Where Have All of Britain’s Millionaires Gone?

Does this really surprise anyone?
Dr. Art Laffer developed the Laffer Curve which proves that when you raise tax rates, tax revenues go down and when you lower tax rates, tax revenues go up.
If the intent is to raise tax revenues to reduce the deficit, perhaps raising tax rates is NOT the answer.
Tax (Photo credit: 401(K) 2012)

Where have all the millionaires gone?That’s a question many Britons are asking now that new data show nearly two-thirds of the country’s million-pound earners have disappeared not even one year after a tax hike on the nation’s highest earners went into effect.

Britain’s Telegraph newspaper reports that just 6,000 Britons declared income over a million pounds ($1.6 million) to the nation’s tax authority, down from more than 16,000 in the 2009-10 tax year.

Former Labour Party Prime Minister Gordon Brown raised the top rate from 40% to 50% in 2010, shortly before losing the general election to Conservative Prime Minister David Cameron.

The closely watched wealth tax was a disappointment from the beginning, with the first monthly receipts last January bringing a half a billion pounds less than the same month in 2011.

The Telegraph reports the tax increase has so far cost the U.K. Treasury 7 billion pounds.

Please comment.

Posted via email from Curated 401k Plan Content

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Roth 401(k)s vs. Traditional 401(k)s

By now, most Americans understand that at the very least, they should be participating in their employer’s defined contribution plan, most commonly offered in the form of a 401(k). But some companies offer two forms of these plans: the traditional 401(k) and the Roth 401(k). You thought deciding how much to allocate to your plan and then researching and electing the investment funds to support it was confusing enough, but here you are, faced with yet another option for safeguarding some retirement funds. Let’s break it down just a bit more.

What’s the difference?
The primary difference between a traditional and a Roth 401(k) is simple but significant. With a traditional 401(k) plan, your contributions grow tax free, and you pay taxes on the withdrawals; Roth 401(k)s, on the other hand, work in precisely the opposite way, as you pay taxes on your contributions but not on your withdrawals.

Additionally, Roth 401(k)s tend to be seen as more of an estate planning tool, since they do not necessitate that you to take required minimum withdrawals (RMDs) once you reach age 70 ½, as you must do with traditional 401(k)s. This allows you to leave your funds untouched for as long as you want after retirement, letting your investment grow tax free all the while.

Which is right for you?
This is a conversation best held with your financial advisor, as you must determine whether the back-end payoff of a Roth 401(k) outweighs the benefits of traditional tax deferral on the front end, but generally speaking, it depends largely on where you are in life and into which tax bracket you fall.

If you’re relatively young with an eye toward saving for retirement and you don’t earn a great deal of money, a Roth 401(k) may be worth exploring, as the upfront tax-savings benefits wouldn’t be as significant to you as a tax-free payout in retirement. Conversely, if you’re an established earner in a higher tax bracket, getting up-front tax-advantaged treatment is probably best, making the traditional 401(k) your most likely option. This is especially true for individuals who expect to be in a significantly lower tax bracket when they retire.

You can even double-dip.
If your employer does offer both types of 401(k) plan, you can split your contributions between the two if you so choose, as long as your  combined annual contributions do not exceed 2012’s annual limit of $17,000. If you’re 55 or older, that limit jumps to $22,500.

With so many options, there is a 401(k) plan, or a combination of the two, that is ideal for your current situation. But before you make your decisions, be sure to weigh these considerations carefully, especially if you don’t speak with a financial advisor regularly.

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401(k) Loans: Avoid Problems for Your Plan

This is a hot topic today since many Americans are strapped for cash. Taking a loan from your 401(k) plan must be a strategy of last resort. The loan provision in a 401(k) plan is optional for the plan sponsor. Most include it to boost participation. I believe education must be the strategy of choice. Please protect the future you from the current you.

Loans (Photo credit: jferzoco)

On top of that, consider a couple other suggestions.  Maybe your plan should only permit one loan at a time or there should be a limit on the size and scope of the loans.  You should also consider your procedures for monitoring and collecting loans from participants after they have terminated employment and establish a procedure for keeping track of whether those loans have been satisfied.  Since non-conforming loansare clearly a component of the IRS’s audit package for 401(k) plans, it pays to know more about loans, better manage them and accurately report them before you face an audit.  So don’t simply assume plan loans are being handled properly.  Look into them now and fix your mistakes.  If you need assistance, your attorney at Fox Rothschild can help you sort it out.. 

A loan from a 401(k) plan must be your last resort. Prior to taking this loan consult with a professional to determine if the loan is necessary and if it will solve your problem. Remember even if you must file bankruptcy your 401(k) plan can not be touched by creditors.

Please comment or call to discuss.

  • Pulling funds from 401(k) may hurt later (usatoday.com)
  • Is the Recession Causing Small Retirement Plans to Skimp on Compliance Efforts? (401kplanadvisors.com)
  • Eight suggestions for improving your 401(k) plan (401kplanadvisors.com)
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What is a 401K?

Of course you’ve heard of a 401k, but what exactly is it, and how do you manage one successfully?  401k plans are an excellent addition to your retirement planning and serve as a dual-feeding investment between you and your employer.  And even though there is an equal monetary deposit between both you and your employer, there are other aspects of the 401k plan that may or may not bode well for your financial plan.  In the very least, we will break down the nuts and bolts behind the 401k and give you the tools you need to decide whether it is right for you.

First and foremost, what is a 401k, and how does it work?  401k plans are retirement savings plans sponsored by your employer.  It allows employees to invest and save a portion of their paycheck before taxes are deducted.  Taxes are then taken out once the money is removed from the account.  With a 401k, you decide how your money is invested.  Most plans offer a spread of mutual funds composed of stocks, bonds, and money market investments. The most popular option tends to be a combination of stocks and bonds, which gradually become more moderate as you reach retirement.

Next comes the question of how much you should invest.  If your employer is matching your timely investment percentage each paycheck it would benefit you greatly to keep your 401k contribution at a feasible amount.  Obviously, manage your finances and ensure that you have enough to live and enjoy life, but keep in mind that retirement planning is important.  If your employer is offering a 50-50 contribution you should take advantage of the plan; don’t leave cash on the table.  The most popular contribution is 3% of your salary.  So, if you earn $50,000 a year and contribute 3%, your personal contribution will be $1,500 and your company’s contribution will be $1,500.  Although you can contribute over 3%, your company cannot, and this is where the possible drawbacks begin.

The IRS mandates contribution limits for 401k accounts.  As noted, your company will not contribute over 3%, and the total dollar amount that can be contributed—including both your contributions and your employers’—cannot exceed 100% of your salary.  In most cases, you can’t tap into your employer’s contributions immediately.  There are complex rules about when you can withdraw your money and costly penalties for pulling funds out before retirement age.  This is why most employers hire investment administrators to oversee your account.  It is their job to inform you of updates about your plan and its performance, manage the paperwork and assist you with requests.  You can also go to your administrator’s web site or call their help center if you need further assistance.

The final question is which type of 401k you should invest in.  Most companies offer a traditional 401k, where the less common plan is a Roth 401k.

Traditional 401k:

  • Wages are contributed before taxes from each paycheck, like a deferred salary.
  • Taxable income drops by the amount you contribute.
  • You pay income taxes on contributions and earnings upon withdrawal.
  • No access to your funds before age 59 ½ or if you leave your employer at age 55 or older.
  • If you dip in early, expect a 10% penalty — on top of the usual tax bill.

Roth 401k:

  • Contributions are made with money that’s already been taxed.
  • No taxes paid upon withdrawal.
  • Better flexibility: free access to your money as long as you’ve held the account for 5 years.

As you can see, there are benefits and drawbacks to both 401k retirement plans.  It is essential to survey your finances and what types of savings plans are right for you.  401k plans are great because of the contributions made by your employer, and the flexibility of deciding how much you’d like to contribute.  Don’t hesitate to ask if you have any further questions or comments regarding 401k plans or financial management in general.


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The high cost of 401(k) hardship withdrawals

A hardship withdrawal must always be your last resort. Remember, if things are really bad and you are required to file for bankruptcy your money in a qualified retirement plan are protected from creditors. Seek professional help before you make a mistake which cannot be reversed.

WASHINGTON - OCTOBER 26:  Internal Revenue Ser...
WASHINGTON - OCTOBER 26: Internal Revenue Service Commissioner Douglas Shulman addresses the American Institute of Certified Public Accountants' 35th Annual National Tax Conference October 26, 2010 in Washington, DC. Shulman addressed a new IRS program requiring that anyone making money from completing tax returns must register with the IRS, pay a fee and pass competency tests and eventually attend continuing education programs. (Image credit: Getty Images via @daylife)

Hardship requirements

There are two main requirements that need to be satisfied to qualify as a hardship. The first is that the hardship withdrawal must be due to an immediate and heavy financial need. The IRS uses the examples of buying a boat or a television as situations that would not qualify under this condition.3 The second requirement is that the amount distributed under the hardship be restricted to the necessary funds needed to satisfy the financial need.4 This means that a participant can’t receive a hardship withdrawal in the amount of $10,000 when only $2,000 is needed.

The amount available for distribution is generally restricted to the amount the participant has contributed to the plan (without earnings). Some plans do allow employer contributions to be available as well, but this is not as common. In addition, the hardship withdrawal is not rollover-eligible, meaning that the funds distributed cannot be placed in an IRA or another qualified retirement plan to keep its tax deferred status.

What qualifies as a hardship?

The determination of what qualifies as a hardship is usually, but not always, based on “safe harbor” standards. These standards are outlined by the IRS to help plan sponsors determine if a participant’s situation qualifies as a hardship event. The eligible hardship events under the safe harbors are:

  • Medical care expenses that have been incurred or for medical care that is needed
  • Costs associated with purchasing a principal residence (excluding mortgage payments)
  • Tuition payments, educational expenses, or room and board expenses that will be incurred during the next 12 months of postsecondary education
  • Payments to prevent either eviction or foreclosure on a principle residence
  • Funeral expenses
  • Certain expenses related to repairs of a principal residence that are due to damage

When you are considering a hardship withdrawal please seek the advice of a professional. This added expense may help avoid a costly mistake which cannot be reversed.

Please comment or call to discuss how this affect you and your retirement future.

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Tax Organization Tips for Small Businesses

If tax season were like Christmas, you’d definitely file doing your taxes under “last-minute shopping.”  Not only is it time to prepare last year’s taxes, but it’s also important to get this year’s taxes rolling as well.  Compiling tax data last minute can be stressful and confusing.  And trying to throw together important information regarding the success of your business under pressure will surely lead to costly mistakes.  Here’s a list of helpful organization tools that can cut your tax preparation time in half:

  • Don’t store all your tax records in one file.  Keeping your tax records all in one place can lead to lost items and mismanagement.  Try purchasing organizational containers like plastic tubs and label them with the tax year.  Items like vendor files, appointment books, bank records Insurance policies, capital asset files, investment accounts, real estate and capital improvement files are important tax documents that need to be filed together under the same tax year.
  • Track your mileage.  If you use your vehicle or cell phone for business you’ll want to track your usage accordingly.  While cell phones can be easily archived through your bill, your vehicle is different.  The IRS asks for your total mileage on the tax return, so try keeping a notebook in your vehicle and tracking your mileage for each trip.
  • Collect all of last year’s tax documents.  If you haven’t done this yet, create income tax files for last year and this year – and make them stand out.  Throughout the year as taxable transactions occur, collect all documents in the file.  Filing documents like third-party reporting documents such as 1099s, K-1s, W2s, 1098s, etc., and receipts for tax deductable transactions immediately when you receive them will make data compilation much easier.  After archiving these throughout the year you can simply grab the file, a back up of your QuickBooks data, and head out to your tax pro.
  • Go green!  Welcome to the 21st century!  Now welcome your bookkeeping system as well, and purchase up-to-date digital accounting software.  Most accounting software programs are easy enough for the non-accounting professional to use.  Now tax return preparation, financial and tax planning are simplified because of the comprehensive reports generated by a decent accounting program.  Imagine not having to peruse through your filing cabinet for hours at a time, and simply pulling it up on your computer instead.  Furthermore, these digital files are easily transferable and take up less space.  Although, beware of the caveat – computer crashes are not uncommon, and losing all your important files in a “virtual fire” can ruin you and your business.  Be sure to implement a routine backup plan where the files can be stored outside of your hard drive.

There are myriad tips that can help you and your business organize your taxes throughout the year, making last-minute tax preparation less of a headache.  If you have tips of your own that you’d like to share please let us know!

Photo courtesy of: http://helpfreetheearth.com
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Don’t Forget Your ERISA Bond

Fiduciary Trust Building
Image by ToastyKen via Flickr

Keep in mind this bond does not protect the plan sponsor from fiduciary liability. It offers protection in the event of fraud.

Who must be covered by the bond?
As a general rule, every plan fiduciary and every person who “handles funds or other property” of an ERISA-covered employee benefit plan (see below) must be bonded. It should be noted that administrative committee or investment committee members are often considered to be plan fiduciaries. A person is considered to “handle” plan funds if the person has physical contact with cash, checks, or other similar property, is able to secure physical possession of plan funds, or has the potential ability to direct (acting alone or with others) the transfer of plan funds to himself or herself or to third parties.What employee benefit plans are covered?
The bonding requirement applies to most employee benefit plans under ERISA, including:

tax-qualified retirement plans;

group medical, dental, and prescription drug plans; and

flexible spending arrangements (FSAs).

You should think about the ERISA bonding requirements any time that you or one of your employees or agents is handling employee money or plan assets.

TaxQualified Retirement Plans
Tax-qualified retirement plans will always require bonding because they involve plan assets that are set aside in a trust. Thus, any analysis will need to focus on whether the fiduciary in question “handles” the plan assets, not on whether plan assets exist.

The fidelity bond is extremely important and required by the regulations. It does not provide fiduciary protection to the plan sponsor.

Please comment or call to discuss.

  • Brokerages may have to change business practices: DOL (401kplanadvisors.com)
  • Who Are Your Fiduciaries? (401kplanadvisors.com)
  • Fiduciary Responsibility for Plan Investments. (401kplanadvisors.com)
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Been There, Done That. Now What?

Image by 401K via Flickr

Plan design is a very important component to allowing you plan to attract and retain top talent. This talent will be crucial in small to mid sized companies to remain competitive.

Paying Now or Paying LaterWhat we said: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. The impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts. Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

Where we are: Perhaps the most surprising trend to emerge from this year’s PLANSPONSOR Defined Contribution Survey was a huge increase in the offering of Roth 401(k)s, an option that “plan sponsors have long been reluctant to push since their pay-it-now concept on taxes seems at odds with the traditional tax-deferral mantra, and their benefits are often seen as skewed toward more highly compensated workers.” This year’s survey found that 38.2% of all plans now offer the option, compared with just 20.2% a year ago, and that increase was broad-based across market segments. Of course, just try finding someone today (who is not running for political office) who is expecting taxes to be lower in the future.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Many more plans are now offering the choice, but it remains to be seen if participants will respond in kind. I would guess not that many in the short term—but that, of course, could change.

Plan design is critical to many small businesses to realize a true employee benefit. One which will attract and retain talented employees.

Please comment or call to discuss how this could affect you and your company.

  • This Do-Over Could Save You Thousands (401kplanadvisors.com)
  • The 408(b)(2) Burden on Fiduciaries. (401kplanadvisors.com)
  • Boost Your Retirement Savings (turbotax.intuit.com)
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Tax Credit for Starting a New Employer Retirement Plan

SR&ED Investment Tax Credits
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Section 45E of the tax code permits an eligible small employer to claim a tax credit versus a deduction for qualified startup costs and plan administration fees.  The credit is 50 percent of the relevant expenses and is limited to $500 per year for the first credit year and each of the following 2 tax years.  The credit is currently set to expire at the end of 2012; however, it has previously been extended.

For example, if such an employer paid $1,200 in fees to establish a new plan in 2011, and then paid $800 in plan administration fees in 2012, the allowable tax credit would be $500 in 2011 and $400 in 2012.  Thus, the real cost to establish the plan is reduced from $1,200 to $700 because of the $500 tax credit.

An eligible small employer is one who had no more than 100 employees during the tax year preceding the first credit year and only employees who were paid more than $5,000 during that tax year are counted.  Further, as the credit is intended to spur the adoption of new plans, if an otherwise eligible employer established or maintained a plan during the 3 tax years preceding the first credit year, they are not eligible to claim the credit.

Get’em before there gone!

Please comment or call to discuss if this is right for your company.

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The Small Business 401(k) is the Holiday Gift That Keeps on Giving

Eagle with flag in background.
Image via Wikipedia

Business owners understand that they cannot rely on the government for their retirement. A 401(k) plan can not only help them save for their retirement but also help attract and retain talented employees.

The Benefit That Keeps on Giving and Can Pay for Itself

There’s no doubt about it, giving each of your employees a fat check around the holidays would feel great. But, in the long-term, giving them free money every two weeks — via matching contributions to their 401(k) — can actually work out even better for both you and your employees.  And, for smaller firms, the plan may actually pay for itself outright.

Here’s how 401(k) saving and tax advantages can really add-up.  Consider a scenario of two businesses. Each has seven employees including the owner, and the owner earns $150,000 a year.  One offers a 401(k) plan with a “safe harbor” match to maximize her contributions and one does not provide a retirement plan at all.

So which owner keeps more of her money? In this situation, the owner with the 401(k) is much better off than the owner without a plan.  The owner with a 401(k):

  • Keeps  $2,729 more of her own money
  • Pays $7,465 less in personal and business  taxes
  • Saves $22,087 in tax-deferred income for retirement

That’s just year one. Take a ten year view, and the numbers get even more exciting.  The owner saves nearly $75,000 in taxes and builds a nest egg $305,000 assuming a seven percent annual return over the period.  Tax credits, deductions of any match and plan expenses, and matching can all have powerful effects on your bottom line.

Small business 401(k)s are in everyone’s best interest and bottom line. Now that’s a concept that even Scrooge could love.

There is a human tendency to believe when times are good they will always be good. And when times are bad they will always be bad. This is not the case, the economy and the world will get better. Now is the time to begin a retirement plan for yourself and your employees. It will pay dividends for you very soon.

Please comment or call to discuss how this affects you.

  • Your Employees Appreciate Your Company’s 401(k) Plan (401kplanadvisors.com)
  • An Employer’s Guide in Choosing which Retirement Plan to set up (401kplanadvisors.com)
  • A Solo 401(k) Plan Can Cut Your 2011 Tax Bill by $9,800. But Need to Act Soon. (401kplanadvisors.com)
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