Roth-it-Sharing Revisited for 2011 Tax Planning

As we close in on the end of 2011, we’ve had many inquiries about what 401(k) profit sharing provisions may be retroactively effective to January 1, 2011, even if a plan amendment is not signed until December.

In addition to making retroactive 2011 profit sharing allocation and discrimination testing changes in December, it’s also possible to retroactively implement a Roth-it-Sharing^SM  plan amendment and participant election to convert 2011 profit sharing contributions to Roth status.

Roth-it-Sharing^SM – Expanding the Boundaries of the 401(k) Plan

For decades, business owners and high income individuals have taken advantage of qualified retirement plans to shelter income from current taxation and to accumulate substantial savings for retirement.  Beginning in 2006, the law allowed a 401(k) plan sponsor to offer its participants the option to make their 401(k) contributions on a post-tax Roth basis.  While the Roth 401(k) feature was initially met with low adoption by plan sponsors, and even lower utilization by plan participants, recent events have caused renewed interest.

Why the renewed interest?

It appears that two factors are driving the groundswell of interest in Roth:

1.  A growing consensus that the top federal income tax rates will rise, and perhaps rise significantly.  By paying income taxes now, and allowing the earnings to grow tax free, participants may effectively lock in the income tax rate at what many consider to be a historic low.

2.  A realization that many business owners might never need all of their qualified plan accumulation in retirement.  While pre-tax monies will be taxed to either the participant or to their beneficiary at some point in the future, Roth accounts may be passed on to the next generation without taxation.

So what’s the problem?

For the last five years, the law has allowed participants to make their 401(k) contributions on a post-tax Roth basis. The law does not allow the plan sponsor to contribute the employer matching or profit sharing contributions on a post-tax basis.  For many business owners, the 401(k) deferral portion represents only about one-third of the annual amount being contributed on their behalf.   

So what’s the solution?

By using MandMarblestone’s customized Roth-it-Sharing^SM  approach to maximizing Roth contributions in a qualified plan, participants may elect to have not only their 401(k) contribution treated as a post-tax Roth contribution, but also their profit sharing and matching contributions treated as post-tax Roth contributions as they are funded.  The Roth-it-Sharing^SM approach is unique and available by utilizing our customized OCPP^® plan document and annual consulting services.

A quick example of the Roth-it-Sharing^SM approach

A 40 year old physician who is a new partner in a medical practice contributes $49,000 a year [a $16,500 401(k) contribution and a $32,500 profit sharing contribution] to the practice’s 401(k) profit sharing plan.  Assuming the physician will contribute at this rate until age 65, and earns a 5% rate of return, the account will have accumulated $2,455,560, either to spend, or to pass on to beneficiaries.  A distribution from a traditional 401(k) account would be 100% taxable.  Assuming a 35% income tax bracket, a lump sum distribution would result in income tax of $859,446.  This also assumes that Federal Income Tax Rates do not increase.

The same distribution from a MandMarblestone Roth-it-Sharing^SM Plan is 100% tax free, providing an additional $199,831, for an enhanced retirement at the time of distribution! Here’s what the comparison looks like.

MandMarblestone Roth-It 401(k) Plan                   Traditional 401(k) Plan

Account Balance After 25 Years                                  $2,455,560                                              $2,455,560

Taxes Due Upon Redemption @ 35%                           $0                                                          $859,446

Taxes Paid During Accumulation @ 35%                     $659,615                                                 $0

Roth-It Sharing Tax Savings                                        $199,831

Who is a Roth-it-Sharing candidate? Roth-it-Sharing may be right for any 401(k) plan, since all participants, regardless of age, compensation level or annual contribution amount they receive, may conclude that Roth is right for them. Certainly, those participants who currently are funding Roth 401(k) contributions or have recently completed a Roth IRA conversion are likely fits for Roth-it-Sharing.  Participants should consult with their individual tax advisors to determine if Roth contributions are right for them.

If you’d like to discuss how MandMarblestone might help you or any of your clients to implement Roth-it-Sharing, call Bob Mand, Ken Marblestone, Lori Gordon, Ian Haring or Mike O’Connell at:  215-222-5000, or e-mail us at: rmand@mand.com, marblestone@mand.com, lgordon@mand.com, iharing@mand.com, moconnell@mand.com.

We also remediate problematic plans to full IRS compliance.

You also may reach us through our website: www.mand.com.

Maximize Year End Tax Savings and Still Mantain Contribution Flexibility

With the end the year rapidly approaching, now is the time to review your retirement plan program to make sure that important, time sensitive opportunities are not missed.

It’s Not Too Late for Owners to Maximize at the $49,000 or $54,500 level in 2011!

Don’t have a 401(k) plan? Put in a new one now! Have a plan?
Modify it now! Either way, reduce 2011 taxes, increase owner’s
contributions and/or reduce 2011 staff contribution expense.

New plans may be implemented now, and existing plans, including
restrictive prototype documents, may be amended retroactively to
January 1, 2011, to take advantage of tax savings opportunities for 2011.
MandMarblestone’s IRS-approved OCPP® (One Category Per
Participant) plan design provides larger contributions for owners
and other favored employees at a lower cost to all other staff than
may be achieved with traditional or prototype plan documents.

The MandMarblestone Group does not offer investments or provide
investment advice. That is the responsibility of a 401(k) investment
professional.

What Does the OCPP® Plan Design Accomplish?

Our IRS-approved OCPP® plan design, along with our ongoing client and
advisor support, helps to accomplish the following results:

•  Maximize contribution to owners, family members and favored employees
•  Reduce staff contribution expense
•  Maximize contribution flexibility on a yearly basis to be
  responsive to economic and business changes without the need for
  a costly plan amendment

How to Reach Us

From initial, no-fee consultation and analysis, through proposal,
presentation, implementation, and personal support, contact Bob Mand,
Ken Marblestone, Lori Gordon, Ian Haring or Mike O’Connell at
MandMarblestone. (215) 222-5000, or e-mail us at:

rmand@mand.com, marblestone@mand.com, lgordon@mand.com, iharing@mand.com,
moconnell@mand.com

We also remediate noncompliant retirement plans to full IRS compliance.

You also may reach us through our website: www.mand.com.

Do You Value the Ability to Save for Retirement?

If yes, you need to let your elected officials in DC know!  Click the link to read a short article highlighting the fact that Congress continues to look for ways to reduce the deficit.  Guess where they are looking…they have turned their attention to the tax incentives that power the retirement plan system!  Don’t delay, read this article and follow-up with contacting your representatives in DC! http://bit.ly/tBzLbi

Ophthalmologists’ Retirement Plan Myopia Cured!

Despite the turbulent medical landscape, a local ophthalmology practice of 5
physicians was seeing continued success. They were pleased to welcome their
newest partner Joel, age 39, to their practice. Joel was excited to become a
partner, and to receive all of the related pay and benefits. Little did the partners
know that this one change would have significant financial consequences for their practice’s retirement plan.

The Problem

After the year end, they submitted their annual data to their TPA expecting the
same results they had enjoyed for years. However, including Joel in the Partner
category resulted in a huge increase for the required staff contribution.

Historically, the partners were able to maximize their pre‐tax savings amounts ($54,500 each) within the company plan for a cost of 4.42% of pay to each of their 21 staff members. Adding Joel meant that to achieve the same partner results, they would need to contribute over 10% of pay for each staff member! This meant approximately $65,000 more would need to be contributed for staff in order to maintain the maximum contribution for the physicians.

They asked their current provider for options…the answer was grim. Option 1: you can reduce the amounts saved per partner; Option 2: you can pay the increased staff cost.

Having no real choice, the shareholders were forced to reduce their pre‐tax
contributions, which resulted in additional personal income tax liability of $40,000
for the partners.

The current provider suggested amending the plan document for next year, which
would create a category for Joel to receive a contribution similar to all other staff.
This was unacceptable to Joel, as well as his physician partners, for obvious
reasons.

Frustrated, the founding physician called his financial advisor for help. His advisor
felt his pain and suggested that, if there was a solution, he knew MMG would have
the answer.

The Solution

MMG immediately recognized the practice’s prototype document utilized an
inefficient 2‐ tiered new comparability allocation, which severely restricted its
flexibility.

By implementing MMG’s proprietary OCPP® document, and utilizing their
proactive consultation, the practice was able to achieve the best possible
solution…here’s what they did:

• They selected their practice manager, Mary Jane, a 35 year employee, and gave her an additional $2,880 within the plan as a reward for her strong and consistent performance
• This additional contribution to a non‐highly compensated employee enabled ALL of the physician partners, including Joel, to receive the maximum allowable tax savings and allowed the plan to pass all required testing
• All other staff contributions remained at 4.42%

Based on this allocation, the partners were able to achieve their objective of maximizing the amount they contributed to the plan, while controlling the overall employer contribution cost. In fact, over 81 cents of every dollar the partners contributed to
the plan benefited them! The plan was able to continue as an efficient tax shelter.

Summary

With the implementation of MMG’s customized OCPP® plan document and
proactive consulting, the practice was able to achieve its objectives without
significant cost. Now, as new partners emerge as the practice grows over time, the
physicians are confident that their customized approach will allow them to
continue to find effective solutions that will always remain legally compliant.

Clothing Manufacturer Gets a Great Retirement Plan “Fit”

For 40 years, a successful manufacturer and distributor of children’s clothing had been steadily growing.  The company always viewed its employees as its greatest asset and was generous.  Despite economic uncertainty, it held its own and is now seeing exponential growth!

Ironically, its success was creating a strain in its retirement plan programs.  The Company had always sponsored both a Defined Benefit (DB) plan and a 401(k) plan for its employees.  While the DB plan had been the central benefit, the growth of the company (both in increased number of staff and higher salaries of staff) was causing the required DB employer contribution to spiral out of control.

To find out how MMG was able to solve the problem, visit http://bit.ly/sGRVR3.