If you work in a job that’s covered by Social Security, your employer normally withholds 6.2% of your wages to pay for the Social Security portion of federal employment (Federal Insurance Contributions Act, or FICA) taxes (assessed on wages up to the taxable wage base of $110,100 in 2012). Your employer has to pay the same amount–6.2% of your wages up to $110,100 (in 2012). You and your employer also each contribute an additional 1.45% of your compensation (with no limit) for the Medicare portion of the FICA employment tax.
If you’re a self-employed individual, you have to pay both portions of each tax. Normally, that means you would pay 12.4% for the Social Security portion of your self-employment tax, and 2.9% for the Medicare portion of your self-employment tax.
Legislation in late 2010 extended multiple expiring tax provisions. The legislation also created a temporary one-year payroll tax cut in the form of a 2% reduction in the Social Security portion of the FICA employment tax. That means for 2011, if you were an employee, you paid Social Security tax at a rate of 4.2% (instead of 6.2%). If you were self-employed during 2011, you paid the tax at a rate of 10.4% (instead of 12.4%).
In late December 2011, legislation extended the 2% reduction through February 2012 to give parties time to reach a broader agreement. Subsequent discussion and compromise resulted in the Middle Class Tax Relief and Job Creation Act of 2012, signed into law on February 22, 2012. This new legislation extends the 2% Social Security payroll tax reduction once again, this time to the end of 2012.
You don’t have to do anything to get the benefit of the payroll tax deduction–the Social Security portion of your payroll tax should simply continue to be withheld at the lower rate. It’s also worth noting that the lower rate will have no effect on your future Social Security benefits.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified financial planner.
Securities offered through LPL Financial, Member FINRA/SIPC
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.
As 401(k) plans have become more popular, plan participants have become increasingly responsible for making their own retirement savings decisions. The Department of Labor (DOL) has become concerned that participants in self-directed 401(k) plans (those that allow participants to direct the investment of their own accounts) might not have access to, or might not be considering, information critical to making informed decisions about the management of their accounts–particularly information on investment choices, fees, and expenses.
As a result, in October 2010, the DOL issued new regulations that require self-directed 401(k) plans to provide detailed information to participants about the plan and its investments, on a regular and periodic basis, so that participants can make informed investment decisions. Some information must be provided on an annual basis, and some information must be provided quarterly. For most plans, the initial annual disclosure must be furnished no later than August 30, 2012. The first quarterly statement must be furnished no later than November 14, 2012 (for July through September).
What’s changing?
If you’re currently participating in a 401(k) plan, chances are you’re already receiving similar information as a result of an earlier set of DOL regulations. However, employer compliance with the older regulations was voluntary, whereas the new disclosure rules are mandatory for all self-directed 401(k) plans. Even participants in plans that previously complied with the earlier disclosure rules will see some changes when the new regulations take effect. For one, you’ll receive more detailed information about investment fees and expenses. Another change is that plan investment information must be provided in a chart, so that you’ll be better able to compare investment alternatives. And plans will no longer be required to automatically provide a prospectus, although one must be provided if you request it.
Which plans do the new rules apply to?
These new disclosure rules apply to 401(k) plans and other plans that allow participants to direct their own investments, but they do not apply to IRAs, SEPs, or SIMPLE IRA plans. They also do not apply to plans that are not covered by the Employee Retirement Income Security Act of 1974 (ERISA), including governmental plans, owner-only plans, certain 403(b) plans, and certain church plans.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.
Background
The Pension Protection Act of 2006 first allowed taxpayers age 70½ or older to exclude from gross income otherwise taxable distributions (“qualified charitable distributions,” or QCDs) from their IRA that were paid directly to a qualified charity. Taxpayers were able to exclude up to $100,000 in both 2006 and 2007. The law was extended through 2009 by the Emergency Economic Stabilization Act of 2008, and has just been extended again, through 2011, by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act).
How QCDs work for 2011
You must be 70½ or older in order to make QCDs. You direct your IRA trustee to make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity. The distribution must be one that would otherwise be taxable to you. You can exclude up to $100,000 of QCDs from your gross income in 2011. If you file a joint return, your spouse can exclude an additional $100,000 of QCDs in 2011. Note: You don’t get to deduct QCDs as a charitable contribution on your federal income tax return–that would be double dipping.
QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA in 2011, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) that you subsequently transfer to a charity cannot qualify as QCDs.
Example: Assume that your RMD for 2011, which you’re required to take no later than December 31, 2011, is $25,000. You receive a $5,000 cash distribution in February 2011, which you then contribute to Charity A. In June 2011, you also make a $15,000 QCD to Charity A. You must include the $5,000 cash distribution in your 2011 gross income (but you may be entitled to a charitable deduction if you itemize your deductions). You exclude the $15,000 of QCDs from your 2011 gross income. Your $5,000 cash distribution plus your $15,000 QCD satisfy $20,000 of your $25,000 RMD. You’ll need to withdraw another $5,000 no later than December 31, 2011, to avoid a penalty.
Example: Assume you turned 70½ in 2010. You must take your first RMD (for 2010) no later than April 1, 2011. You must take your second RMD (for 2011) no later than December 31, 2011. Assume each RMD is $25,000. You don’t take any actual distributions from your IRA in 2011. Prior to April 1 you make a $25,000 QCD to Charity B. Because the QCD is made prior to April 1, it satisfies your $25,000 RMD for 2010. Prior to December 31 you make a $75,000 QCD to Charity C. Because the QCD is made prior to December 31, it satisfies your $25,000 RMD for 2011. You can exclude the $100,000 of QCDs from your 2011 gross income.
As indicated above, a QCD must be an otherwise taxable distribution from your IRA. If you’ve made nondeductible contributions, then normally each distribution carries with it a pro-rata amount of taxable and nontaxable dollars. However, a special rule applies to QCDs–the pro-rata rule is ignored and your taxable dollars are treated as distributed first. (If you have multiple IRAs, they are aggregated when calculating the taxable and nontaxable portion of a distribution from any one IRA. RMDs are calculated separately for each IRA you own, but may be taken from any of your IRAs.)
Why are QCDs important?
Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be a bit more cumbersome, and possibly more expensive. You would need to request a distribution from the IRA, and then make the contribution to the charity. You’d receive a corresponding income tax deduction for the charitable contribution. But the additional tax from the distribution may be more than the charitable deduction, due to the limits that apply to charitable contributions under Internal Revenue Code Section 170. QCDs avoid all this, by providing an exclusion from income for the amount paid directly from your IRA to the charity–you don’t report the IRS distribution in your gross income, and you don’t take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don’t itemize deductions to make charitable contributions.
QCDs in 2010
As indicated earlier, the Tax Relief Act also allowed QCDs to be made for 2010, but the deadline for making 2010 QCDs (January 31, 2011) has passed. If you made QCDs in 2011 that you elected to apply to 2010, you must subtract those QCDs from your December 31, 2010, IRA balance when calculating your RMD for 2011.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC
Prepared by Forefield Inc. Copyright 2011.
Many retirement plan and IRA limits are indexed for inflation each year. Some of the key numbers for 2011 are discussed below.
Elective deferrals
If you’re lucky enough to be eligible to participate in a 401(k), 403(b), 457(b), or SAR-SEP plan, you can make elective deferrals of up to $16,500 in 2011, unchanged from 2010. If you’re age 50 or older, you also can make a catch-up contribution of up to $5,500 to these plans in 2011 (also unchanged from 2010). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)
If your 401(k) or 403(b) plan allows Roth contributions, your total elective contributions, pretax and Roth, can’t exceed $16,500 ($22,000 with catch-up contributions). You can split your contribution any way you wish. For example, you can make $9,500 of Roth contributions and $7,000 of pretax 401(k) contributions. It’s up to you.
If you participate in a SIMPLE IRA or SIMPLE 401(k) plan, you can contribute up to $11,500 in 2011 (unchanged from 2010). If you’re age 50 or older, the maximum catch-up contribution to a SIMPLE IRA or SIMPLE 401(k) plan in 2011 is $2,500 (unchanged from 2010).
IRA limits remain the same for 2011
The amount you can contribute to a traditional or Roth IRA remains at $5,000 (or 100% of your earned income, if less) for 2011, and the maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to an IRA in addition to an employer-sponsored retirement plan. But if you (or your spouse) participate in an employer-sponsored plan, your ability to deduct
| Contribution limits: 2011 tax year* |
| Plan type |
Annual dollar limit |
Catch-up limit |
| 401(k), 403(b), govt. 457(b) plans |
$16,500 |
$5,500 |
| SIMPLE plans |
$11,500 |
$2,500 |
| Traditional and Roth IRAs |
$5,000 |
$1,000 |
*Contributions can’t exceed 100% of your income. Special catch-up rules apply to 403(b) and governmental 457(b) plans.
traditional IRA contributions may be limited, depending on your income. Roth contributions are also subject to income limits.
Some other key numbers for 2011
For 2011, the maximum amount of compensation your employer can take into account when calculating contributions and benefits in qualified plans (and certain other plans) is $245,000 (unchanged from 2010).
The maximum annual benefit you can receive from a defined benefit pension plan is limited to $195,000 in 2011 (unchanged from 2010).
And the maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2011 is $49,000 (also unchanged from 2010), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)
| Income phaseout range for determining deductibility of traditional IRA contributions in 2011 |
| 1. Covered by an employer plan |
|
| Single/head of household |
$56,000-$66,000 (same for 2010) |
| Married filing jointly |
$90,000-$110,000 ($89,000-$109,000 for 2010) |
| Married filing separately |
$0-$10,000 |
| 2. Not covered by an employer plan, but filing joint return with a spouse who is covered |
$169,000-$179,000 ($167,000-$177,000 for 2010) |
| Income phaseout range for determining ability to fund Roth IRA in 2011 |
| Single/head of household |
$107,000-$122,000 ($105,000-$120,000 for 2010) |
| Married filing jointly |
$169,000-$179,000 ($167,000-$177,000 for 2010) |
| Married filing separately |
$0-$10,000 |
Many retirement plan and IRA limits are indexed for inflation each year. Most of the limits for 2011 are unchanged from 2010.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC
Prepared by Forefield Inc. Copyright 2011.
A New Chapter for Retirement
John F. Kennedy once said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.” This is certainly true of preparing for retirement. If we continue to expect that the ways of the past will see us through to our futures, we will be left behind. The methods that helped prepare us for retirement are quickly disappearing, and we must start using others.
Today’s companies are rewriting the retirement rules for working Americans. Traditional pension plans, which gained prominence in the 20th century, are rapidly disappearing because of the high costs involved in funding them. Some corporations are defaulting on their plans, and an increasing number of companies have underfunded or at-risk plans.
To help protect employees with corporate pensions, the federal government has enacted laws requiring employers to meet a 100% funding target for their defined-benefit plans. Companies that sponsor pension plans are also required to pay higher insurance premiums to the Pension Benefit Guaranty Corporation (PBGC), which was created by Congress in 1974 to help protect American workers from the risk of pension default. Premiums have increased because the PBGC itself is facing a deficit as a result of more companies defaulting on their pension plans.
Because of these costly requirements, it is becoming less and less attractive for companies to provide traditional pensions to retirees. Employers with underfunded plans may simply choose to eliminate them, and even companies with healthy plans may decide that defined-benefit plans are not worth the cost. As a result, it is likely that more companies will offer defined-contribution plans like the 401(k) to attract new employees and to help employees fund their own retirements.
Thus, it is important to be aware that you may have less help from your employer and will probably have to rely more on your own savings and investments to fund your retirement.
The government has tried to help by raising contribution limits to most employer-sponsored retirement plans. You can contribute money to these plans on a pre-tax basis. Your contributions and any earnings accumulate on a tax-deferred basis. Of course, remember that distributions from most employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% federal income tax penalty.
A number of companies are taking steps to help workers fund retirement. Many have instituted automatic-enrollment in their defined-contribution plans to encourage more employees to participate. Some are enhancing the benefits of their plans by increasing the amount they contribute to employee accounts and/or enhancing matching contributions.
Many companies that still have traditional pension plans should be able to pay their promised benefits. But in light of recent trends, it would be wise to consider all possible sources of retirement income when reviewing your retirement strategy. With the changing retirement landscape, there may be no better time than now to size up your current situation. Your company-sponsored retirement plan will be just one piece of your retirement funding pie.
This material was written and prepared by Emerald.
© 2010 Emerald
