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It’s Not Too Late to Catch Up

Your clients can still set up retirement plans and cut taxes.

By Janet Arrowood

Even though 2005 has ended, there is still time for many of your business-owner clients and individuals to set up certain retirement plans, fund them, save on taxes and make “catch-up” contributions to IRAs and some company-sponsored plans. Do these financial contributions make sense for your clients, especially your 50+ clients?

Your client has until august 2006 to fully fund a sep ira.

If your client is a highly-compensated employee or owner, neither the IRA nor the company plan options may be available. This is because your client either makes too much money to contribute to a Roth or traditional deductible IRA (although the nondeductible IRA is always an option), or the lower-compensated employees don’t contribute enough to allow your client to maximize his company-qualified plan contributions, let alone make a catch-up contribution. The ins and outs can get complicated, so always consult a tax professional before making client recommendations.

Company-sponsored plans
Some company-sponsored, qualified retirement plans allow regular and catch-up contributions to be made even after the calendar year has ended. The table summarizes the simplest company retirement plans.

While the set-up dates for the SIMPLE and defined-benefit plans preclude setting up a 2005 year plan now, the Simplified Employer Pension Plan IRA (SEP IRA) is still an option for many employers looking for ways to boost their employees’ retirement savings and reduce taxes. The total allowable contribution for new plans is $42,000 or 25 percent of compensation; there is no catch-up provision. If your employer client has not filed the tax return for 2005, it is not too late to set up and fund a SEP IRA. Even better, contributions can still be made (and deducted) through the date the actual return is filed, including all extensions. This gives your client until at least August 2006 to fully fund a SEP IRA.

If a defined-benefit plan is already in place and your employer client has not filed the tax return for 2005, contributions can still be made (and deducted) through the date the actual return is filed, including all extensions. This gives your client until at least August 2006 to fully fund the defined benefit plan.

Type of Plan
Last Date to Set Up
Last Date to Contribute
SEP IRA
(employer-funded)
Any time up to due date of employer’s return (including extensions).
Due date of employer’s return (including extensions).
SIMPLE IRA
Any time between 1/1 and 10/1 of the calendar year. For a new employer coming into existence after 10/1, as soon as administratively feasible1.
1. Salary Reduction: 30 days after the end of the month for which the contributions are to be made
2. Employer (Matching) Contribution: Due date of employer’s return (including extensions)
SIMPLE 401(k)
Any time between 1/1 and 10/1 of the calendar year. For a new employer coming into existence after 10/1, as soon as administratively feasible2.
1. Salary Reduction: 30 days after the end of the month for which the contributions are to be made
2. Employer (Matching) Contribution: Due date of employer’s return (including extensions)
Defined Benefit3
Due date of employer’s return (including extensions).
By the end of the employer’s tax year.

1 But always by the tax return due date.
2 Ibid.
3 For a defined-benefit plan subject to minimum funding requirements, contributions are due in quarterly installments.

IRAs
IRA contributions are tied to your client’s normal tax-filing deadline, so 2005 contributions, including catch-up amounts, can be made until April 17, 2006, or the date the tax return is filed, whichever is earlier. This applies to all forms of IRAs.

Of course there is always a cost associated with waiting. If your client set up an IRA on Jan. 1, 2006, and funded it with $4,000 ($5,000 if he is 50+), by March 31, 2007 (at 8 percent), the value of the contribution would be about $4,000 ($5,500 with the catch-up). Contrast this with the client who waits until April 2007 to make the 2006 contribution and then extends that into the future (using the rule of 72s). The cost of waiting, based on one year’s contribution, is significant.

Janet Arrowood is the managing director of The Write Source Inc., a Colorado-based international writing and training company. You can reach her at TheWriteSource1@yahoo.com.

 


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