"Pension Trends" Newsletter

Pension Trends Volume III, No. 2, May 2002 Download/view PDF version

In this issue...

Retirement Planning Tax Ideas for 2002 - Part II

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Retirement Planning Tax Ideas for 2002 - Part II

As we mentioned in the last newsletter (February 2002), there are a number of new law changes that affect the ways in which money can be set aside for retirement. Ideas three and four identify some more ways in which your clients can maximize their retirement savings, particularly if they are over 50 years old.

Turning age 50 is a downer for some folks. Now, at least, 401(k) plans can offer a little something extra to those over 50.

Beginning in 2002, a 401(k) plan can let employees who turn age 50 during or before the 2002 plan year increase their deferrals by an additional $1000, on top of all other contributions they or their employer makes on their behalf. This is referred to as a “catch-up” contribution, and the catch-up contribution amount increases to $2000 in 2003, $3000 in 2004, $4000 in 2005, and $5000 in 2006, with inflation adjustments thereafter.

The really good news is that catch-up contributions are not subject to nondiscrimination testing so long as they are made available to all employees age 50 or older. Adding catch-up contributions to your plan is a simple, low-cost way to help employees increase their retirement savings. The plan must be amended to provide for catch-up contributions, but the amendment is relatively straightforward. A first step would be to talk to your record keeping firm to see how you go about getting started.

Want to contribute a lot of money to a retirement plan in a relatively short time frame? Consider setting up a Defined Benefit Pension Plan.

The rules governing Defined Benefit Pension Plans have been substantially liberalized, especially for the small business owner. Consider that now:

· Tax deductible contributions can exceed $200,000 depending upon the age of key employees and other factors.

· A company can keep its 401(k) plan and add a defined benefit plan on top.

· Defined benefit plans are best suited for plans geared toward management.

Defined Benefit plans will always be somewhat of a mystery because of the complicated combination of pension and actuarial rules that apply, but for the business owner wanting to set aside substantial sums of money, they are the only game in town and they just got a whole lot better. If you have questions, give us a call. We have some good explanatory information available for you and your clients.

But wait, there’s more - employers with fewer than 100 employees may be eligible for a tax credit to offset plan expenses, of up to $500 per year for the first three years of a new plan established in 2002.

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This newsletter has been published in order to share general information with our professional contacts. The information presented in this newsletter should not be relied upon without first seeking the advice of a CPA, Attorney or other benefit professional.