Beginning January 1, 2006, a traditional 401(k) plan can be amended to include the new Roth 401(k) provisions. The Roth 401(k) has some of the benefits of a Roth IRA, but at the increased contribution amounts allowed with the 401(k). This Roth 401(k) option is scheduled to sunset in 2010 unless extended by Congress, thus providing a five year window that is soon approaching. Now is a good time to see if the proposed IRS regulations for the Roth 401(k) provide benefits that help achieve your retirement goals.
The distinguishing feature of a Roth plan is that contributions are made with after-tax dollars, and the income on the amount in the plan is free of federal income tax. When withdrawals are made from the plan, qualified distributions (see chart) are free of federal income taxes.
In contrast, contributions to and the earnings within a traditional 401(k) or IRA are not taxable until distributions are made, at which time they are included in taxable income. Thus, if the employee believes that he or she will be in a higher tax bracket when making withdrawals, the Roth would be of benefit. If tax rates go down, which is typical at retirement, the net yield on the Roth investment would be less. When deciding whether to choose between a Roth and a traditional 401(k) plan, the rate of tax is not the only factor to consider.
Younger participants with a longer timeline until retirement can benefit greatly from the Roth’s tax free income growth potential. High wage earners that are excluded from owning a Roth IRA may qualify for the Roth 401(k), which has no income limits. All employees who qualify for a traditional 401(k) account are also eligible for the Roth 401(k).
Tax free distributions from a Roth 401(k) can begin as early as age 59˝, as long as the account has been in existence for 5 years. Minimum annual distributions, based on the amount in the plan and the life expectancy, must begin at age 70˝. One way to extend the time required to make distributions is to roll a Roth 401(k) over into a Roth IRA, which has no minimum distribution rules. Thus, the Roth IRA can be left alone and continue earning tax free income as long as the owner is alive. It can be passed on to heirs who have a variety of post-death distribution options to consider. Lastly, since the entire balance in the Roth account is income tax free, the retiree gains some flexibility in controlling annual taxable income as well.
An employer wanting to include the Roth option with an existing 401(k) must amend the plan to include the Roth provisions. Also, employees’ tax deferred 401(k) funds must be accounted for and kept separately from their Roth after-tax funds. Employees can apportion contributions between both types of accounts up to the total maximum 2006 contribution of $15,000 (plus a $5,000 "catch up" contribution if age 50). Employer matching contributions, if any, are not allowed with the Roth 401(k), so the employees will need to apportion enough of their contribution into the regular 401(k) Plan to cover any matching.
In conclusion, the Roth 401(k) will soon offer some unique retirement saving opportunities that may be of benefit to businesses and employees.
|
COMPARISON
|
|||
|
Roth 401(k) |
401(k) Plan |
Roth IRA |
|
|
Contributions made with
|
After-tax dollars
|
Tax- deferred dollars |
After-tax dollars
|
|
Maximum contribution for 2006
|
$15,000 (20,000 if age 50 by year-end)
|
$15,000 (20,000 if age 50 by year-end)
|
$4,000 (5,000 if age 50 by year-end)
|
|
Qualified distributions
|
Excluded from gross income
|
Taxable income in year of distribution |
Excluded from gross income
|
|
Distributions become qualified |
Age 59 ˝ & account held for 5 years
|
Age 59 ˝
|
Age 59 ˝ & account held for 5 years
|
|
Minimum distributions required
|
Age 70 ˝or retirement date if later |
Age 70 ˝or retirement date if later |
None. Can be passed on to heirs |
|
Roll-overs (generally) |
Roth IRA
|
Traditional IRA
|
Other Roth IRA
|
Promenade on the River is a senior living community that will surprise you. What started out as a dream of affordable luxury living for seniors has become a reality, thanks to dedicated owners Phil and Nancy Shapiro. The company’s impact has been felt throughout the entire Reno community.
Promenade’s history began with both an entrepreneurial desire and an opportunity for community improvement. In 1999, the Shapiros, along with additional investors, bought the building at 525 Court Street near downtown Reno. Originally the location was intended for luxury condos, but the project had fallen through and the building had remained empty for four years. By October of 2001, Promenade opened its doors, having been transformed into a one-of-a-kind luxury senior living community.
Phil Shapiro explains that the Promenade is a very unique facility. "We’ve tailored the experience here to that of an all-inclusive cruise ship," he says. "All amenities are taken care of; this includes dining, transportation and most utilities." Residents enjoy the same luxury environment they would "touring the Caribbean, but without the sea-sickness."
Sales Director Laurie Leonard explains that the staff of Promenade is offering not only a collection of amenities, but a fulfilling experience as well. "We strive to enrich the lives of our residents." To this aim, Promenade provides programs ranging from performing arts to social activities to informative lectures on health issues. "Our residents have the opportunity to be as active as they want to be and as social as they want to be. We’re not selling an apartment, we’re offering a lifestyle."
As an active part of the Reno community, Promenade was recently honored by Truckee Meadows Tomorrow for its commitment to wellness through a program called UNR Residents in Residence. Under the program, a UNR medical student receives free room and board at Promenade for one year, in exchange for interacting daily with residents and providing in-house lectures.
With all of the care and luxury provided by Promenade, one might assume that only the very rich could afford to live there. "In fact," says Phil Shapiro, "the hardest part about our job is explaining how affordable it really is." Phil goes on to explain that once most people factor in all of the money they save through the all-inclusive service, the cost of living at the Promenade is comparable to living on their own. To aid in this, BV&Co. helped the Promenade develop a tool for helping people factor the true cost of senior living, which can be found on their website at www.promenadereno.com.
The American Institute of Certified Public Accountants (AICPA) has spearheaded a campaign called 360 Degrees of Financial Literacy with the support of state CPA societies. This is a national effort of the CPA profession to improve Americans' financial understanding. The program encourages CPAs to take a broad leadership role in volunteering to educate the American public. Their campaign provides a comprehensive approach to financial education, focusing on the information that people need at each stage of their lives.
These stages include childhood, college, career, military & reserves, couples and marriage, parenthood, home ownership, entrepreneurs, life crisis, sandwich generation and retirement. In addition, the AICPA and the Ad Council have signed an agreement to launch a national public service advertisement campaign on financial literacy, which will focus on helping Americans positively change money management. The AICPA’s website is www.360financialliteracy.org. Each life cycle contains articles and other valuable tools related to financial issues.
Recently, the AICPA and the National Endowment for Financial
Education (NEFE) jointly developed two guides to help Americans after disasters
such as Hurricane Katrina. Current guides include resolving financial issues
that arise after a disaster and business recovery resources. This information
can be found at
www.aicpa.org by clicking on the 360 Degrees of Financial Literacy link.
Locally, the Nevada Society of CPAs (NSCPA) has a presentation available for young adults, ages 18 to 25. Prior to working for Barnard, Vogler & Co., I created the presentation in conjunction with the NSCPA on topics I felt were most applicable to my peers. This presentation includes topics such as creating a budget, credit card dangers, buying your first car, and starting your career. We now have a presentation made for elementary students as well.
If you know of any clubs or organizations that would be interested in this presentation, please contact us and we will organize a member of our firm to come and speak about these issues. We realize that financial literacy is important at every age and presentations can be created for other life cycles. If an organization you belong to would like to have a presentation regarding a different age group, please contact us. Barnard, Vogler & Co. is excited to help the NSCPA in its effort to improve the financial literacy of all Nevadans.
On October 21st, Barnard, Vogler & Co. gave roughly 100 third graders from Stead Elementary a presentation regarding financial literacy.
The presentation covered where money comes from, how to earn money, how to save money and other interesting money-related topics.
In addition, kids were given gift bags with fun items, one of which was a piggy bank to encourage saving. Not only did the presentation reaffirm what the kids learned in school about money, but it taught the students good money habits that we hope they will continue to use as they get older.
This is just the first of hopefully many presentations Barnard, Vogler & Co. will give to the community regarding financial literacy.
The IRS has announced an increase in the optional standard mileage rates used by employees, self-employed individuals and other taxpayers for all business miles driven between September 1 and December 31, 2005. The rate used for providing services to charitable organizations is set by statute and did not change.
Mileage rates for September 1 through December 31, 2005:
Business: 48.5 cents per mile
Medical and moving: 22 cents per mile
Charitable: 14 cents per mile (unchanged)
Many little girls dream of becoming firefighters or princesses or superheroes… Teela Hammond dreamed of being an accountant. "Since I always liked numbers, my mom always said I should be an accountant." Since joining BV&Co. last June, Teela has been making that dream a reality as an enthusiastic member of our team.
Born in Ventura, CA, and raised in Las Vegas, Teela moved to Reno in 2000 to get her undergraduate degree from UNR. "The millennium scholarship was a great incentive to stay in Nevada, and I chose UNR because of their business program." After earning her B.S. in Accounting in May of 2004, Teela began the Master's of Accountancy program specializing in taxation.
It was while studying for her undergraduate degree that Teela became close friends with fellow BV&Co. employee, Sara Gilligan. Teela joined the firm as a staff accountant shortly after Sara did and since then has been an active part of the BV&Co. team.
Teela says her decision to join BV&Co. was based on the advantages of working for a local firm. "At Barnard, Vogler & Co., I knew that I’d be able to work on a variety of different projects. I also liked the family-like atmosphere." Teela mentions that the closeness of the firm has helped her learn her job quickly. "One thing I love is that everyone has been friendly and willing to help me whenever I have a question."
When she’s not at BV&Co., Teela says her time is spent reading or at social gatherings, but mostly studying for school. Also, she is a self-titled animal-fanatic. "I love animals. I donate to the Humane Society, ASPCA and National Wildlife Federation regularly." Her fondness is evidenced by her love for her cat, Albert. Teela says she named him after Albert Einstein because "he’s a genius."
At Barnard Vogler & Co., we are proud to have Teela on our team and look forward to helping her fulfill her dream of a career in accounting.