This article focuses on a number of fast approaching tax filing and document execution deadlines. It is not too early to begin thinking about these and other year-end tax and retirement planning opportunities as you prepare for year-end.
September 30, 2006
Beneficiary Designation Date. It may be possible for beneficiaries of IRAs and Qualified Retirement Plans (QRPs) to take Required Minimum Distributions (RMDs) based on their own single life expectancy. But only if the deceased IRA or QRP account owner had a Designated Beneficiary(s). Generally, a Designated Beneficiary is a beneficiary designated as of the account owner's death who still remains a beneficiary on September 30 of the year following death. Thus, any person or entity that was a beneficiary as of the date of the account owner's death, but is not a beneficiary as of September 30, 2006 (either due to distribution or qualified disclaimer), is not taken into account in determining the existence and identity of a Designated Beneficiary.
October 1, 2006
2006 Catch-up Contribution Universal Availability Deadline. Individuals who attain age 50 or over on or before December 31, 2006 may make catch-up contributions to applicable employer retirement plans: 401(k)s, Simple IRA, SEP, 403(b), or 457 plans. A plan is not required to permit catch-up contributions, but may do so. A plan that offers catch-up contributions meets non-discrimination requirements only if all catch-up eligible participants are given the same opportunity to make catch-up contributions. An employer that sponsors more than one of the applicable plans and want to provide for catch-up contributions must adopt catch-up contributions provisions for all the applicable plans no later than October 1, 2006.
October 1, 2006
Deadline To Establish SIMPLE IRA Plan For 2005 Plan Year. An employer may set up a Simple IRA plan any date between January 1, 2006 and October 1, 2006. If an employer doesn't come into existence until after this deadline, special rules apply and a Simple IRA plan may still be established.
October 1, 2006
Deadline To Set Up A New Safe-Harbor 401(k) Plan for 2006 Plan Year. The first plan year must be at least a three-month plan year. Therefore, new Safe-Harbor 401(k) plans must be established by October 1st.
October 15, 2006
Last Day To Recharactorize A 2005 Conversion To A Roth. Certain taxpayers may want to recharacterize from a Roth IRA to a traditional IRA. These taxpayers are (1) those whose Roth IRA has experienced a drop in market value of the assets following a 2005 conversion from a traditional to a Roth IRA, (2) those who converted and their AGI for 2005 exceeded $100,000, and (3) those who made a Roth IRA contribution and their AGI exceeded $95,000 for a single filer, or $150,000 for a married filer.
Assuming the taxpayer has timely filed their 2005 tax return, the taxpayer has until October 15th to transfer the monies without incurring a penalty. To claim a refund for any taxes paid on the conversion to the Roth IRA, file an amended return on Form 1040-X and mark the top of the first page 'Filed pursuant to section 301.9100-2.'
November 2, 2006
Deadline To Establish A SIMPLE IRA Plan Effective 1/1/2006. An employer may adopt a SIMPLE IRA plan to become effective January 1, 2006, provided the employer will not maintain any Qualified Retirement Plan (QRP) for 2006. A 457 plan is not treated as a QRP for purposes of denying SIMPLE IRA contributions. Note: beginning 2002, salary deferral contributions made to an eligible 457(b) plan no longer reduces the amount an employee may defer to a SIMPLE IRA.
November 2, 2006
Deadline For Providing SIMPLE IRA Required Notices (Including Notification Of Plan Termination). Employers sponsoring a SIMPLE IRA plan must provide each eligible employee with two required notices 60 days prior to the start of the 2007 plan year. First, employers must provide eligible employees with either (1) a Summary Plan Description (SPD) for the plan, or (2) a copy of the IRS Form 5304-Simple or 5305-Simple (whichever is applicable).
Second, employers are also required to notify each eligible employee that the employee may make or change salary reduction elections during this 60-day period, the 'election period.' Such elections or changes will become effective on January 1, 2007. Employers terminating a SIMPLE IRA effective December 31, 2006 must include notification of the termination.
December 1, 2006
Deadline For Notification Of Switch From Regular 401(k) Or Profit Sharing Plan To A Safe Harbor 401(k) Plan. Employers that have amended their existing 401(k) or PSPs to include a safe-harbor 401(k) provision effective 2007 must provide written notice to each eligible employee between 30 and 90 days prior to the start of the 2007 plan year. The written notice must (1) explain their rights and obligations under the plan, (2) be accurate and comprehensive, and (3) be written in a manner calculated to be understood by the average employee eligible to participate in the plan. Notification that each eligible employee may make, or change, a salary reduction election that will become effective on January 1, 2007.
December 15, 2006
Last Day to Initiate A 2006 Termination Of A Money Purchase Pension Plan Or (2) Reduction Of Future Plan Year Benefit Accruals To Zero. Beginning 2002, Economic Growth & Tax Relief Reconciliation Act (EGTRRA) increased the deduction limit for Profit Sharing Plans (PSPs) from 15% to 25% of eligible compensation. Because of the new limits, employers will no longer need their existing Money Purchase Pension plans (MPPs) to maximize contributions. Therefore, many employers will either (1) terminate existing MPPs, or (2) change the plan document to cease benefit accruals.
ERISA requires employers that are terminating a MPP, or changing it to cease benefit accruals, to provide written notice to all eligible participants at least 15 days prior to the effective date of the termination or change. December 31, 2005 is the last day to effectively terminate or merge a MPP prior to the beginning of the 2007 tax year. Therefore, the employer must provide the written notice on or before December 15, 2006.
December 31, 2006
Last Day To Execute Documents To Adopt A Qualified Retirement Plan (other than a Safe-Harbor 401(k)) For 2006. December 31 is the last day an employer may execute document to establish a Qualified Retirement Plan for 2006 to be effective any date between January 1st and December 31st, provided the employer did not previously maintain a Simple IRA plan for 2006. Employers whose corporate entity came into being after January 1 should use an effective date coinciding with or following the corporation's inception date.
401(k) plan notes: A participant may only defer compensation earned after a salary deferral form has been completed and signed. New Safe-Harbor 401(k)s must be established by October 1st, see above.
December 31, 2006
Required Minimum Distribution (RMD) Deadline. Taxpayers taking their second and following RMDs, from a QRP or IRA, must take distribution of their 2006 RMD on or before December 31, 2006. Taxpayers reaching age 701/2
during 2006 may delay taking their 2006 RMD, the initial RMD, until April 1, 2007. Taxpayers electing to delay distribution of their first RMD will then take two distributions in 2007: the 2006 RMD by April 1, 2007 and the 2007 RMD by December 31, 2007.
For more information on these and other year-end tax and financial planning opportunities, please consult with your Financial Advisor or CPA.