Investment tax planning for retirement: how to make taxes work for the client.EXECUTIVE SUMMARY * FOR CLIENTS DREAMING OF A FINANCIALLY SECURE retirement, CPAs need to offer assistance on which savings vehicles--qualified and nonqualified--will help them reach their goal. This decision involves both tax and nontax considerations. * CLIENTS PREPARING FOR RETIREMENT HAVE a wide variety of savings vehicles available to them including 401(k) plans, regular and Roth IRAs Roth IRA An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first and other qualified plans. CPAs can recommend clients also set aside funds in other aftertax investment vehicles. * IN RECOMMENDING RETIREMENT SAVINGS OPTIONS, CPAs have to keep in mind certain rules including minimum distribution requirements, premature withdrawal penalties and liquidity concerns. * CLIENTS SHOULD CONTRIBUTE AS MUCH AS POSSIBLE on a pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern basis to their 401(k) plans, particularly those that offer employer matching, which immediately boosts the plan's "return." Clients over age 50 can make additional, catch-up catch-up n. 1. An approach or strategy intended to overcome a disadvantage or lead: The competition will be playing catch-up for the rest of the season. 2. contributions. * THERE ARE SOME SAVINGS OPTIONS CPAs SHOULD encourage clients to avoid. These include tax-deferred annuities tax-deferred annuity See tax-sheltered annuity (TSA). , which usually carry high fees, and nondeductible non·de·duct·i·ble adj. Not deductible, especially for income-tax purposes. Adj. 1. nondeductible - not allowable as a deduction deductible - acceptable as a deduction (especially as a tax deduction) IRAs; a Roth IRA would be a better alternative. As many Americans do, Sam (1) (Security Accounts Manager) The part of Windows NT that manages the database of usernames, passwords and permissions. A SAM resides in each server as well as in each domain controller. See PDC and trust relationship. and Sue dream of a stress-free retirement--enjoying an Alaskan cruise, visiting New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. or just strolling through the park. For this couple, tomorrow cannot come soon enough. Regrettably, for some retirees tomorrow may bring with it some disappointment. Living one's retirement dreams requires much more savings and financial planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against than most people realize. Today's prospective retirees are experiencing neither the increase in real income nor the corporate stability that past generations have enjoyed. Employers have shifted the risk of preparing for retirement to employees by replacing defined-benefit plans Defined-Benefit Plan An employer-sponsored retirement plan for which retirement benefits are based on a formula indicating the exact benefit that one can expect upon retiring. Investment risk and portfolio management are entirely under the control of the company. , which offer a guaranteed monthly retirement benefit, with defined-contribution and 401(k) plans, which are not guaranteed. Couples such as Sam and Sue--and single individuals as well--realize they need help preparing for retirement and are turning to their CPAs for professional help. One question clients have is whether they should put their savings in tax-deferred tax-de·ferred adj. 1. Of or relating to an investment that is not liable to taxation until income is withdrawn or an appointed date is reached. 2. or taxable accounts. They think tax-deferred investments would be better for them, but they don't don't 1. Contraction of do not. 2. Nonstandard Contraction of does not. n. A statement of what should not be done: a list of the dos and don'ts. fully understand the impact taxes will have on their retirement savings. And they worry about the liquidity of those funds and any related premature-withdrawal penalties. In addition they wonder what effect tax-rate changes after they retire will have on the savings vehicles they select today. This article answers these questions and provides a framework to help CPAs counsel clients like Sam and Sue on their choice of retirement savings vehicles. ACCUMULATING ASSETS FOR RETIREMENT CPAs can begin this process by identifying available savings vehicles. Clients have several options for accumulating retirement capital--among them taxable accounts, deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). pension plans, nondeductible IRAs and Roth IRAs. The various vehicles are best categorized cat·e·go·rize tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es To put into a category or categories; classify. cat by their tax treatment. Clients who understand the differences can make better decisions about how best to accumulate Accumulate Broker/analyst recommendation that could mean slightly different things depending on the broker/analyst. In general, it means to increase the number of shares of a particular security over the near term, but not to liquidate other parts of the portfolio to buy a security funds for their retirement. Most likely, they will use more than one vehicle to accomplish their goals. Exhibit 1, page 66, summarizes the tax treatment of some of the more common savings vehicles. The tax consequences differ at inception, during the investment period and at withdrawal. At inception, the initial savings amount the clients place in a taxable account, a nondeductible IRA Ira, in the Bible Ira (ī`rə), in the Bible. 1 Chief officer of David. 2, 3 Two of David's guard. IRA, abbreviation IRA. or a Roth IRA is made with aftertax dollars. Deductible pensions are funded with pretax dollars because these contributions escape current taxation. During the investment period, the returns a taxable account generates are taxed annually at either ordinary income or capital gains rates. In contrast, returns are not taxed in deductible pensions, nondeductible IRAs or Roth IRAs. At withdrawal, the accumulated ac·cu·mu·late v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates v.tr. To gather or pile up; amass. See Synonyms at gather. v.intr. To mount up; increase. returns in a nondeductible IRA are taxed at ordinary income tax rates. In a Roth IRA, withdrawals are tax-free tax-free adj. Not subject to taxation; tax-exempt. tax-free Adjective not needing to have tax paid on it: a tax-free lump sum Adj. 1. (if the client began the Roth at least five years earlier and takes withdrawals after age 59 1/2). In a deductible pension, all withdrawals are taxed at ordinary income rates. AFTERTAX RETURNS Sam and Sue both are 52 years old and plan to retire in nine years. They have taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. of $100,000 before considering any deductible retirement accounts. Since their combined federal and state income tax rate totals 35%, they have $65,000 of aftertax income. Because the couple needs only $59,000 to meet their living expenses, they plan to save $6,000 of aftertax dollars each year for the next nine years. Unless unexpected emergencies occur, the couple will not need to use these funds before age 72. Sam and Sue participate in their respective employers' 401(k) plans, and each is eligible to contribute up to $12,000. Their employers match 50% of the first $5,000. Each spouse spouse A legal marriage partner as defined by state law expects to contribute $5,000 annually. Sam and Sue need help determining the savings vehicles that will provide them with the greatest amount of aftertax funds in 20 years. Because of employer matching, their first contributions should go to their 401(k) plans. Putting $5,000 in such a plan is the equivalent of investing $7,692 in aftertax dollars. The employer's matching contributions Matching Contribution A type of contribution an employer chooses to make to his or her employee's employer-sponsored retirement plan. The contribution is based on elective deferral contributions made by the employee. gives taxpayers like Sam and Sue an immediate 50% return on their investment. The next decision involves where the couple should invest their remaining $6,000. To help them determine this, the CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. can assume their tax rate will remain at 35% during the couple's working years and will range from 15% to 40% during retirement. These rates reflect the added effect of state income taxes. Investments are expected to earn 7% pretax annually. Exhibit 2, page 66, shows that the deductible pension and Roth IRA would provide the couple with substantially greater accumulated aftertax funds than the other two savings vehicles. Whether Sam and Sue should choose deductible pensions that don't offer matching contributions or Roth IRAs depends mainly on the relationship between their expected income tax rate during retirement and their current rate. Rates lower than 35% during retirement favor deductible pensions, while rates greater than 35% favor Roth IRAs. In the case of Sam and Sue, lower rates mean the "added accumulation" of $81,454 ($232,725-$151,271) from investing in a deductible pension will exceed the related tax bill. For example, a 15% tax rate during retirement results in a tax bill of $34,909, which is more than offset by the additional $81,454. Exhibit 2 shows that when the tax rate during retirement is more than 35%, the Roth IRA becomes the preferred choice because the final tax liability exceeds the added accumulation of $81,454. WITHDRAWAL AND LIQUIDITY CONCERNS Retirement accounts, other than Roth IRAs, have minimum withdrawal requirements. Individuals must begin withdrawing funds from deductible pensions by April 1 of the year following the year they turn age 70 1/2. Failure to do so can result in a 50% excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. levied on the amount by which the required minimum distribution exceeds the actual distribution. Roth IRA withdrawals do not have minimum distribution requirements, nor do they affect taxes paid on Social Security benefits. Withdrawals from deductible pensions, on the other hand, can affect how much tax a retiree pays on his or her Social Security benefits. All tax-favored retirement accounts have liquidity restrictions. In general, a 10% penalty tax applies to withdrawals from retirement accounts before age 59 1/2. This restriction is seldom as pressing as it seems. * If the savings are for retirement, this penalty tax rarely comes into play since few people retire before this age. * About 75% of pension plans sponsored by large employers allow participants to borrow against their retirement accounts. * Withdrawals for disability, major medical expenses or other special circumstances special circumstances n. in criminal cases, particularly homicides, actions of the accused or the situation under which the crime was committed for which state statutes allow or require imposition of a more severe punishment. before age 59 1/2 are not subject to the penalty tax. Again, Roth IRAs receive special consideration. In addition to the above reasons, Roth withdrawals escape the 10% penalty when used for a first-time home purchase (this distribution must be less than $10,000). Also investors can withdraw their contributions (not earnings) from a Roth IRA at any time without incurring in·cur tr.v. in·curred, in·cur·ring, in·curs 1. To acquire or come into (something usually undesirable); sustain: incurred substantial losses during the stock market crash. 2. income or penalty taxes. Any such withdrawals are first considered to be contributions. After 10 years the tax advantages of Roth IRAs and deductible pensions are so great that their aftertax accumulated amounts, even reduced by the 10% penalty, still would exceed the accumulated amounts in most taxable accounts. These withdrawal requirements and liquidity restrictions favor the Roth IRA over the deductible pension, particularly when the clients' tax rate during retirement equals or exceeds the current rate. SUGGESTED SAVINGS VEHICLES CPAs can now recommend other savings vehicles that will enable their clients to accumulate additional aftertax retirement funds. First, as discussed above, they should direct their savings to 401(k) plans that receive matching employer contributions. A 50% matching contribution provides the client with an added 50% rate of return on these accounts. Next they should decide whether to place any remaining cash in deductible pensions without matching contributions or in Roth IRAs. As previously discussed, this decision is heavily influenced by the relationship between the clients' current tax rate and the expected rate during retirement. Higher tax rates in retirement tend to favor Roth IRAs. If the clients are concerned about withdrawal requirements and liquidity restrictions, this further favors Roth IRAs. Lower tax rates during retirement make deductible pension funds the more attractive option. Because Sam and Sue should save all they can in deductible pensions and Roth IRAs, it was fortuitous that the Economic Growth and Tax Relief Reconciliation Act of 2001 significantly increased contribution limits for these vehicles. Exhibit 3, page 68, shows that in 2003, a taxpayer can individually contribute a maximum of $3,000 to an IRA plus another $500 if she or he is over age 50. Sam and Sue can invest a maximum of $12,000, plus the $2,000 catch-up contribution the 2001 act permitted for taxpayers over age 50, in their 401(k) plans. Exhibit 3 also includes contribution limits for other plans that might apply to Sam and Sue if their employment status changes in the future and to other clients like them. FUTURE INVESTMENT CONSIDERATIONS Because Sam and Sue can expect future salary increases, may change jobs or decide to save more money, they also may seek advice about savings vehicles to accommodate these changes. Earlier recommendations would remain unchanged. Currently, neither spouse can invest in a deductible IRA because both participate in employer-sponsored retirement plans and their adjusted gross income exceeds $54,000. But if in the future either qualifies for a deductible IRA and has to choose between a Roth IRA and a deductible IRA, the same analysis used in exhibit 2 applies. Again, the choice largely depends on the couple's expected tax rates before and during retirement. Exhibit 2 shows that a Roth IRA yields the highest return under expected high future tax rates. But if Sam and Sue fail to qualify for a Roth IRA because their adjusted gross income exceeds the allowed limit (currently $160,000 for married couples filing jointly) they should consider a nondeductible IRA. Any taxpayer with earned income Sources of money derived from the labor, professional service, or entrepreneurship of an individual taxpayer as opposed to funds generated by investments, dividends, and interest. , regardless of amount or participation in any other qualified retirement plan, is eligible to contribute to a nondeductible IRA. Exhibit 1 shows the major difference between the two is that the government levies ordinary income taxes on earnings a taxpayer withdraws from a nondeductible IRA while all Roth withdrawals are tax-exempt tax-ex·empt adj. 1. Not subject to taxation, as the capital or income of a philanthropic organization. 2. Producing interest that is exempt from income tax: tax-exempt bonds. n. . CPAs should remind clients that an individual's maximum contributions to all IRAs except the SEP 1. SEP - Someone Else's Problem. 2. (tool) SEP - A SASD tool from IDE. IRA and the Coverdell Education Savings Account Coverdell Education Savings Account A special individual retirement account opened on behalf of a child under age 18. Contributions of up to $2,000 annually may be made by anyone who meets specified income limits. (formerly the Education IRA) is $3,000 annually before considering any catch-up contributions. Both now and in the future, taxable accounts should be Sam and Sue's last choice as savings vehicles. Some financial advisers offer nonqualified tax-deferred annuities as an investment alternative. These annuities are essentially high-cost nondeductible IRAs. Clients invest in both vehicles using aftertax dollars that grow tax-deferred. The earnings are taxed at ordinary rates upon withdrawal. Although the tax treatment may be the same, the rates of return are not. Unlike a nondeductible IRA, a deferred annuity Deferred Annuity A type of annuity contract that delays payments of income, installments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which is an insurance product that typically carries additional annual fees of 1.25%, lowering the rate of return. Therefore, the nondeductible IRA is the preferred savings vehicle. Studies show that nonqualified annuities are usually preferred over taxable accounts only when the insurance fees are low--for example, below 0.5%--and the investment horizon is long--say, greater than 12 years. Because the typical fees exceed 0.5%, CPAs should advise couples to invest in taxable accounts before buying nonqualified tax-deferred annuities. If the clients are averse a·verse adj. Having a feeling of opposition, distaste, or aversion; strongly disinclined: investors who are averse to taking risks. to taxable accounts, advise them to consider municipal bonds or other tax-exempt investments. CPAs should advise clients considering taxable accounts to select investments that minimize expenses and get the most benefit from the federal long-term capital gains Long-term capital gain A profit on the sale of a security or mutual fund share that has been held for more than one year. tax rate. Changes in the Jobs and Growth Tax Relief Reconciliation Act of 2003 make the taxation of long-term gains Long-term gain A profit on the sale of a capital assets held longer than 12 months, and eligible for long-term capital gains tax treatment. even more favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. , as well as offering preferential pref·er·en·tial adj. 1. Of, relating to, or giving advantage or preference: preferential treatment. 2. rates on stock dividends. Most long-term capital gains after May 5, 2003, will be taxed at a maximum rate of 15% (down from 20%). For tax years beginning after 2003, dividends noncorporate taxpayers receive from domestic corporations will be taxed at 15% (or at 5% for taxpayers in the two lowest tax brackets Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. ). HOW TO BE TAX SAVVY With all that has happened in the investment markets, many clients, Sam and Sue included, are concerned their vision of retirement may not become a reality because they won't won't Contraction of will not. won't will not won't will have enough money. To make sure this doesn't does·n't Contraction of does not. happen, one of the greatest services CPAs can offer clients is to help them save in a tax-savvy manner. Not only is it important to save; it also is important to do so in the most tax-favored way. The understanding CPAs have of the tax laws gives them a distinct advantage over other investment professionals when it comes to making sure these rules work for clients not against them. Saving for Retirement Of those between the ages of 50 and 61 * 31.2% have a 401(k) plan. * 41.1% have contributed to an IRA or Keogh For the name, see Kehoe. Keogh plans are full fledged pension plans for self employed people. They are sometimes called HR10 plans and are not Individual Retirement Accounts (IRA). account. * 52% are covered by a pension plan. Source: AARP AARP, a nonprofit, nonpartisan national organization dedicated to "enriching the experience of aging"; membership is open to people age 50 or older. Founded in 1958 by Ethel Percy Andrus as American Association of Retired Persons, AARP now has over 30 million , Washington Washington, town, England Washington, town (1991 pop. 48,856), Sunderland metropolitan district, NE England. Washington was designated one of the new towns in 1964 to alleviate overpopulation in the Tyneside-Wearside area. , D.C., www.aarp.org See .org. (networking) org - The top-level domain for organisations or individuals that don't fit any other top-level domain (national, com, edu, or gov). Though many have .org domains, it was never intended to be limited to non-profit organisations. RFC 1591. PRACTICAL TIPS TO REMEMBER * Clients should direct their initial retirement savings to a 401(k) plan if their employer offers one. These plans offer professional management and employer matching up to certain limits. * A Roth IRA provides investors with a substantially greater aftertax return than a taxable investment or a nondeductible IRA. * Keep minimum distribution requirements and premature withdrawal penalties in mind when recommending savings vehicles based on the client's projected retirement age and need for income to supplement pensions and Social Security. * The high fees associated with nonqualified tax-deferred annuities mean they are seldom the best alternative for clients saving for retirement. Generally even a nondeductible IRA is a better option. Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the Resources www.aarp.org. Advice on retirement finances and lifestyle issues from the organization formerly known as the American Association of Retired Persons American Association of Retired Persons: see AARP. . www.aoa.gov/retirement. Guidance from the U.S. Department of Health and Human Services Noun 1. Department of Health and Human Services - the United States federal department that administers all federal programs dealing with health and welfare; created in 1979 Health and Human Services, HHS Administration on Aging The Administration on Aging (AoA) is an agency of the United States Department of Health and Human Services. AoA awards annual grants (computed by formulas) to State government agencies on aging and Native American tribal organizations to support programs mandated by the Congress . www.morningstar.com. Includes access to the Morningstar Retirement Center. www.investorguide.com/Retirement.htm. Information on retirement and estate planning Estate Planning The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death. Notes: Contrary to popular belief, estate planning involves much more than preparing a will, and it is not only for the . www.rothira.com. Everything there is to know about this popular retirement plan. www.seniors-site.com. Advice for adults over 50. www.spry An application framework from Adobe for building rich Internet applications using HTML. Spry takes the tedium out of writing AJAX code and also includes routines for creating animation effects and building widgets. For more information, visit http://labs.adobe.com/technologies/spry. .org. An organization that helps individuals set priorities for their retirement years.
Exhibit 1: Tax Treatment of Savings Vehicles
Tax treatment of Tax treatment during
Savings vehicles initial investment investment period
1. Taxable account Aftertax dollars Taxable at either ordinary
or capital gains rates
2. Deductible Pretax dollars Tax-deferred
pension account *
3. Nondeductible IRA Aftertax dollars Tax-deferred
4. Roth IRA Aftertax dollars Tax-exempt
Savings vehicles Tax treatment at withdrawal
1. Taxable account No additional tax is due because
tax was paid during the investment period.
2. Deductible Initial investment and earnings
pension account * are taxed at ordinary rates.
3. Nondeductible IRA Only earnings are taxed at ordinary rates.
4. Roth IRA Initial aftertax investment and earnings
are tax-exempt.
* Includes defined-contribution plans, profit-sharing plans,
401(k) plans, 403(b) plans, 457 plans, Keogh plans, Simplified
Employee Plans (SEPs), SIMPLE plans and deductible IRAs.
Exhibit 2: Aftertax Balance in 20 Years
Assumptions: An individual invests $6,000 of aftertax funds each year
for 9 years at 7% before taxes and then withdraws funds after 11 more
years; in a deductible pension, he invests $9,231 of before-tax funds,
which is $6,000 of aftertax funds. The tax rate is 35% before
retirement and 15% to 40% after.
Current income tax rate 35% 35% 35%
Retirement income tax rate 15% 20% 25%
Taxable account (1)
Aftertax balance in 20 years $122,649 $118,265 $114,024
Deductible pension account (2)
Accumulated pretax amount $232,725 $232,725 $232,725
Tax on accumulated pretax
amount if withdrawn in 20 years (34,909) (46,545) (58,181)
Aftertax balance in 20 years $197,816 $186,180 $174,544
Nondeductible IRA (3)
Accumulated pretax amount $151,271 $151,271 $151,271
Tax only on accumulated returns
if withdrawn in 20 years (14,591) (19,454) (24,318)
Aftertax balance in 20 years $136,680 $131,817 $126,953
Roth IRA (4)
Aftertax balance in 20 years $151,271 $151,271 $151,271
Current income tax rate 35% 35%
Retirement income tax rate 35% 40%
Taxable account (1)
Aftertax balance in 20 years $105,954 $102,117
Deductible pension account (2)
Accumulated pretax amount $232,725 $232,725
Tax on accumulated pretax
amount if withdrawn in 20 years (81,454) (93,090)
Aftertax balance in 20 years $151,271 $139,635
Nondeductible IRA (3)
Accumulated pretax amount $151,271 $151,271
Tax only on accumulated returns
if withdrawn in 20 years (34,045) (38,909)
Aftertax balance in 20 years $117,226 $112,362
Roth IRA (4)
Aftertax balance in 20 years $151,271 $151,271
Note: Bold type denotes the largest aftertax accumulations.
(1) Given i = 4.55% or 7% (1-0.35), n = 9, PV = $0, and PMT = $6,000,
calculate the FV in 9 years of $64,945.96. Insert this amount as PV,
i = 5.95% or 7% (1-0.15), n = 11, PMT = 0 and calculate FV at the end
of 20 years of $122,649 (rounded). Assume the return would be taxable
at 35% each year. The ending wealth is larger if part of the return
is tax-deferred capital gains or taxed at preferential rates. However,
the ending wealth from a Roth IRA and a deductible pension remain
larger than the ending wealth from the taxable account even if capital
gains are tax-deferred and taxed at preferential rates.
(2) Given i = 7%, n = 9, PV = $0, and PMT = $9,230.77 or $6,000/
(1-0.35), calculate the FV in 9 years of $110,566.06. Insert this
value as PV, i = 7%, n = 11, PMT= $0 and calculate FV in 20 years of
$232,725.17 of pretax dollars. Taxes on this amount at 15% are
$34,909. The aftertax amount is $197,816.
(3) Given i = 7%, n = 9, PV = $0, and PMT = $6,000, calculate the FV
in 9 years at $71,868. Insert this value as PV, i = 7%, n = 11,
PMT = $0 and calculate FV at the end of 20 years of $151,271.36.
Taxes of 15% are due on accumulated returns of $97,271, which is
$151,271 less the $54,000 cost basis. The tax bill is $14,591 and the
aftertax amount is $136,680.
(4) Given i = 7%, n = 9, PV = $0, and PMT = $6,000, calculate the FV
in 9 years of $71,868. Insert this value as PV, i = 7%, n = 11,
PMT = $0 and calculate FV in 20 years of $151,271.
Key: i = interest rate, n = number of years, PV = present value,
PMT = payment and FV = future value.
Exhibit 3: Contribution Limits to IRAs and Deductible Pensions
Traditional and Roth
IRAs
Regular Catch-up *
Year Contribution contribution
2003 $3,000 $500
2004 $3,000 $500
2005 $4,000 $500
2006 $4,000 $1,000
2007 $4,000 $1,000
2008 $5,000 $1,000
2009 Indexed ([dagger]) $1,000
401 (k), 403(b)
457 plans
Regular Catch-up *
Year contribution contribution
2003 $12,000 $2,000
2004 $13,000 $3,000
2005 $14,000 $4,000
2006 $15,000 $5,000
2007 Indexed ([dagger]) Indexed ([dagger])
2008
2009
SIMPLE plans
Regular Catch-up *
Year contribution contribution
2003 $8,000 $1,000
2004 $9,000 $1,500
2005 $10,000 $2,000
2006 Indexed ([dagger]) $2,500
2007 Indexed ([dagger])
2008
2009
SEP-IRA
Keogh plans plans
Regular Regular
Year contribution contribution
2003 $40,000 15%
2004 Indexed ([dagger]) 15%
2005 15%
2006 15%
2007 15%
2008 15%
2009 15%
* Eligible individuals 50 years or older at end of the year can
contribute this additional amount.
([dagger]) Indexed for inflation.
Source: Adapted from Integrating Taxes and Investments. William
Reichenstein and William W. Jennings. Wiley Press, January 2003.
DELTON L. CHESSER, CPA, PhD, is the Roderick L. Holmes Professor of Accounting at Baylor University Baylor University, mainly at Waco, Tex.; coeducational; chartered and opened 1845 by Baptists (see Baylor, Robert E. B.) at Independence, moved 1886 and absorbed Waco Univ. (chartered 1861). The library has a noted Robert Browning collection. in Waco, Texas For the Branch Davidian siege in Waco, Texas, see . For other uses of "Waco", see Waco (disambiguation). Waco (pronounced: /ˈweɪkoʊ/) is the county seat of McLennan County, Texas. . His e-mail address See Internet address. e-mail address - electronic mail address is Del_Chesser@baylor.edu. WALTER T. HARRISON JR., CPA, PhD, is professor of accounting at Baylor University. His e-mail address is Tom_Harrison@baylor.edu. WILLIAM R. REICHENSTEIN, PhD, is professor of finance and the Pat and Thomas (language) Thomas - A language compatible with the language Dylan(TM). Thomas is NOT Dylan(TM). The first public release of a translator to Scheme by Matt Birkholz, Jim Miller, and Ron Weiss, written at Digital Equipment Corporation's Cambridge Research Laboratory runs R. Powers Professor of Investment Management at Baylor University. His e-mail address is Bill_Reichenstein@baylor.edu. |
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