New Increases for 2015

The Social Security Administration announced on October 22, 2014 that the wage base for computing the Social Security tax in 2015 will increase to $118,500 from $117,000, which is the current wage base for 2014.

What impact does this have on doctors? Assuming you make at least this much as a wage, you will pay an extra $93 of Social Security Tax to meet the new maximum amount o $7,347.00 per individual.  Your employer will also match this amount or you will if you are the employer – so,  the total additional tax amount for 2015 will be $186.

The IRS also announced many retirement plan dollar limits for 2015.  Here are those that have an impact on the doctors with whom we work:

  • Catch Up contributions for 401(k) and SIMPLE plans (for those age 50 and over) – increased from $5,500 to $6,000
  • Defined Contribution Plans – the limit on the annual additions to a participant’s account increases from $52,000 to $53,000
  • Elective deferrals for 401(k) plans – increases from $17,500 to $18,000
  • Annual Compensation Limit – the maximum amount of annual compensation that be considered for purposes of a qualified plan will move from $260,000 to $265,000
  • Elective deferrals for a SIMPLE plan – increases from $12,000 to $12,5000
  • Simplified Employee Pensions (SEP’s) – the compensation limit for keeping employees from participating in the plan increases from $550 to $600

The IRA contribution limits remain unchanged at $5,500 per year.

 

Retirement Plans & Planning – Know your Responsibilities

Many physicians and dentists who maintain an independent practice have learned that sponsoring a qualified retirement plan through their business can be a great savings tool.

Even though the stock market hasn’t performed as they might have desired over the past several years, doctors and owners of healthcare businesses are still able to put good sums of money into their “nest egg” for retirement and I have seen their personal balances become one of their major personal assets contained in their overall personal net worth.   Retirement plans are certainly a great resource for any business where the owner wishes to provide a means for saving money for the future, deferring tax obligations, and providing employees with a great benefit.  However, just like many things in the business of Healthcare, if you don’t comply with the rules and regulations set forth by governmental agencies, in this case the Internal Revenue Service (IRS) and Department of Labor (DOL), you could find yourself facing a governmental agency audit or a lawsuit brought on by a disgruntled employee participant in your plan.

As a sponsor of a retirement plan, you are responsible for making sure that your plan is administered properly.  You have obligations to provide some information automatically to each plan participant and to each beneficiary who is receiving benefits, while other materials are to be provided to participants and beneficiaries only upon their request.  Also, certain materials must be made available for inspection at reasonable times and places.  The following is a general and basic listing of some of the items that you should be aware of as a plan Sponsor.

  • Summary Annual Report – Narrative summary of the financial statements contained on the tax return Form 5500.
  • Summary Plan Description – Primary document for informing participants and beneficiaries about the plan and how it operates.  This document must be written in a language understandable by the average plan participant so that they can comprehend their rights and obligations under the plan.
  • Participant Benefit Statement – A statement of the accrued and non-forfeitable benefits to which a participant is entitled.  Additional information may need to be provided depending upon the type of plan that is in place.
  • Notification of Intent to Use Safe Harbor Notice – This notice, which summarizes the participants rights and obligations under the plan including the matching of non-elective contribution formula, and how and when to make deferral elections, must be given to participants not less than 30 days or more than 90 days prior to the beginning of each plan year.
  • Summary of Material Modifications – This is a document that describes material modifications to a plan and any change required to be in the Summary Plan Description.

In addition to the above items, trust agreements, contracts, or other instruments under which the plan is established or operated must be made available for inspection.

In February of this year, the Department of Labor issued a set of final regulations, to what is known as the Participant Fee Disclosure Regulations, which have an impact on 401(k) and 403(b) plans where participants have the ability to direct all or a portion of their investment.  The Department of Labor wants to ensure that participants with self-directed account plans have the information they need regarding their rights and responsibilities in managing their accounts, and that they are provided sufficient information about the plan itself, the designated investment alternatives, and fees to make informed decisions about the management of their account.  For calendar year plans beginning in 2012, these new regulations apply to all participant-directed defined contribution plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA).

The fiduciary duty to follow these regulations has been placed upon the plan administrator, defined in the final regulations as the fiduciary with authority to cause the plan to enter into, or extend or renew, a contract arrangement for the provision of services to the plan.  In other words, as the Plan Sponsor, you are ultimately responsible for complying with these regulations just as you have been for many preceding regulations, which are often quite lengthy and complex as is the case with this set of regulations.   Currently there is no penalty imposed for failure to follow these regulations, however, as stated previously, the consequences of a breach in your fiduciary liability may result in legal action maintained by the DOL or a participant in your plan.

Most investment companies that represent plans have been working on the necessary disclosure requirements and should be issuing this information to you this month if they have not done so already.  Plan Sponsors that rely on this information in good faith will not be liable for the completeness and accuracy of the information used to satisfy the disclosure requirements.  Keep in mind, however, that you are ultimately responsible for providing this information to your participants if your investment company does not supply you with the information.  And for plans that maintain several designated investment alternatives, this process may not be covered by one particular investment company which will create complexity to this process.

Under these new regulations, an initial notice must be provided to each participant or beneficiary on or before the first date the person can first direct his or her investments and then annually thereafter.  The following is a listing of the disclosures required:

1)     General Disclosures
a)      How the participant and beneficiaries may give investment instructions.
b)     Any limitations of such instructions, including and restrictions on transfer to or from a designated investment alternative.
c)      Any plan provisions relating to the exercise of voting, tender, and similar rights.
d)     The designated investment alternatives offered under the plan.
e)      Any brokerage windows, self-directed brokerage accounts, or similar arrangements that enable the selection of investments beyond those designated by the plan.
2)     Administrative Expenses
a)      An explanation of any expenses or fees for general administrative services that may be charged to or deducted from all individual accounts and are not reflected in the total operating expenses of any designated investment alternative.
b)     A description of the basis on which these fees will be allocated.
3)     Individual Expenses – an explanation of any fees that will be charged to an individual account rather than on a plan-wide basis.
4)     Investment Related Disclosures
a)      The information must be provided for each investment alternative under the plan.
b)     The name and category of each investment.
c)      The performance data on each investment.
d)     Benchmark returns for each investment option based upon the appropriate broad market index on one, five, and ten year periods.
e)      The amount and description of each shareholder type fee against a participant’s investment.
f)       The total operating expense for each investment expressed as a percentage.
g)     A statement indicating that the cumulative effect of fees can substantially reduce the growth of the account.
h)     A statement that fees are only one of the several factors to consider in making investment decisions.
i)      The address of an Internet website that is sufficiently specific to provide participants information about the investment alternatives.
j)      A glossary of general terms.
k)     Fixed investment and annuity disclosures.
l)      Upon request, a paper copy of the website information is available.

In addition to the above disclosures, on a quarterly basis certain disclosures must be provided to plan participants no later than the 45th day following the end of a quarter.  These additional provisions include:

1)     The dollar amount of any plan administrative fees actually charged during the preceding quarter.
2)     The dollar amount of any individual fees and expenses charged to the participant’s account during the preceding quarter.
3)     A description of the services to which the fees relate.
4)     The amount and nature of any administrative expenses paid from total operating expenses of the plan’s investment options.
Be sure that your company’s Retirement Plan continues to work well for “your tomorrow” by planning and making certain that you are fulfilling your responsibilities today.
Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Hardship Distributions from your Retirement Plan

Over the past 26 years of working with doctor clients, I can’t remember a year where I received more phone calls from participants in retirement plans requesting a distribution due to a financial hardship than last year. Upon receiving such a call, we would educate the client’s staff member on the consequences of a plan distribution prior to age 59 ½, but often a “hardship distribution” was their only option. Some of the phone calls, though, resulted in having to refuse the request. Why? – Because the employee couldn’t substantiate or verify the hardship.

Warner, Norcross, & Judd (www.wnj.com), a local law firm in Grand Rapids Michigan, recently sent out a question and answer summary of this topic that I thought would be worth sharing with you for the next time you are presented with an employee requesting a distribution from your retirement plan for a “financial hardship”. Here is a paraphrased version:

Q: What documentation do I need to verify that an employee has experienced an event that qualifies as a safe harbor hardship under our 401(k) plan?

A: While the Internal Revenue Service doesn’t have specific rules for what documentation is needed, a hardship distribution should only be made if the employee has demonstrated the occurrence of the event. Having the employee fill out a form and simply check a box that they have incurred a hardship is not sufficient: you need to have some form of documentation. So, what could you use?

Medical Expenses – ask for a copy of the medical bill, along with a denial from the insurance company, or a letter from the health care provider verifying the need for the treatment and a summary of the out-of-pocket costs.

Purchase of principal residence – request a signed purchase agreement.

Twelve months’ future tuition and related costs – obtain a bill or letter from the educational institution that outlines the tuition, room, board and related expenses for the student enrolled.

Payments to prevent eviction or foreclosure on principal residence – have the employee submit to you the formal legal document giving notice of overdue rent or mortgage payments that will result in eviction or foreclosure proceedings, if not paid by a certain date.

Burial or funeral expenses – get a copy of a death certificate and funeral home bill.

Repair of casualty losses to a principal residence – gather evidence of a casualty loss, a repair bill and proof that the expenses were not covered by an insurance company.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Consider Converting your Traditional IRA to a Roth IRA in 2010 – Part 3

I have a few clients that started a Roth IRA in their college or residency years, however most physicians and dentists with whom I work, do not have Roth IRA’s because the income limitations associated with Roth contributions have made it impossible for them to start one.

Recently, I have had several physician clients inquire about the possibility of converting their “Traditional IRA” account to a “Roth IRA” in 2010.   Beginning on January 1, 2010, the modified adjusted gross income limit of $100,000 that has precluded most physicians and dentists from converting  traditional IRA balances to a Roth account will be repealed.   This change in the tax law will allow affluent taxpayers the significant opportunity to move funds from a tax-deferred status to a situation where future distributions may be tax-free.

The intent of this series is to provide you with some basic strategies and information on Roth Conversions for 2010. The concepts and strategies offered here may not be right for you.  For a more specific tax analysis of your personal situation, you should schedule a consultation with your tax preparer or financial planner.

For the final post on this matter (Part 3 of 3) – let’s review a strategy where hindsight can be beneficial to making a Roth conversion work for you:

Over the years of preparing taxes for physicians and dentists, I have come across the situation where a client’s Roth contribution for the year was in excess of the allowed amount because their income for the year was too high.  Rather than withdrawing the excess contribution to avoid the potential tax and penalty consequences, I would suggest that they contact the trustee of their IRA and “re-characterize” their contribution, or portion thereof, to a traditional IRA before we filed their income tax return.  This, after-the-fact, corrective action would allow the client to keep any built up earnings in a tax deferred account rather than paying the tax consequences.For the purpose of converting your traditional IRA to a Roth IRA in 2010, utilizing a similar “re-characterization” strategy may prove beneficial to you if, in hind-sight, you determine that converting wasn’t as beneficial as you might have hoped.  Under the current tax law, a taxpayer has until October 15 of the year following the conversion date to “re-characterize”, or undo, your conversion. Let’s look at a couple examples:

Let’s say that you convert all of your traditional IRA accounts to a Roth IRA right away in 2010.  At the time of your conversion the value of your traditional IRA’s was $100,000. You would have up to October 17, 2011 to re-characterize all or a portion of your conversion.  In late summer or early fall of 2011 you check the value of your now Roth IRA and find that the market value of your account is $125,000.  In this situation, choosing to keep the 2010 conversion would make sense because you will have sheltered $25,000 of income from future income tax.

Now let’s assume the same facts as above, but in this case when you open your statement in late summer or early fall of 2011 you find that the value of your account dropped to $80,000.  If you would have known that your account was going to drop in value when you made the original conversion, you would have put off the conversion of your traditional IRA until the later date to avoid paying tax on the higher value of $100,000, right? Well, in this case, you would simply “re-characterize” the Roth conversion back to a traditional IRA before October 17, 2011 and then reconsider converting the lower value to a Roth at later date.

While the above examples present a fairly straight-forward reason for using the strategy of “re-characterizing” a Roth, your personal situation may present a whole set of different circumstances requiring further analysis.  Regardless, having the option of looking back and re-considering your decision makes the initial decision to convert from a traditional IRA to a Roth IRA a whole lot easier and less risky.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Consider Converting your Traditional IRA to a Roth IRA in 2010 – Part 2

I have a few clients that started a Roth IRA in their college or residency years, however most physicians and dentists with whom I work, do not have Roth IRA’s because the income limitations associated with Roth contributions have made it impossible for them to start one.
Recently, I have had several physician clients inquire about the possibility of converting their “Traditional IRA” account to a “Roth IRA” in 2010.   Beginning on January 1, 2010, the modified adjusted gross income limit of $100,000 that has precluded most physicians and dentists from converting traditional IRA balances to a Roth account will be repealed.   This change in the tax law will allow affluent taxpayers the significant opportunity to move funds from a tax-deferred status to a situation where future distributions may be tax-free.
The intent of this series is to provide you with some basic strategies and information on Roth Conversions for 2010. The concepts and strategies offered here may not be right for you.  For a more specific tax analysis of your personal situation, you should schedule a consultation with your tax preparer or financial planner.
For today’s post on this subject (Part 2 of 3), here are six reasons and strategies for physicians and dentists to consider in converting from a Traditional IRA to a Roth:

  1. Take advantage of today’s lower tax rates – obviously, no one really knows for sure what direction income tax rates will go in the coming years, but it seems very likely, based upon current and proposed government spending, that future income rates will increase.   By converting dollars from a traditional IRA to a Roth IRA and paying the tax required on this income at current rates for 2010, you stand to save tax dollars.  If you desire, you can elect to pay the tax due over tax years 2011 and 2012, but the chances of tax rate increases in those years are greater.  If you aren’t so sure that rates will go up in the future, but you don’t want to take a chance that they will, then convert just a portion of your IRA.  Higher income tax rates in your future may also be caused by the distributions you will need in future years.  If your planned lump-sum distribution will cause you to move up a tax bracket in the year in which you need the money, consider converting a series of distributions that will keep you in the lower bracket each year leading up to the year in which you anticipate needing the money.   
  2. Use up charitable deduction carry-forwards – I find that clients in their retirement years who are inclined to continue their charitable contributions may have limits placed upon their contributions because their taxable income isn’t high enough to take the full deduction.  By converting a portion of their IRA to a Roth we are able to take a larger charitable deduction and not necessarily increase their tax liability.
  3. Utilize high basis in non-deductible IRA – Over the past several years, I have recommended that physician and dental clients consider making contributions to their IRA account even though it was not tax deductible (see Part 1 for a discussion on deductible vs. non-deductible IRA’s).   This action has caused their “basis”,  or portion of the balance that represents their contribution, to be high as compared to the IRA overall value.  Of course, the stock market decline prior to this year has also contributed to this factor.  Converting your regular IRA to a Roth in situations where you have a high “basis” could mean that you will pay minimal or no additional tax.  Keep in mind, though, that all IRA balances are considered and not just the non-deductible account that you may have segregated into a separate account. 
  4. Estate Planning – you may find, in your retirement years, that you don’t need the all of the “nest egg” that you have acquired over many years of saving and you desire to leave a portion of this money to your heirs.  Roth IRA’s provide a for a more efficient way of leaving retirement plan money to your children or grandchildren.  Distributions from traditional IRA’s, for example, require that your kids pay income taxes on the money they receive at their rates.  Roth IRA distributions from an inherited Roth IRA would be exempt from personal income taxes.  The other advantage that Roth IRA’s have over Traditional IRA’s is the fact that you are not required to take an required minimum distributions after age 70 1/2.  
  5. Use non-qualified money to pay the tax – Physicians and Dentists should use money outside of their qualified retirement plan money to pay the tax associated with the conversion.  Using funds, outside of your qualified retirement money, even if you are 59 1/2, will generally enhance your overall future wealth.
  6. Contribute and then Convert – As noted above, the income limitations for converting from a traditional IRA are soon to be repealed.  However, the income limits for making a current Roth contribution remain in effect.  Assuming you don’t have a traditional IRA to convert and you are subject to the income limits for making a contribution, you can still make a contribution to a Roth IRA by first making a non-deductible contribution to a traditional IRA account and then immediately converting it to a Roth IRA.
There’s an old saying that hindsight vision is 20/20.  On the next post we will consider a strategy that will allow you the ability to correct the timing of your Roth conversion.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Consider Converting your Traditional IRA to a Roth IRA in 2010 – Part 1

I have a few clients that started a Roth IRA in their college or residency years; however, most physicians and dentists with whom I work do not have Roth IRA’s because the income limitations associated with Roth contributions have made it impossible for them to start one.

Recently, I have had several physician clients inquire about the possibility of converting their “Traditional IRA” account to a “Roth IRA” in 2010.   Beginning on January 1, 2010, the modified adjusted gross income limit of $100,000 that has precluded most physicians and dentists from converting  traditional IRA balances to a Roth account will be repealed.   This change in the tax law will allow affluent taxpayers the significant opportunity to move funds from a tax-deferred status to a situation where future distributions may be tax-free.

The intent of this series is to provide you with some basic strategies and information on Roth Conversions for 2010. The concepts and strategies offered here may not be right for you.  For a more specific tax analysis of your personal situation, you should schedule a consultation with your tax preparer or financial planner.

For today’s post (Part 1 of 3), let’s consider some basic concepts of the two types of IRA’s that are generally available today:
Traditional IRA – these Individual Retirement Accounts allow the income or capital gains in your “nest egg” to accumulate without having to pay current taxes on your earnings.  Contributions are either tax deductible as an income adjustment on your personal tax return, providing for tax current tax savings.  Or, because of participation in another qualified retirement plan and income limitations, the contribution to your account is considered to be a “Non-Taxable” contribution.  In the case of the non-taxable contributions, taxpayers file a form 8606 with their tax returns, which reports the contribution type to the IRS and tracks your contributions from year to year as additional contributions are made.  The filing of this form becomes an important factor for the year in which you receive distributions from your IRA or, for the purpose of this summary, the year in which you convert to a Roth IRA.  When you convert to a Roth or begin to take distributions from a regular IRA you pay taxes on this ordinary income based upon a computation that takes into consideration your non-tax contributions.
Roth IRA – like the traditional IRA’s, your “nest egg” can grow without having to report and pay current taxes on the earnings in your account.  Unlike the traditional IRA, contributions to a Roth do not afford the ability to deduct the contributions from your taxable income and thus, do not allow for current year tax savings.  Your savings comes in future years when “qualified” distributions are made from your account and considered exempt from income taxes.   A distribution is considered to be qualified if made: once you reach age 59 1/2, upon death or disability, or (up to $10,000 per lifetime) for first-time homebuyer expenses.  However, and this is a key considerationa distribution is not considered qualified if made within the five-year period beginning with the first tax year you made a contribution to a Roth IRA.

The first, and probably the most important, reason for converting your traditional IRA to a Roth IRA (even if it is a partial or small contribution) is that you need to get the “five-year period clock” ticking to take advantages of the strategies that I will outline in my next post.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com