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Ed Slott's Free IRA Update

September 2009

Volume 2, Number 9


In This Issue

• Focus on - Five Tips on Choosing the Right Retirement Plan for Your Business

• Question of the Month

• News, Rulings and Other Updates

• Retirement Planning Tip

• Ed Slott's IRA Advisor - September Issue






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September Focus:  Five Tips on Choosing the Right Retirement Plan for Your Business


A small business owner who decides to adopt a retirement plan for her business has made only the first of many important steps in this direction. The next step is to decide which retirement plan would be suitable for the business. If you find yourself faced with such a dilemma, use the following tips to help you make the right decision:


  1. Can You Afford to Fund the Plan Each Year?

If your business is new or your profits are cyclical, you may want to choose a retirement plan with a discretionary contribution feature. This includes SEP IRAs and profit sharing plans. The discretionary feature allows you to choose whether you want to fund the plan in a particular year. This can be a useful feature in cases where your business experiences a loss or you feel that your profits are not sufficient to allow for funding of the plan. Caution: With the profit sharing plan, you want to be careful about not funding the plan for too many consecutive years, as the IRS may determine that your plan is not eligible for the tax deductions and tax-deferred treatment afforded to employer sponsored plans.


A money purchase pension plan has a mandatory contribution feature, which requires that you fund the plan whether you can afford to or not. SIMPLE IRA contributions can also be mandatory, if you choose the nonelective contribution feature, or if you choose the matching contribution feature and your employees elect to make salary deferral contributions. Read about the challenges faced by business owners who adopt SIMPLE IRAs and get tips on how to avoid such dilemmas in the September 2009 issue of Ed Slott's IRA Advisor.


  1. Is the Cost of Maintenance a Concern?

The administrative costs of maintaining a retirement plan range from very low to very high. The least costly is the SEP IRA, because administration is usually limited to funding the plan and reporting contributions on your business' tax return. The 401(k) plan is usually the most costly because of the nondiscrimination testing which is required. If administrative cost is an issue, work with your retirement counselor to identify the costs that may apply to each plan, and choose the one that you can afford to maintain.

Note: Defined benefit plans are usually more costly to maintain than 401(k) plans, but are beyond the scope of this article.


  1. How Much do You Need to Save?

If you have a long period over which to accumulate your retirement nest egg, you have some degree of flexibility with respect to the type of retirement plan that you choose. However if you are close to retirement age and find that you have come up short of your savings goal, you may want to consider a retirement plan that allows to you skew contribution amounts so that the lion's share goes to older employees, such as an age weighted profit sharing plan. Of course, this feature would be beneficial to you only if you are older than your employees.


  1. Do You Want to Offer Loans?

If you would like your employees, including yourself and your spouse (if your spouse works for your business), to be able to take loans from your retirement plan, then you must choose a qualified plan. This is because SEP IRAs and SIMPLE IRAs cannot include loan features.


  1. Do You Want to Place Restrictions on Withdrawals?

Many employers maintain retirement plans because they specifically want to help their employees save for their retirement. If the employees withdraw their account balances before retirement, it defeats the employer's goal. If you want to place restrictions on when employees can withdraw their balances, you would need to adopt a qualified plan and implement those restrictions. In the case of SEP and SIMPLE IRAs, withdrawals are made at the employee's discretion, which means they can be made at anytime.




There are many other features to consider when choosing a retirement plan for your business. For instance, a profit sharing plan can include a mandatory contribution feature. As such, you want to be careful when you choose the elective features for your retirement plan. Your retirement counselor can help you to define the retirement profile of your business and this will greatly assist you in choosing the most suitable retirement plan for yourself and your employees.



Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of the content of the newsletter, you can preview past issues before subscribing.


Set yourself apart from the competition, and bring in millions in new IRA rollover business by subscribing to Ed Slott's IRA Advisor Newsletter and attending Ed Slott's IRA Workshops. Click here to see a schedule of upcoming workshops.


Question of the Month



Question:  I am facing some financial difficulties and would like to make a hardship withdrawal from my traditional IRA. I will be receiving a bonus from my employer within 45 days and would be able to return the amount at that time. However, I am being told that since I am only 39 years old, I cannot make a hardship withdrawal from my IRA. Is that true?


Answer: Hardship withdrawal is an optional feature of a 401(k) or 403(b) plan. They allow participants access to their retirement funds, before the participants experiences any triggering events. A hardship withdrawal is still subject to income tax and the 10% early distribution penalty unless an exception applies. While hardship withdrawals cannot be made from IRAs, you can withdraw amounts from your IRA at anytime. You can replace (rollover) the amount within 60-days of receipt, if you did not already complete a 60-day rollover for that IRA. Bear in mind that if you do not rollover the amount within 60-days, it will be treated as ordinary income - which means that you will owe income tax on any taxable amount at your ordinary income tax rate, and - since you are under age 59 ½, you will owe the IRS an additional tax (early distribution penalty) of 10%. The 10% additional tax is waived if you qualify for an exception


News, Rulings and Other Updates



PLR: 200933038 IRS Waives 60-day limit for rollover-due to medical condition.

The taxpayer submitted a request to the IRS, asking that they waive the 60-day limit for his rollover, based on the following circumstances:

  • The taxpayer, let's call him John, explained to the IRS that his failure to meet the 60-day deadline was due to a medical condition which impaired his ability to manage his financial affairs. 
  • John further stated that the distributed amount had not been spent or used for any other purpose, which helps to demonstrate intent to complete the rollover.  
  • Documentation submitted indicates that during the early part of 2008, John was diagnosed with Alzheimer's disease.
  • On June 15, 2008, at the recommendation of his doctor, a Power of Attorney ("POA") was prepared for handling John's finances and medical decisions. John refused to sign the POA and on June 17, 2008 withdrew the amount from his IRA.
  • On June 24, 2008, John deposited the amount in a non-IRA account.
  • On July 3, 2008 a petition was filed requesting an appointment of a Guardian and Conservator for John and the appointment was made by the Court on November 7, 2008.


On the condition that the amount was rollover eligible, the IRS waived the 60-day rollover requirement, giving John a period of 60 days from the issuance of the PLR to complete the rollover.




September Retirement Planning Tip:  Double-check Your 2008 Conversions Now


The deadline for completing a recharacterization for 2008 is October 15, 2009. Check your 2008 conversion to determine if you need to complete a recharacterization. Reasons to recharacterize include experiencing market losses on your conversion amount. For instance, if your conversion was valued at $100,000 when it was done in 2008, but its value is now only $50,000, you will be stuck with a tax bill on a $100,000 conversion that is now worth only $50,000. The recharacterization will make the conversion null and void, thus removing the tax bill. You can always reconvert later. For the rules on reconversions, see the tutorial Roth IRA: Reconversions.



Highlights from Ed Slott's IRA Advisor Newsletter - September 2009 Issue


The September 2009 issue of Ed Slott's IRA Advisor is now available online. You may access your newsletter at IRAhelp.com by clicking here: http://www.irahelp.com/newsletter.php?area=a

Hot topic: Are your clients contributing all they can to all the retirement accounts they are able to? Many don't realize they can contribute to more than one type of plan or IRA. This month we feature our annual chart, "2009 Limitations When Individuals Own or Participate in Multiple Retirement Plans." The chart will alert you now, before year-end, to opportunities for clients to contribute the maximum allowable to all possible retirement accounts.

Also inside:
Establishing a Roth 401(k), and a warning for small businesses with SIMPLE plans about funding those plans when times get tough. IRS has said they must be funded.


Feature Article

Guest IRA Expert
Denise Appleby APA, CISP, CRC, CRPS, CRSP

A Primer on Roth 401(k)s

  • Roth 401(k) Accounts Defined
  • Establishing a Roth 401(k)
  • Contributions
  • Taxation of Distributions
  • Roth 401(k) Portability
  • RMD Rules

SIMPLE IRAs Mean Tough Choices for Business Owners

  • Even Cash Strapped Employers Must Fund Their SIMPLE IRAs
  • How You Can Help Your Clients

Reference Chart: Contributions to Multiple Retirement Plans

2009 Limitations When Individuals Own or Participate in Multiple Retirement Plans

To view current and past issues of the IRA Advisor, click the link below to access the "Subscribers Only" section of our website:

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