by Mat Sorensen | Nov 25, 2014 | News
Retirement account/plan contributions are one of the most powerful tax strategies you can implement but you’ve got to make them by the deadline so that they can reduce this years tax liability. With the end of the year fast approaching, now is the time to make certain you are maximizing this important tax strategy for your 2014 tax planning. Please find below a table outlining the deadlines for 2014 retirement plan contributions according to your type of retirement account. If you are self-employed, you’ll notice the deadline also may depend on the type of company you own (e.g. s-corp or LLC) but also whether you are making contributions as an employee of your company and/or as the employer. First, let’s summarize the IRA contribution deadlines.
IRA Contribution Deadlines
| Type of IRA |
Contribution Type |
Deadline Details |
| Traditional IRA |
Traditional, Deductible |
April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 219(f)(3); You can file your return claiming a contribution before the contribution is actually made. Rev. Rul. 84-18. |
| Roth IRA |
Roth, Not Deductible |
April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 408A(c)(7). |
| SEP IRA |
Employee |
N/A; employee contributions cannot be made to a SEP IRA plan. |
| Employer Contribution |
March 15/April 15th, Due Date for Company Tax Return Filing (including extensions). IRC § 404(h)(1)(B). |
| Simple IRA |
Employee Elective Deferral |
January 30, 2015. IRC § 408(p)(5)(A)(i). |
| Employer Contribution |
March 15/April 15, Due Date for Company Tax Return Filing (including extensions). IRC § 408(p)(5)(A)(ii). |
In summary, for traditional and roth IRA contributions you have until the individual tax return deadline of April 15, 2015 to make 2014 contributions. SEP and SIMPLE IRA contribution deadlines are based on the company tax return deadline which could be March 15th if the company is a corporation and April 15th if it is a sole proprietorship or partnership. Keep in mind that this deadline does NOT include extensions so even if you extend your personal tax return filing to September 15, 2015, you still have a April 15, 2015, contribution deadline for Roth and Traditional IRAs.
401(k) Contribution Deadlines
| Solo 401(k) |
Business Structure |
Type of Cont. |
Deadline Details |
| 401(k), including self-directed Solo 401(k) (plan must be adopted by 12/31/14) |
Sole Proprietorship |
Employee Elective DeferralContribution |
April 15, 2015, contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105. |
| S-CorporationOr C-Corporation |
Employee Elective Deferral contribution |
March 15, 2015 (corporation filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
March 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105 |
| Partnership (e.g. partnership LLC) |
Employee Elective Deferral Contribution |
April 15, 2015 (partnership return filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and Election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105. |
There are a few important things to keep in mind regarding 401(k) contributions.
401(k) Contribution Deadlines Can Be Extended
First, the contribution deadline for employer and employee contributions is the company tax return deadline INCUDLING extensions. So, if you have a solo 401(k) you can extend your company tax return and your contribution deadline is also automatically extended. For example, if you have a solo 401(k) plan adopted by your s-corporation, then your s-corporation tax return deadline is March 15, 2015, but that can be extended 6 months until September 15, 2015, upon filing an extension to extend the company tax return with the IRS. If you do this, you’d have until September 15, 2015, to make the 2014 employee and employer contributions. That being said, the employee contributions are taken from your salary/wages and if you make traditional 401(k) employee contributions those amounts are reported on your personal W-2 and reduce your taxable wages. The W-2 is effectively where your tax deduction for traditional employee contribution arises is it reduces your taxable wages on your W-2. As a result, you’ll need to make or at least know the amount you intend to make for employee contributions by January 31, 2015 as that is the W-2 filing deadline for 2014.
New 401(k)s Must Be Adopted by December 31st
Second, if you are establishing a new Roth or Traditional IRA, you can create that new account at the time of the IRA contribution deadline. However, if you are establishing a new solo 401(k) plan, you must have the plan established by December 31, 2014. Because there are a number of documents and procedures required to create a new 401(k) plan, this is not something that can be left to the last minute and you should start immediately if you intend to open a 401(k) this year.
Make 2014 Contributions in 2014
And lastly, while the deadlines for most 2014 retirement plan contributions for IRAs and 401(k)s runs into 2015, to keep things simple and stress-free we recommend making 2014 contributions by December 31, 2014, when possible.
As you can see, the contribution deadlines vary depending on the type of account/plan but also on the type of contribution. With respect to contributions to a self-directed solo 401(k), the contribution deadline also varies depending on the type of company you own that has adopted the plan. Therefore, it is important that you understand these deadlines and don’t miss out on an opportunity to maximize your tax deductions. For guidance on the contribution limits in 2014, please click here.
As previously stated, it is not too late to setup a retirement account/plan if you have not done so already. The deadline to set up a 401(k) and to make contributions for 2014 is typically the last day of the year, although I wouldn’t wait until the last day or even the last week of the year to do so. If you are interested in setting up a self-directed solo 401(k), please contact us immediately as we are helping clients establish these and so that we can get it set up before the end of the year.
by Mat Sorensen | Jul 22, 2014 | News
Many savvy investors have come to find Roth retirement accounts as a great tool to building long-term tax-free wealth. Roth IRAs were first introduced in 1997. Roth 401(k)s came around in 2006 but had many restrictions and were not widely offered. Under current 401(k) rules, you can contribute $17,500 a year to your Roth 401(k) account as an employee contribution. You can contribute up to an additional $34,500 to your 401(k) for the year, depending on your income, up to a total amount of $52,000 but the $34,500 would be employer contributions and must be Traditional dollars. So, if you’re self-employed and have a solo 401(k) and want to max-out your 401(k) contributions you could contribute $17,500 as Roth 401(k) dollars and $34,500 of Traditional 401(k) dollars. But what if you want all of the funds to be Roth 401(k) dollars? Well, have no fear; all you have to do is convert the Traditional 401(k) dollars to Roth. Also, what if you want to roll-over existing retirement accounts to your Roth 401(k)? This is also possible, you just have to roll the funds over and convert. This article outlines the brief history and details on how you can maximize your Roth 401(k) account.
The American Tax Payer Relief Act of 2012 (“ATRA”) totally changed the game for Roth 401(k)s. Following ATRA, Roth 401(k)s became significantly more beneficial to investors for one simple reason: you could more easily put your existing retirement plan dollars into it. Since 2012, any 401(k) account owner, whose plan offers a Roth 401(k) account (and most now do), is eligible to convert any and all of their existing Traditional 401(k) dollars to Roth 401(k) dollars. This includes Traditional IRA rollovers to the 401(k), 401(k) employee contributions, and vested 401(k) employer contributions. Keep in mind that when you convert any Traditional retirement plan dollars to Roth 401(k) dollars that you will be taxed on the amount converted. That’s what Roth retirement account dollars are. They are post-tax retirement plan funds (you’ve paid taxes on them already) that grow tax-free and are withdrawn at retirement tax-free (age 59 ½).
Transfer and Rollover Rules
Additionally, funds in prior employer Roth 401(k)’s may be rolled into your existing Roth 401(k). Unfortunately, one source of funds that cannot be rolled, transferred, or converted into a Roth 401(k) are Roth IRAs. Here’s a quick chart breaking down the rules.
| Existing Retirement Plan Dollars |
Can These Retirement Plan Dollars Go Into My Roth 401(k)? |
| Transfer/Rollover from a Traditional IRA or Prior Employer Traditional 401(k). |
Yes, but tax will be due at the time of conversion on the amount converted to Roth. |
| Traditional Employee Contribution Made to Your Traditional 401(k) Account. |
Yes, but tax will be due at the time of conversion on the amount converted to Roth. |
| Employer Contribution Made to Your 401(k). These Are Always Contributed as Traditional Dollars. |
Yes, but tax will be due at the time of conversion on the amount converted. |
| Prior Employer Roth 401(k). |
Yes, these are rolled from the old Roth 401(k) plan to the existing Roth 401(k). |
| Roth IRA |
No, right now you cannot roll Roth IRA dollars into a Roth 401(k). We expect this law to change over time but not anytime soon. |
In addition to the chart above, here’s a link to IRS Notice 2013-74 which discusses Roth 401(k) conversions and rollovers.
Keep in mind that conversions to Roth dollars are only permitted if your 401(k) plan allows it. Most Solo or Owner Only 401(k) plans allow for Roth contributions and conversions. Also, only vested amounts are available for conversion, which in a Solo 401(k) plan, all amounts contributed are usually immediately vested. Finally, keep in mind that any amounts converted are still subject to tax based on your personal tax rate liability. However, once converted, all subsequent distributions will be tax-free, so long as any converted funds remain in the Roth account for five years prior to distribution.
In summary, Roth 401(k) sums can be accumulated from many different sources. They can be accumulated from conversions of traditional IRAs, old employer Traditional 401(k)s, and from existing Traditional 401(k) contributions (employee or employer). You aren’t just limited to putting in your annual $17,500 of Roth 401(k) dollars each year. So, if you want to maximize your Roth 401(k) account, all you need to do is rollover and/or convert your existing dollars to Roth.
by Mat Sorensen | Jun 3, 2014 | News
Roth IRAs can be established and funded for high-income earners by using what is known as the “back door” Roth IRA contribution method. Many high-income earners believe that they can’t contribute to a Roth IRA because they make too much money and/or because they participate in a company 401k plan. Fortunately, this thinking is wrong. While direct contributions to a Roth IRA are limited to taxpayers with income in excess of $129,000 ($191,000 for married taxpayers), those whose income exceeds these amounts may make annual contributions to a non-deductible traditional IRA and then convert those amounts over to a Roth IRA.
Examples
Here’s a few examples of earners who can establish and fund a Roth IRA.
- I’m a high-income earner and work for a company who offers a company 401(k) plan. I contribute the maximum amount to that plan each year. Can I establish and fund a Roth IRA? Yes, even though you are high-income and even though you participate in a company 401(k) plan, you can establish and fund a Roth IRA.
- I’m self-employed and earn over $200,000 a year; can I have a Roth IRA? Isn’t my income too high? Yes, you can contribute to a Roth IRA despite having income that exceeds the Roth IRA income contribution limits of $191,000 for married taxpayers and $129,000 for single taxpayers.
The Process
The strategy used by high-income earners to make Roth IRA contributions involves the making of non-deductible contributions to a traditional IRA and then converting those funds in the non-deductible traditional IRA to a Roth IRA. This is often times referred to as a “back door” Roth IRA. In the end, you don’t get a tax deduction the amounts contributed but the funds are held in a Roth IRA and grow and come at tax-free upon retirement (just like a Roth IRA). Here’s how it works.
Step 1: Fund a new non-deductible traditional IRA
This IRA is “non-deductible” because high-income earners who participate in a company retirement plan (or who have a spouse who does) can’t also make “deductible” contributions to an IRA. The account can, however, be funded by non-deductible amounts up to the IRA annual contribution amounts of $5,500. The non-deductible contributions mean you don’t get a tax deduction on the amounts contributed to the traditional IRA. Don’t worry about having non-deductible contributions though as you’re converting to a Roth IRA so you don’t want a deduction for the funds contributed. If you did get a deduction for the contribution, you’d have to pay taxes on the amounts later converted to Roth. You’ll need to file IRS form 8606 for the tax year in which you make non-deductible IRA contributions. The form can be found here.
If you’re a high-income earner and you don’t have a company based retirement plan (or a spouse with one), then you simply establish a standard deductible traditional IRA, as there is no high-income contribution limitation on traditional IRAs when you don’t participate in a company plan.
Step 2: Convert the non-deductible traditional IRA funds to a Roth IRA
In 2010, the limitations on Roth IRA conversions, which previously restricted Roth IRA conversions for high-income earners, was removed. As a result, since 2010 all taxpayers are able to covert traditional IRA funds to Roth IRAs. It was in 2010 that this back door Roth IRA contribution strategy was first utilized as it relied on the ability to convert funds from traditional to Roth. It has been used by thousands of Americans since.
If you have other existing traditional IRAs, then the tax treatment of your conversion to Roth becomes a little more complicated as you must take into account those existing IRA funds when undertaking a conversion (including SEPs and SIMPLE IRAs). If the only IRA you have is the non-deductible IRA, then the conversion is easy because you convert the entire non-deductible IRA amount over to Roth with no tax on the conversion. Remember, you didn’t get a deduction into the non-deductible traditional IRA so there is not tax to apply on conversions. On the other hand, if you have an existing IRA with say $95,000 in it and you have $5,000 in non-deductible traditional IRA contributions in another account that you wish to convert to Roth, then the IRS requires you to covert over your IRA funds in equal parts deductible (the $95K bucket) and non-deductible amounts (the new $5K) based on the money you have in all traditional IRAs. So, if you wanted to convert $10,000, then you’d have to convert $9,500 (95%) of your deductible bucket, which portion of conversion is subject to tax, and $500 of you non-deductible bucket, which isn’t subject to tax upon once converted. Consequently, the “back door” Roth IRA isn’t well suited when you have existing traditional IRAs that contain deductible contributions and earnings from those sums.
There are two work-arounds to this Roth IRA conversion problem and both revolve around moving the existing traditional IRA funds into a 401(k) or other employer based plan as employer plan funds are not considered when determining what portions of the traditional IRAs are subject to tax on conversion (the deductible AND the non-deductible). If you participate in an existing company 401(k) plan, then you may roll over your traditional IRA funds into that 401(k) plan. Most 401(k) plans allows for this rollover from IRA to 401(k) so long as you are still employed by that company. If you are self-employed, you may establish a solo or owner only 401(k) plan and you can roll over your traditional IRA dollars into this 401(k). In the end though, if you can’t roll out existing traditional IRA funds into a 401(k), then the “back door” Roth IRA is going to cause some tax repercussions, as you also have to convert a portion of the existing traditional IRA funds, which will cause taxes upon conversion. Taxes on conversion aren’t “the end of the world” though as all of the money that comes out of that traditional IRA would be subject to tax at some point in time. The only issue is it causes a big tax bill now so careful planning must be taken.
The bottom line is that Roth IRAs can be established and funded by high-income earners. Don’t consider yourself “left out” on one of the greatest tax strategies offered to Americans: the Roth IRA.
