Saving for Retirement


Saving for retirement is not an option but a necessity. The younger one starts, the greater the benefit. There are many choices for the retirement savings beginner or a seasoned retirement saver.

IRS News

Worker Classification

IRS launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.





Economic News

Wealth Distribution

The ultra wealthy in the United States is growing. The rest of us, not so much....more




News for CPAs
New Requirements

Engagement letter format has changed.







Individual Retirement Accounts

Summary of Options

Faced with a plethora of choices for retirement savings options, taxpayers need guidance. Whether from an employer sponsored account or retirement plans for employees and the self-employed, there are many options.

The following are popular options for employees and the self-employed (followed by employer-sponsored plans).

Traditional IRA

Employees and self-employed individuals who aren't active participants in an employer-maintained retirement plan can set aside and deduct up to $5,500 for tax year 2016, for contributions to an individual retirement account, or for the purchase of individual retirement annuities or endowment contracts. This limit is reduced by contributions made to all IRAs during the tax year. For individuals over 50, a catch-up contribution is available (if eligible) of an additional $1000 for a total maximum of $6,500.

An active participant in an employer plan (or whose spouse is) can't make deductible IRA contributions unless his/her adjusted gross income is below specified levels, as shown on the Individual Tax Tables.

Upon reaching 70-1/2, the taxpayer must start taking distributions as per distribution rules (see Individual Tax Tables.

Traditional IRAs can be rolled over penalty-free (but not tax-free) into Roth IRAs.

Roth IRA

A taxpayer can make nondeductible contributions to Roth IRAs. Qualified distributions from Roth IRAs are tax-free and penalty-free. Roth IRAs are not subject to the post-age 70-1/2 required distribution rules

An individual can make annual nondeductible contributions to a Roth IRA in amounts up to $5,500 for tax year 2016 ($1,000 catch-up for 50 and older), or 100% of compensation, if less, reduced by contributions for the tax year made to all other IRAs (other than to a SEP or SIMPLE plan).

The allowable contribution phases out ratably (in $10 increments) over specific levels of modified adjusted gross income. See tax tables for individuals for the specific income ranges.

Taxpayers, including those filing married filing separately, may convert amounts in a traditional IRA to amounts in a Roth IRA without regard to their modified adjusted gross income or filing status. The conversion may be done one of three ways.

(1) Rollover to a Roth IRA of a distribution from a traditional RIA within 60 days of the distributions, (2) Trustee--to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA or (3) Transfer of an amount in a traditional IRA to a Roth IRA maintained by the same trustee.

Qualified distributions from a Roth IRA are not included in income. These are distributions made after the five-year period beginning with the first tax year for which the taxpayer or the taxpayer's spouse made a contribution to a Roth IRA established by the taxpayer, including qualified rollover contribution from another IRA other than a Roth IRA, and are made: (1) on or after age 59 1/2, (2) at or after death (to a beneficiary or estate), (3) on account of disability, or (4) for a first-time home purchase expense.


SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan.

  • Available to any small business – generally with 100 or fewer employees
  • Easily established by adopting Form 5304-SIMPLE, 5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan document
  • Employer cannot have any other retirement plan
  • No filing requirement for the employer
  • Contributions:
    • Employer is required to contribute each year either a:
      • Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
      • 2% nonelective contribution for each eligible employee
        • Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $265,000 for 2015 (subject to cost-of-living adjustments in later years)
    • Employees may elect to contribute
    • Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money

The amount the employee contributes to a SIMPLE IRA cannot exceed $12,500 in 2016 (as it was in 2015).

If an employee participates in any other employer plan during the year and has elective salary reductions under those plans, the total amount of the salary reduction contributions that an employee can make to all the plans he or she participates in is limited to $18,000 in 2015.

  • Catch-up contributions. If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $3,000 in 2016. No change from 2015.


Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.

  • Available to any size business
  • Easily established by adopting Form 5305-SEP, a SEP prototype or an individually designed plan document
    • If Form 5305-SEP is used, cannot have any other retirement plan (except another SEP)
  • No filing requirement for the employer
  • Only the employer contributes
    • To traditional IRAs (SEP-IRAs) set up for each eligible employee
    • Employee is always 100% vested in (or, has ownership of) all SEP-IRA money

Contributions an employer can make to an employee's SEP-IRA cannot exceed the lesser of:

  1. 25% of the employee's compensation, or
  2. $53,000 for 2016 (same as 2015)

Note: Elective deferrals and catch-up contributions are not permitted in SEP plans.

Participants in Salary Reduction Simplified Employee Pension (SARSEP) plans established before 1997 were entitled to make elective salary deferral contributions. For these plans, a participant’s elective deferral contributions are further limited to $18,000 in 2016 or 25% of their compensation, whichever is less. Catch-Up contributions are not subject to this limit.


Employer-Sponsored Retirement Accounts


Summary of Popular Plans

Qualified pension, profit sharing and elective deferral (401(k)) plans offer substantial tax benefits to sponsor-employers and their employees.

The principal advantages include:

Employer gets an immediate deduction for contributions under the plan

the employee isn't taxed on his/her share of the fund until distribution

the tax is deferred on qualifying distributions of appreciated employer stock until the stock is sold

Pension Plan

A qualified pension plan (otherwise known as a defined benefit plan) provides systematically for the payment of definitely determinable benefits to employees (and their beneficiaries) after retirement over a period of years, usually for life.

Retirement benefits are generally measured by such factors as years of the employee's service and compensation received. Benefits under a defined benefit plan are 'definitely determinable' if they a re determined actuarially, on the basis that precludes employer discretion.

The employer must contribute to the plan on a regular basis so sufficient funds are available to pay required benefits to all retired employees as they come due. The employer bears the risk of having enough funds for pension payments.

Profit Sharing and Stock Bonus Plans

A qualified profit sharing plan must have a definite, predetermined formula for allocating contributions made under the plan among the participants, and for distributing the funds accumulated under the plan only after a fixed number of years, the attainment of a stated age or upon the occurrence of some event (disability, death, ...).

Contributions can be made to a qualified profit-sharing plan whether or not the employer has current or accumulated profits. Contributions must be made on a non-discriminatory basis.


Cash or deferred arrangements (CODAs), popularly known as "401(k)" plans allow an employee to choose whether the employer should pay a certain amount directly to the employee in cash, or should instead pay that amount on the employee's behalf to a qualified trust under a profit-sharing plan, a stock bonus plan, a pre-ERISA money purchase plan or a rural cooperative defined contribution pension plan.

Sharing Plan Contribution Limits

Two annual limits apply to contributions:

  • A limit on employee elective deferrals; and

  • An overall limit on contributions to a participant’s plan account (including the total of all employer contributions, employee elective deferrals and any forfeiture allocations).

Deferral limits for 401(k) plans 

The limit on employee elective deferrals (for traditional and safe harbor plans) is:

  • $18,000 in 2016

  • The $18,000 amount may be increased in future years for cost-of-living adjustments.

Generally, you aggregate all elective deferrals you made to all plans in which you participate  to determine if you have exceeded these limits. If a plan participant’s elective deferrals are more than the annual limit, find out how you can correct this plan mistake.

Deferral limits for a SIMPLE 401(k) plan

The limit on employee elective deferrals to a SIMPLE 401(k) plan is:

  • $12,500 in 2016

  • This amount may be increased in future years for cost-of-living adjustments

Plan-based restrictions on elective deferrals

These restrictions may further reduce the maximum allowable elective deferrals:

  • Your plan's terms may impose a lower limit on elective deferrals

  • If you are a manager, owner, or highly compensated employee, your plan might need to limit your elective deferrals to pass nondiscrimination tests

Catch-up contributions for those age 50 and over

If permitted by the 401(k) plan, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions. The additional elective deferrals you may contribute is:

  • 6,000 to traditional and safe harbor 401(k) plans in 2016

  • $3,000 to SIMPLE 401(k) plans in 2016

  • These amounts may be increased in future years for cost-of-living adjustments

Employee Stock Ownership Plans (ESOPs)

An ESOP is a qualified defined contribution plan that is either a stock bonus plan, or a combination stock bonus plan and money purchase plan, that invests primarily in employer securities, and is formally designated as an ESOP.

For S Corporations, to ensure that ESOPs benefit a broad range of an employees, restrictions apply that generally prohibit the accrual or allocation of S corporation stock to certain disqualified persons in an ESOP where 10% owners hold 50% or more of the interests in the S corporation.

Dividends on employer securities that are distributed from an ESOP must be reported on a Form 1099-R that does not report any other distributions rather than on Form 1099-Div

Vesting of Benefits

Plans must provide that a participant right to his accrued benefit vests at certain rates during the years of his/her employment. Benefits from employee contributions must be 100% vested at all times. Benefits derived from employer contributions must become nonforfeitable when the employee reaches normal retirement age.

Coverage and eligibility requirements

A qualified plan other than a government plan must meet special tests designated to ensure adequate coverage of rank and file employees and avoid discrimination.

The plan, on at least one day in each quarter, either (1) benefit 70% of the employees who aren't "highly compensated" or (2) benefit a percentage of nonhighly compensated employees that is at least 70% of the highly compensated benefiting, or (3) meet a test under which the average benefit for the nonhighly compensated.

The definition of "highly compensated" is an employee who (1) was a 5% owner at any time during the determination year or the preceding year, or (2) for the preceding year, received more than $115,000 in compensation from the employer, and, if the employer elects, also was in the "top-paid group" (top 20%) of employees for that year.


Sound confusing? For further information including other plan options and to speak with a retirement planner, contact us.