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Thursday, March 31, 2016

CWF Reminder - 4/30/16 is Deadline to Update Certain Old Keogh and Profit Sharing Plans

Any old Keoghs or old profit sharing plans sitting in any files? Forgotten gems or forgotten liabilities?

Substantial tax benefits are realized by sponsoring businesses and participants of qualified profit sharing plans and 401(k) plans. In order to gain such tax benefits such plans must be amended and restated on a timely basis.

April 30, 2016 is the deadline for most defined contribution plans to be amended and restated. If a plan has been updated within the last 1-20 months, it should be in compliance. If it has not been updated, it should be by April 30th, 2016.

CWF has been a prototype plan submitter since 1984. Contact us if your institution or any of your business clients would benefit by using a CWF document to amend and restate its retirement plan. The consequences of missing this deadline means an employer will have to pay substantially higher fees to bring the plan into compliance. The IRS may argue the plan is no longer qualified and the funds are deemed distributed and taxable.

The IRS has always taken the tax position that a distribution in any pension plan is eligible to be rolled over or directly rolled over to any type of IRA or other plan only if the plan is "qualified" at the time of the distribution. To be qualified at the time of distribution the plan document must set forth the current laws. Thus, the need to amend and restate the plan.

Posted by James M. Carlson at 14:20.36
Edited on: Tuesday, April 05, 2016 14:22.53

Tuesday, March 01, 2016

Understanding What Forms Are Needed To Establish a SEP-IRA

Jane Smith wishes to make a SEP-IRA contribution for herself. Jane is a self-employed horse rider/exerciser. She had a good year and so she wants to establish a SEP and then make a $26,000 contribution to her SEP-IRA for tax year 2015.

What forms will she need to prepare?

First, as an employer (a one person busines s), she must establish her Simplified Employee Pension Plan (SEP). She will do so by completing and signing the IRS model form 5035-SEP. Note that she signs the form as the “employer.” The financial institution does not sign this form. Jane will either obtain this form from her accountant, attorney, financial institution or she will find it on-line at the IRS website, www.irs.gov.

Second, as the employer, she will write a business check for the amount of $26,000 and she will contribute it to her SEP-IRA. A SEP- IRA is established by a person establishing a standard traditional IRA (IRS model form 5305) and then making a SEP-IRA contribution to it. For 2015 she is permitted to make a SEP-IRA contribution equal to the lesser of 25% of her adjusted business earnings or $53,000.

We recently had a call from an IRA representative where the IRA software system her bank was using did not make this clear. The system gave the idea that the only form needed was the Form 5305-SEP. The system did not make it clear that the individual either needed to have an existing IRA into which the SEP-IRA contribution would be contributed or a new SEP- IRA must be established. Both forms are needed and so hopefully the vendor wil change its system once it is advised that a clarification is needed.

IRS statistics show that annual SEP-IRA contributions exceed those of annual traditional IRA contributions. A financial institution will benefit by communicating with its business customers about the benefits of SEP-IRAs. The tax laws do not require a person who has an existing traditional IRA to set up a new SEP-IRA. Some financial institutions choose for administrative reasons to require a separate IRA, but the tax laws do not require it. If any employee would fail to have a SEP-IRA so the business did not make a SEP contribution for such employee, there would be no SEP and the expected tax benefits would not apply for the spons oring business and other employees.

In summary, establishing a SEP is easy as long as the two steps above are completed for a one person business and the three steps are completed for a business with employees.

Posted by James M. Carlson at 14:14.59
Edited on: Tuesday, April 05, 2016 14:18.18

SEPs The Last-Minute Retirement Plan and Tax Deduction


SEP — SEP is the acronym for Simplified Employee Pension plan. In order to have a SEP, two requirements must be met. First, an employer must sign a SEP plan document which may be: (1) the IRS model Form 5305-SEP; (2) a SEP prototype; or (3) a SEP plan as written specifically for that employer by an attorney. The employer may be a gigantic corporation or a self employed person. Second, all eligible employees must establish (or have established for them) a SEP-IRA.

SEP-IRA — A SEP-IRA is a standard, traditional IRA established with a financial institution to which an employer has made a SEP-IRA contribution. The IRA custodian is required to report SEP-IRA contributions in box 8 on Form 5498. In all other respects, the standard, traditional IRA rules will apply to administering SEP-IRAs. Contributions to SEP-IRAs are always owned by the employee, once the funds have been contributed to the employee’s SEP-IRA.

SEP plans may be established and funded by the normal tax deadline, plus extensions. A person may come into your institution in July of 2016, and make a SEP contribution of $53,000, for tax year 2015. If an individual has the proper extension(s) a SEP contribution may be made as late as October 15 of 2016, for tax year 2015.

Posted by James M. Carlson at 14:12.04
Edited on: Tuesday, April 05, 2016 14:19.07