IRA. Conversion income is not included in the calculation
	Married couple filing separately are not eligible
	In 2010 all taxpayers can convert to Roth IRAs from a traditional IRA.

Contribution Limits
None

Deadline to Set Up/Contribute

	The year the distribution from the previous retirement plan occurs determines the tax year of the conversion
	Contributions must be in cash

Distributions

Tax-free distribution events for accounts established at least five calendar years and
	Attainment of age 59 ½
	Permanent disability
	First time home purchase ($10,000 lifetime cap)
	Death
No minimum distributions required at age 70 ½
Distributions taken before the end of the four year spread which is available for and ensuing from 1998 Roth conversions may increase the payment of conversion taxes
Distributions of amounts that were previously taxed at conversion are also subject to the 10% Federal penalty if taken within five years of the conversion
Distributions that do not meet the tax-free distribution events may be taxable
Contributions/conversions are taxed first, then earnings
See Traditional IRA distribution rules for an explanation of the 10% penalty exceptions

SEP-IRA

Used by
Self-employed individuals or small business owners with variable earnings who want a retirement plan with minimal IRS filings and paperwork

Features
• Easy to establish and maintain
• Low cost
• Minimal IRS filings and paperwork
• Flexible employer contribution limits
• Employer is not committed to contributions for any future years
• Only the employer makes contribution
• The employer is making contributions to his and his employees IRAs. Same % contribution for all eligible employees.

Eligibility
Must include all employees who
• Are at least age 21
• Have earned at least $450 (indexed) in three of the preceding five years
May exclude
1-Union employees
2-Certain nonresident aliens (no age requirements)

Contribution Limits

	Up to 25% of total payroll and not more than $45,000 in 2007 per participant. Self-employed individuals, partners and sole proprietors use a special formula to determine the amount they contribute to their SEP. The calculation is best left up to their accountants who have access to the necessary numbers to complete it.
	Amount of annual compensation taken into account in determining benefits will be indexed for inflation for tax years 2003-2010

Deadline Set Up/Contribute
Employer’s tax-filing deadline plus extensions for prior year deductibility

Distributions
Minimum distributions must begin at age 70 ½

Unless rolled over within 60 days, distributions taken prior
to age 59 ½ may be subject to a 10% federal penalty in
addition to ordinary income taxes

Exceptions:
1- A timely withdrawal of an excess contribution
2- Due to death or permanent disability
3- If taken as substantially equal payments over single or joint life expectancy
4- Used for a first home purchase- cap is $10,000
5- Post-secondary education for the investor or a dependent
6- Deductible medical expenses
7- For certain unemployed individuals, medical insurance payments

SARSEP-IRA

Used by

	Small proprieters or small businesses with less than 25 employees

-New SARSEPs could not be established after 12/31/96

Features

	Contributions may be made by both employee and employer
	In over 50% of the firms, employees must participate

Eligibility
Service with the employer in at least three of the last five years

Contribution Limits
Employee contributions
Year Over 50 Other
2006 $20,000 $15,000
2007 $20,500 $15,500

The employer contribution may not exceed the lesser of 25% of the employees compensation or $45,000 for 2007.

Deadline to Set Up/Contribute
Tax filing deadline not including extensions (usually April 15)

Distributions
Minimum distributions must begin at age 70 ½

Unless rolled over within 60 days, distributions taken prior to age
59 ½ may be subject to a 10% federal penalty in addition to ordinary income taxes.

Exceptions:
1- A timely withdrawal of an excess contribution
2- Due to death or permanent disability
3- If taken as substantially equal payments over single or joint life expectancy
4- Used for a first home purchase, cap is $10,000
5- Post-secondary education for the investor or a dependent
6- Deductible medical expenses
7- For certain unemployed individuals, medical insurance payments

401K

	Pretax contributions may reduce employee’s current taxable income
	Primarily employee funded
	May include discretionary employer contributions and/or employer matching contributions
	Flexibility in plan design
	May allow for plan loans

Must include all employees who
• Are over 21 years old
• Have completed one year of service (must have worked at least 1,000 hours each year)

May exclude
1-Union employees
2-Certain nonresident aliens (no age requirements)

Employee contributions
Year Over 50 Other
2006 $20,000 $15,000
2007 $20,500 $15,500

	Plan must be adopted by employer’s year end.
	Employer contributions must be made by the employer’s tax-filing deadline, plus extensions.

Distribution Events

• Attainment of the plan’s normal
retirement age
• Financial hardship
• Permanent disability
• Separation from service
• Death
• Minimum distributions required at age 70 ½ or retirement whichever is later.
	20% federal withholding for distributions before age 59 ½ that are not rolled over to an IRA or into another 401(k). Financial hardship distributions are not eligible for rollover treatment and are not subject to mandatory withholding.
	Distributions received by plan participants before age 59 ½ are subject to 10% federal penalty
	Distributions received by plan participants are subject to ordinary income taxes

Simple IRA
Businesses with 100 or fewer eligible employees seeking an alternative to the 401(K) plan
Self-employed individuals with modest incomes (no employees required)

• Fewer administrative requirements than the 401(K)
• Easy to set up and maintain
• Pre-tax contributions may reduce employee’s current taxable income
• 100% immediate vesting
• No nondiscrimination testing and no participation requirements

Must include all employees who:
• Earn at least $5,000 during two preceding years and can be reasonably expected to earn at least $5,000 during the current year
May exclude
1-Union employees
2-Certain nonresident aliens

Employee contributions
Year over 50 other
2006 $12,500 $10,000
2007 $13,000 $10,500
Employer contributions
• For each calendar year, the employer will contribute a matching contribution to each employee’s SIMPLE equal to the employee’s salary reduction contribution up to a limit of 3% of the employees compensation for the year.
• The employer may reduce the 3% if
1- The limit is not reduced below 1%;
2- The limit is not reduced for more than 2 years during the 5-year period ending with the calendar year the reduction is effective;
3- Each employee is notified of the reduced limit within a reasonable period of time before the employees’ 60-day election period.
• Instead of a matching contribution, the employer may make 2% nonelective contribution if certain conditions are met.

New plans may be established between January 1 and October 1

The above rule does not apply to a new employer who comes into existence after October 1 of the year the plan is established

Employer contributions must be made by employer’s tax filing deadline plus extensions

Minimum distributions must begin at age 70 ½

Unless rolled over within 60 days, distributions taken prior
to age 59 ½ may be subject to a 10% federal penalty in
addition to ordinary income taxes.
Exceptions:
1- A timely withdrawal of an excess contribution
2- Due to death or permanent disability
3- If taken as substantially equal payments over
single or joint life expectancy
4- Used for a first home purchase- cap is $10,000
5- Post-secondary education for the investor or a dependent
6- Deductible medical expenses
7- For certain unemployed individuals- medical insurance
payments
The 10% penalty is increased to 25% if the distribution is taken within the 1st two years of plan participation

Profit Sharing

Used By
Companies that want to offer employees a tax deferred savings plan and want the flexibility to change contributions annually

Features

	Employer has flexibility to vary the contribution rate annually
	Employer funded plan
	Vesting schedule available

Eligibility
Must include all employees who
• Are over 21 years old
• Have completed one year of service (must have worked at least 1,000 hours each year)

May exclude
1-Union employees
2-Certain nonresident aliens (no age requirements)

Contributions 2007
Up to 25% of total eligible payroll (and not more than $45,000 per participant)

Deadline to Set Up/Contribute

	Plan must be adopted by employer’s year end
	Employer contributions must be made by the employer’s tax-filing deadline, plus extensions

Distributions

Distribution Events
• Attainment of the plan’s normal
retirement age
• Financial hardship
• Permanent disability
• Separation from service
• Death
• Minimum distributions required at age 70 ½
or retirement whichever is later


20% federal withholding for distributions before age 59 ½ that are not rolled over to an IRA. Financial hardship distributions are not eligible for rollover treatment and are not subject to mandatory withholding.

Distributions received by plan participants before age 59 ½ are subject to 10% federal penalty

Distributions received by plan participants are subject to ordinary income taxes


Profit Sharing & Money Purchase Plans- 5% owners of the company sponsoring the plan must begin taking distributions by April 1 of the year they reach 70 ½.

Money Purchase

Used By
Companies that are willing to commit to the same percentage contributions each year

Features
• Employer and/or employee contributions.
• Annual contributions are required based on a fixed contribution rate
• Vesting schedule available
• May be used in conjunction with a Profit- Sharing Plan

Eligibility
Must include all employees who
• Are over 21 years old
• Have completed one year of service (must have worked at least 1,000 hours each year)

May exclude
1-Union employees
2-Certain nonresident aliens (no age requirements)

Contributions 2007
The lesser of 25% of compensation or $45,000 in 2007. Future years are subject to cost-of-living adjustments.

Deadline to Set Up/Contribute

	Plan must be adopted by employer’s year end
	Employer contributions must be made by the employer’s tax-filing deadline, plus extensions

Distributions

Distribution Events
• Attainment of the plan’s normal
retirement age
• Financial hardship
• Permanent disability
• Separation from service
• Death
• Minimum distributions required at age 70 ½
or retirement whichever is later


20% federal withholding for distributions before age 59 ½ that are not rolled over to an IRA. Financial hardship distributions are not eligible for rollover treatment and are not subject to mandatory withholding.

Distributions received by plan participants before age 59 ½ are subject to 10% federal penalty

Distributions received by plan participants are subject to ordinary income taxes

Money Purchase Plans- Distributions from plans valued over $5,000 require the consent of the participant’s spouse unless a Qualified Joint and Survivor Annuity is used.

403B

Used by
Certain tax-exempt organizations: public schools, universities, colleges, hospitals and churches

Features

	Pre-tax contributions may reduce employee’s current taxable income
	Employer may make matching or discretionary contributions
100% vesting immediately
	Invest in annuities or mutual funds

Eligibility
Employees of a qualified tax-exempt organization

Contributions
Year Over 50 Other
2006 $20,000 $15,000
2007 $20,500 $15,500



403(b) participants who have been with their employer for at least 15 years may defer an additional $3,000 if they have contributed less than an average of $5,000 in previous years. There is a $15,000 lifetime maximum.

Deadline to Set Up/Contribute

	No deadline to establish
	Salary deferral made only on a calendar-year basis

Distributions

Distribution Events
• Attainment of age 59 ½
• Financial hardship
• Permanent disability
• Separation from service
• Death
• Minimum distributions required at age 70 ½
or retirement whichever is later


20% federal withholding for distributions before age 59 ½ that are not rolled over to an IRA. Financial hardship distributions are not eligible for rollover treatment and are not subject to mandatory withholding.

Distributions received by plan participants before age 59 ½ are subject to 10% federal penalty

Distributions received by plan participants are subject to ordinary income taxes

Click here to review other investment vehicles that can be used to augment tax qualified retirement accounts.

All of the above contains material that is believed to be accurate; however, Federal tax laws are complex and subject to change. Neither David Lerner Associates nor its employees give legal or tax advice. Investors should consult their attorney or tax advisor before acting on any tax advice.

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