DAT Financial & Tax Service

Retirement and Pensions

Minimum IRA Distributions

The year you turn 70 ½ (or by April 1 of the following year), you must begin taking minimum distributions from IRA accounts, pensions, tax-sheltered annuities, any retirement plan, except Roth IRAs or face paying a 50 per cent penalty. New tables and rules result in lower required minimum annual distributions. If the spouse is the sole beneficiary and is more than 10 years younger than the taxpayer, the more beneficial normal joint life expectancy table can be used. The minimum distribution is based on the value of all of your IRAs on December 31 of the prior year and your life expectancy based on your age at the end of the year. Your broker or financial institution holding your plan must provide you with the correct required minimum distribution and a Form 5498 showing the value of your IRA

Contribution Increases

Contribution limits to both traditional and Roth IRAs are $5,000 for 2011-2012 ($6,000 for those 50 and older). The maximum contribution to a 401(k) or similar plan is $16,500 for 2011 and $17,500 for 2012. (The additional elective deferrals for those 50 and over is $5,500 for 401(k) plans.) For SIMPLE plans, the salary reduction limit is $11,500 (an additional $2,500 for those 50 and older). The 2011 SEP contribution limit is $49,000 and $50,000 in 2012 or 20 per cent of adjusted earned income for sole proprietors.

Income Eligibility Limits Raised for Deductible IRAs

Employees who are covered by an employer-retirement plan must meet income limits in order to take a deductible IRA. The 2011 income (modified AGI) phase-out limits are $56,000-$66,000 for single taxpayers ($58,000-$68,000 in 2012). For joint filers, if your spouse is covered by an employer plan, the 2011 income phase-out limits are $90,000-$110,000 ($92,000-$112,000 in 2012). If your spouse is not covered, the income limits are $169,000-$179,000 in 2011 ($173,000-$183,000 in 2012). Married, filing separately receive no deduction if AGI is $10,000 or more.

Saver’s Credit (for Retirement) for Lower-Moderate Income Workers

Lower income workers are entitled to a tax credit of 10-50 per cent of part of their contribution in addition to any otherwise allowable retirement plan (IRA, 401(k) and certain other plans) contribution deduction. The maximum credit is $2,000 for joint filers and $1,000 for single taxpayers. The contribution credit is subject to income phaseouts.

Taxpayers who have received distributions from their retirement plans generally must subtract these amounts from their contributions. This rule applies for distributions starting two years before the year the credit is claimed and ending with the filing deadline for that tax return

Roth Review

Non-deductible Roth IRAs continue to offer many taxpayers tax-free accumulation and distributions. To qualify for the tax-free withdrawal (of growth) after age 59½ or for a qualified first-time home purchase, a distribution must be made after a five-year holding period. Also, there is no required minimum distribution at age 70½.

You cannot contribute to a Roth if you file married, filing separately or are a high-income taxpayer. Income phaseouts are $107,000-$122,000 in 2011 ($110,000-$125,000 in 2012) for singles and $169,000-$179,000 for joint filers in 2011 ($173,000-$183,000 in 2012). In fact, if you’re income is close to $150,000 for joint filers or $95,000 for singles, it may be to your advantage to make any Roth contribution after your tax return is prepared (before the filing deadline without extensions) to make sure you’re eligible for the contribution. Converting to a Roth: You can convert all or part of your traditional IRA to a Roth.

You must pay income tax on the proceeds, which may push you into a higher bracket. Once the funds are converted, the principal and future growth can be withdrawn tax-free following the rules. Penalty free (although not income tax free) IRA withdrawals: can be made for first-time homebuyer expenses (up to $10,000), qualified higher-education expenses or in rare cases for medical expenses.

Roth IRA Conversions.

Solo 401(k)

Self-employed individuals/consultants may want to consider establishing an innovative retirement plan: the "one-person or solo 401(k) plan."
This plan is attractive to a sole owner of a business (either sole proprietor or corporate owner) who has no employees (except for a spouse). The owner can maximize retirement contributions by combining the employee contribution (through 401(k) elective contributions) and the 25 per cent maximum employer contribution (through defined contribution profit sharing contributions). Using this, the maximum deductible amounts are significantly increased, compared to other retirement plans. Together the employee elective contributions and the employer profit sharing contributions cannot exceed $49,000 or 100 per cent of compensation whichever is less in 2011 for those under age 50 (additional $5,500 if 50 or older).

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