Eyeworld

by John J.Grande, C.F.P., Traudy F. Grande, C.F.P., and John S. Grande, C.F.P. Three timely tax facts A fROTHy deferral decision: Roth 401(k) or traditional 401(k)? When 401(k) enrollment time comes around, many eligible 401(k) participants must decide among the traditional pre-tax 401(k) salary de- ferral, the new after-tax Roth 401(k) salary deferral, and, perhaps, split- ting their salary deferrals between the two, for example, 50% desig- nated as pre-tax and 50% designated as after-tax. Let's take a quick look at some of the basic information re- quired to be able to make a knowl- edgeable decision. The Roth 401(k) builds on the Roth IRA concept. That seems to be the appropriate starting place for our discussion. The Roth IRA after-tax contribution limit for 2010 is $5,000, plus a catch-up contribution of $1,000 for those who have reached age 50 or older. What makes the Roth IRA so attractive is that there are NO required minimum dis- tributions (RMDs), and qualified dis- tributions of contributions and earnings thereon are tax-free. How- ever, the Roth IRA is not available to everyone. For 2010, the ability to make an after-tax Roth IRA contribu- tion is restricted to those whose AGI exceeds $105,000 for single filers and $167,000 for married filers. For- tunately, for high wage earners, this Roth IRA income restriction does not apply to 401(k) plans. Eligible traditional 401(k) plan participants may make a 2010 salary deferral of up to $16,500, plus a catch-up contribution of $5,500 for those who have reached age 50 or older. An advantage to the tradi- tional 401(k) plan is that salary de- ferral is on a pre-tax basis, which means it is not included in taxable income for the year in which it is deferred. The downside to the tradi- tional 401(k) is that once a partici- pant reaches age 70½, RMDs must be taken and distributions are sub- ject to ordinary income tax. A Roth 401(k) plan sidesteps the Roth IRA restriction on income and combines the attractions of the Roth IRA with the higher salary deferral limits of the traditional 401(k). Regardless of income, eligible Roth 401(k) partici- pants may make a full Roth 401(k) salary deferral of up to $16,500, plus the $5,500 catch-up contribution. The Roth 401(k) is still a 401(k) plan, however, so RMDs must begin at age 70½. This, because it is antici- pated, may be incorporated into fi- nancial plans and the salary deferral decision at hand. A large number of factors comes into play when deciding whether to make a traditional 401(k) contribu- tion, a Roth 401(k) contribution, or, if permissible, a combination of the two. Tax considerations will have a major impact on the decision. For example, the value of the current benefit to a pre-tax traditional 401(k) salary deferral must be weighed against the future recovery of tax-free earnings with the Roth 401(k) salary deferral. Proper exami- nation of the tax savings factor alone requires financial analysis in- corporating modeling tools that also take into consideration expected earnings rates, length of time before distributions will begin, and the an- ticipated size and frequency of distri- butions. Investors agree: Saving for retire- ment is important. As more and dif- ferent types of retirement savings accounts become available, selecting the most appropriate savings vehicle becomes more complex. If you would like to know more about the Roth 401(k), the traditional 401(k), the Roth IRA, or retirement savings in general, contact your financial ad- visor. After all, the harder your money works for you now, the more secure you are likely to be upon re- tirement. 2011 tax changes, healthcare reform hoaxes The healthcare reform legislation that passed earlier this year was in- credibly broad in scope, so it's not surprising that there's a good deal of confusion and a number of false or misleading claims being circulated. Here's the truth behind two of the claims that have gained the most traction lately. The claim: Beginning in 2011, you'll be taxed on the value of your employer-provided health insurance. There are several email cam- paigns making their way around right now claiming that beginning in 2011 taxable income on forms W-2 will be increased to reflect the value of employer-provided health insurance. A typical email warns: "You will be required to pay taxes on a large sum of money that you have never seen. Take your last tax form and see what $15,000 or $20,000 ad- ditional gross does to your tax debt. That's what you'll pay next year. For many it also puts you into a new higher bracket, so it's even worse. This is how the government is going to buy insurance for the 15% who don't have insurance and it's only part of the tax increases." The facts: While it's true that beginning in 2011 the healthcare re- form legislation requires employers to begin reporting the cost of em- ployer-provided healthcare coverage on an employee's Form W-2, the cost is included for informational purposes only to show employees the value of their healthcare bene- fits. The amount reported is not in- cluded in income and will not affect your tax liability. The claim: Beginning in 2013, a new federal sales tax will apply to the sale of a home. The claim is that beginning in 2013 all real estate sales will be sub- ject to a new 3.8% federal sales tax. The emails making this claim gener- ally contain some variation of the following text: "Under the new healthcare bill—did you know that all real estate transactions are now subject to a 3.8% sales tax? The bulk of these new taxes don't kick in until 2013. If you sell your $400,000 home, there will be a $15,200 tax." The facts: This claim, though inaccurate, has a basis in fact. There's no federal sales tax being im- posed on the sale of homes. But, be- ginning in 2013, the healthcare reform legislation does impose a new 3.8% Medicare contribution tax on the net investment income of EW Ophthalmology Business 86 February 2011

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