By Luxenberg, Stan
Medical Economics , Vol. 71, No. 21
Every few years, Congress rewrites the retirement-plan rules. The constant changes can cause even seasoned pension experts to throw up their hands.
To make sure your plan won't raise hackles a the IRS, you need to consult your adviser--and to do some homework on your own. By keeping up with the changes flowing from Washington, you'll be equipped to pick the best retirement vehicle and keep it running smoothly.
To help you stay current, we're compiled a quiz. Take it, and you'll have a better grasp of the steps needed to ensure a secure retirement. Experts who helped prepare the quiz include: David Schiller, a pension attorney in Norristown, Pa.; Alan Finger, a Chicago attorney; and Alan Kanter, a Baltimore pension consultant.
Q Tax laws discourage borrowing from pensions. Shareholders of incorporated practices can take only limited loans. Owners of unincorporated practices can't dip into their plans at all. Which of the following statements about borrowing from corporate plans isn't accurate?
A. You can borrow up to half your vested interest to a ceiling of $50,000.
B. Borrowers from plans must pay market rates of interest and can deduct the interest on their personal tax returns.
C. You must repay the loan within five years unless you're using the money to purchase your principal residence.
A B. You can't deduct the interest on a loan from your plan. That's why many advisers say you should only borrow for emergencies. Instead of tapping the plan, you may be better off with a home-equity loan. That interest is deductible.
Q Last year, Dr. Walters earned $236,000. He put $30,000 into his profit-sharing plan, the maximum contribution. This year, a new law permits you to base contributions on your first $150,000 in compensation only. That would force Walters to reduce his annual contribution--unless he changes his plan. What should he do to continue making the maximum contribution?
A. He should start a money-purchase plan to supplement his profit-sharing plan.
B. He should convert the entire profit-sharing plan to a money-purchase plan, which would allow him to put in the maximum.
C. He should amend his present plan to increase the percentage he sets aside.
A A. Under the new law, the most Walters can put into his profit-sharing plan is 15 percent of $150,000 or $22,500. To reach the $30,000 level, he should start a supplemental money-purchase plan in which he sets aside an additional 5 percent or $7,500. By relying solely on a money-purchase plan, as suggested in B, he could set aside the full $30,000, but that would lock him into making the contribution each year, regardless of how much he made. By keeping the profit-sharing plan, he retains the flexibility to put in less in a bad year.
Q When Dr. Mitchell incorporated last year, he froze his old Keogh plan. Was that a good move?
A B. No. Even though the plan's frozen, it must comply with all reporting requirements faced by active plans. Administrative fees can be significant. If you fail to continue reporting, you can face IRS penalties ranging to $15,000 a year. It would have been cheaper for Mitchell to transfer his Keogh assets to a new corporate plan. Another alternative would have been to roll the assets to an individual retirement account. With an IRA, he'd avoid some administrative fees, but later on he'd lose the favorable tax treatment Keogh distributions enjoy.
Q You have two choices for vesting employees in Keogh or corporate plans. Under the first, you needn't make any contributions until the person has worked for two years. Then he becomes fully vested. Under the second, contributions must start when the employee has worked one year. Then, after two years, vesting must begin at a rate of at least 20 percent a year. At the end of six years, the employee must be fully vested. Suppose you've got a high turnover, with many employees leaving after a year or two. …