Category Archives: Taxes and Retirement

Increasingly Ominous Social Security Outlook

Recent news from the Social Security Administration’s  (SSA) Office of the Chief Actuary indicates that the Social Security wage base will increase from $110,100 presently to $113,700 in 2013, or an increase of about 3.27%.  This projection was included in a recent annual report to Congress by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fund programs.

More upsetting, however, is the longer term outlook, which suggests that the trust fund assets will decline beginning in 2012, and the current benefit payment levels cannot be sustained after 2033 — three years earlier than previously projected.

And if you think there is no end in sight for continual increases in the wage base, you’re right — the SSA expects continual annual increases up to $161,700 by 2021!

 The report encourages legislators to get on top of this — and now, by including four recommendations for keeping the Social Security program solvent:

  1. Immediately and permanently increase the combined employer and employee FICA rate from 12.4% to 15.01%;
  2. Reduce scheduled Social Security benefits in a manner equivalent to an immediate and permanent reduction of 16.2%;
  3. Draw on alternative sources of revenue; or
  4. Adopt some combination of these approaches.

Don’t hold your breath.

Defined Benefit Pension Plan — A Tax Shelter Worth Considering

Taxpayers are generally familiar with any number of retirement savings vehicles which the law allows, ranging from the simplest and probably most common “Individual Retirement Account” (IRA) to plans with more exotic — and potentially tax beneficial — characteristics.  One of these is the “defined benefit plan,” which can, in the right circumstances, provide even smaller businesses which surprisingly attractive income tax benefits.

A defined benefit plan has its name because it is built around the desired amount of annual pension plan distribution which the retiree will want to receive in retirement, rather than plans formulated from the front end, by defining up front the periodic plan contribution.   These plans are a bit more complex to create and administer (and thus, are somewhat more expensive to maintain on an annual basis) but in the right circumstances can result in big tax savings.

The initial and annual contributions to a defined benefit plan can be much larger than allowed for many defined contribution plans.  Presently, the maximum allowable contribution to a 401(k) plan is $54,500 for participants of age 50 or older.  But contributions to a defined benefit plan can be large enough to provide a pension benefit of up to $195,000 in annual retirement income.  Generally speaking, for taxpayers presently age 50 or older, the tax deductible contribution to a defined benefit plan can range up to as much as several hundred thousand dollars annually.  This is so due to the limited remaining period of years until the retirement date and the need for the plan to accumulate sufficient dollars to grow to a level adequate to provide the required benefit.

And if a highly profitable business has few or maybe even no employees, the mature owner may be surprised to find out how much tax benefit is immediately available.

One caveat: Plans of this nature must be installed before year end, so sharpen your pencil now. Less than 60 days to go before New Year’s Eve!

Thinking of Revisiting That Roth Conversion? Try a ‘Recharacterization’

Recall the special rule, beginning with the 2010 tax year, which allowed taxpayers to convert a traditional IRA to a Roth IRA regardless of his or her adjusted gross income. And along with that rule came a provision which allows taxpayers to change their mind if they took this action in 2010 and now wish they hadn’t.

Let’s say you converted $100,000 and now, because of a “sideways” stock market and/or just poor investment performance during the interim, your account balance is now worth $50,000, with little or no hope for a near term recovery. You may not think, now, that the tax you paid on the original $100,000 conversion was such a good deal.

So, the “good news” is that you can now undo all or a part of the conversion by orchestrating a trustee-to-trustee transfer of the funds from the Roth IRA back to a traditional IRA if you act no later than the due date, including the six month extension period (to October 17, 2011) which will be upon us very soon. Technically, taking this action now is referred to as a “recharacterization.” And upon its completion, the tax impact of the original conversion can be avoided.

The “recharacterization” can result from unwinding all or only a portion of the original conversion — at the taxpayer’s option. This entails pushing a pencil, and making some assumptions regarding the longer term impact on your overall wealth picture. Also don’t forget that any “recharacterization” amount must include any earnings (dividends or interest) earned since the time of the original conversion. (Learn more about Taxes and Retirement Planning.)