In this article, we will look at the advantages of making salary deferral 401k contributions to employer sponsored retirement programs.

1) Reduces Your Current Taxable Income

Contributions towards an employer sponsored 401k retirement plan are made in before-tax dollars. This means your current taxable income for the year is reduced by the total amount of contribution you have made. For example, you might be single and earn $50,000 this fiscal year. However, if you make a $4000 contribution towards a 401k retirement plan this year, your current taxable income for the year will be reduced to $50,000 – $4000 = $46,000. Say hypothetically, you are in the 25% tax bracket. Here are the results:

• Before Making 401k Contributions $50,000 x 25% = $12,500 Tax Owing
  After Making 401k Contribution of $4000. $46,000 x 25% = $11,500 Tax Owing
• After making 401k contributions of $4000, you have lowered your current tax owing from $12,500 to $11,500.
• Note: This is only a hypothetical example. Individual results are based on current taxable income, amount of 401k contributions and what tax bracket you fall into.

Note also that you will eventually be taxed on this $4000 you contribute towards a 401k plan. However, if you do this at the age of 65 (when you are not working and are in a lower tax bracket), you will pay a much lower tax at the age of 65, as opposed to now. Make sense?

2) No Taxes Owing on Earnings

Another advantage of contributing towards a qualified 401k retirement plan is the fact that any earnings you make on your contributions are also tax-deferred up until you retire or withdraw your money. For example, consider this hypothetical example:

• Annual 401k Contributions $4000
• # of Years of 401k Contributions 10 Years
• Interest Rate (Compounded Annually) 8%
• Future Value of 401k Investment 62,581.95
• Original Principal $4000 / year x 10 Years = $40,000
• Earnings $62,581.95 – $40,000 = $22,581.95

Until the time you make 401k withdrawals or turn 65 (upon retirement), you will NOT be taxed on this earnings amount of $22,581.95. Say you are in a tax bracket of 25% at the moment earning $50,000 a year. However when you retire, you will be in a tax bracket of only 10%. This means when you withdraw this earnings amount of $22,581.95 at the age of 65, you will be taxed only 10%, as opposed to getting taxed at your current tax bracket of 25%. Make sense?

3) Employer Match 401k Contributions

Most employers will match your 401k contributions up to a certain percentage amount. You should at least make salary deferral 401k contributions up to the percentage amount of 401k contributions your employer is willing to pay for you. Consider this hypothetical example:

James works for Coco Corporation and has an annual gross salary of $40,000. His employer said he will make employer matched contributions of $0.55 per every dollar that James contributes, up to 5% of his salary. Here’s what’s going on:

• John’s Annual Wage $40,000
• 5% of John’s Annual Wage $2000
• John Contributes $3000 this year to 401k Plan $3000
• Employer Matched 401k Contribution = $3000 x 0.55 = $1650

Therefore, what is the total sum of 401k contributions that John and his employer are making together?

• Total 401k Contributions $3000 + $1650 = $4650

What will the nest egg of John be after 10 years? Using a table similar to the one we used above, here are the results:

• Annual 401k Contributions $4650
• # of Years of 401k Contributions 10 Years
• Interest Rate (Compounded Annually) 8%
• Future Value of 401k Investment $72,751.52
• Original Contribution $3000 / year x 10 Years = $30,000
• Earnings $72,751.52 – $30,000 = $42,751.52

John contributing solely to the 401k plan would have resulted in a nest egg of $46,936.46 in 10 years. However, John and his employer matched contributions combined would result in a nest egg of $72,751.52 The difference is huge:

• Difference = $72,751.52 – $46,936.46 = $25,815.16

Studies indicate that many people do not save for retirement because they do not understand all the 401k gibberish. First there’s the traditional 401k, then there’s the Roth 401k, annuities, ROTH IRA, Individual Retirement Accounts (IRAs) and your savings account at your local bank. Out of all these options, the Roth IRA has come out to be the best and the most popular option. Why? Because its tax-free growth and flexibility of making withdrawals cannot be competed against! Studies suggest that compared to traditional 401k or 403b plans, a retiree who saves in a Roth IRA will have more savings upon retirement. Total Roth IRA assets in the United States totaled $178 billion as of December 2006 (Source: Investment Company Institute).

The Roth IRA was introduced under the Taxpayer Relief Act of 1997, pioneered by the late Senator William V. Roth, Jr. Under a Roth IRA, an individual can invest in all types of investment vehicles including common stocks, mutual funds, futures & options, certificates of deposit, as well as real estate. The main advantage of Roth IRA is its tax structure. Contributions to a Roth IRA are made only from earned income that has been taxed by the Federal government. Since you already pay taxes before saving your money in a Roth IRA, you are not required to pay federal taxes when you make withdrawals from your Roth IRA. Also, any capital gains you make on your Roth IRA investments can be withdrawn tax-free!

Difference between Traditional IRA and Roth IRA

In a traditional IRA, any contributions you make are tax-deductible and any withdrawals you make will be taxed by the federal government. This works inversely with a Roth IRA where any contributions you make is not tax-deductible (because you have already paid taxes on this), and any withdrawals you make will NOT be taxed by the federal government.

Roth IRA Contribution Limits

Advantages of Roth IRA

i) Roth IRA owners can withdraw up to the total value of their contributions at any point in time, without having to pay the 10% early withdrawal penalty or any federal income taxes.

ii) Upto $10,000 can be withdrawn without any penalty if the owner wishes to purchase a home or principal residence. The home must be purchased by either the Roth IRA owner, his spouse, ancestors or descendants. Also, the Roth IRA owner must not have previously owned a home for at least 24 months.

iii) If a Roth IRA owner dies and his spouse also owns a separate Roth IRA, the spouse is permitted to combine the two Roth IRAs into 1 single account without any penalties or fines.

iv) The Roth IRA does not force distributions upon the owner reaching 70 and 1/2 years of age. This is unlike all tax-deferred retirement plans including the Roth 401k where the owner is required to take minimum required distributions (MRDs) after the age of 70 and 1/2 years. Usually all distributions must be withdrawn by April 1st of the calender year.

v) If the Roth IRA owner expects to be in a higher tax bracket upon retirement, it is advantageous for him to contribute maximum amounts of money towards a Roth IRA. Why? Because money being invested in a Roth IRA is taxed at the current lower tax bracket, and will not be taxed when it is withdrawn upon retirement (and when the Roth IRA owner is in a higher tax bracket). For example, consider an investor who contributes $2000 to a Roth IRA when he is in a tax bracket of 21%, and will be in a tax bracket of 33% upon retirement. This means that investor has already paid 21% x $2000 = $420 in taxes. Upon retirement if the investor wants to withdraw his funds, he would have had to pay 33% x $2000 = $660 under a Traditional IRA. However since the investor has already been taxed at his lower bracket of 21%, he would NOT have to pay taxes upon taking retirement distributions when he is in a 33% tax bracket.

Understand 401k Hardship Withdrawals

The Internal Revenue Service (IRS) allows 401k investors to take out 401k hardship withdrawals in the form of loans only if these 6 criteria are met:

i) the withdrawal is due to an immediate and important financial need
ii) the withdrawal must be necessary to satisfy that need
iii) You have no other way to fulfill that need or no other sources of money
iv) the withdrawal should not exceed the total amount needed by you
v) You cannot contribute to your 401k plan for up to 6 months after your withdrawal date
vi) You must have first received all non-taxable distributions or loans available under your 401k

401k Hardship withdrawals are permitted by some large companies, but due to the high costs of administering them, they may not be readily available in smaller companies. Check with your Human Resources department to see if 401k hardship withdrawals are permitted in your 401k program.

The following are reasons acceptable by the IRS for a hardship withdrawal

i) Repairs of primary residences
ii) Funeral expenses
iii) Payments necessary to prevent you from being forced out of your home
iv) Home foreclosures
v) Payments of college tuition & other educational costs such as room & board, transportation, food, etc.
vi) Purchase of principal residence
vii) Unexpected or un-reimbursed medical expenses

401k hardship withdrawals are subject to a 10% early withdrawal penalty as well as income taxes due. For example if you withdraw $10,000 as hardship withdrawal, you will owe $1000 in penalty, as well as be taxed on the $9000. There are some hardship withdrawals however that are not subject to the 10% penalty, they are:

i) You stop working, get laid off, quit or retire in the year you turn 55 or after
ii) Court orders you to give money to a divorced spouse or dependent
iii) Unexpected medical debts that exceed 7.5% of your Adjusted Gross Income
iv) Permanent disabilities
v) You stop working and begin taking regular payments based on a schedule that will make equal payments for the rest of your expected life; this must last for 5 years or until you turn 59 and 1/2, whichever is longer.

A Simple 401k plan is less well known than its counterparts Simple IRA and a traditional 401k but actually combines the best of benefits provided by both plans into 1 single plan, the Simple 401k. In this article, we explore some of the features provided by Simple 401k plans and advantages/disadvantages.

Advantages of Simple 401k Plans

i) No Testing – Traditional 401k plans require intensive testing to make sure the plan works in compliance with regulatory requirements set out by law. Such testing must be done by 401k professionals and can be very costly. On the other hand, Simple 401k plans do not require such testing and can be very appealing to small business owners who do not have the capital to expense to all the heavy testing that traditional 401k plans require.

ii) Borrow Loans - Simple 401k plans make it easier to borrow loans from one’s 401k and pay it back in the form of principal and interest payments.

Disadvantages of Simple 401k

i) Immediate Vesting – With traditional 401k plans, new employees may be required to work a minimum # of years or months before they can make contributions to the company’s 401k plan. This can work in the form of a contribution vesting schedule. With Simple 401k, contributions are vested 100% immediately. This means employees who meet the eligibility of taking distributions from their retirement accounts may do so at any time, even if it means withdrawing their entire savings account.

ii) Lower Contribution Limits – The contribution limits for Simple 401k plans are lower than those of traditional 401k plans. Here’s a comparison of salary deferral limits for both plans.

iii) Limited Employer Matched Contributions – Employer matched contributions are limited to 3% of the employee’s compensation while this is up to 25% for traditional 401k plans.

iv) One Plan Limitation – An employer who participates in a Simple 401k plan cannot maintain any other retirement program for any of its employees that are eligible for Simple 401k contributions. On the other hand, an employer who maintains a 401k retirement program for its employees may also administer and have other defined-contribution plans, SEP IRAs, profit sharing and Roth IRA plans.

Eligibility for Participation

i) Every employer who is eligible to run a traditional 401k program for its employees is also eligible to administer Simple 401k. Examples include sole proprietors, partnerships and corporations. However, Simple 401k plans are limited to employers who have a maximum of 100 employees, each receiving compensation in excess of $5000 annual.

ii) Employees who have worked for their current employers for at least 1 year and who are 21 years or older must be allowed to participate in the Simple 401k plan.

Deadline?

A Simple 401k plan must be established between January 1st – September 30th of any year. This rule is waived for any businesses or corporations that go in to business after October 1st of the current year.

While there are many similarities between simple IRAs and Simple 401k plans, there are many differences as well. In this article, we compare and contract between Simple IRAs and Simple 401k plans.

Eligibility:

i) Employers – For both the Simple 401k and Simple IRA plans, employers must have a maximum of 100 employees or less who receive at least $5000 in annual compensation. Also, employers cannot maintain any other retirement plan for their employees who are eligible for the Simple 401k other than the Simple 401k. The employers can however run another retirement plan for employees who do not qualify for making contributions into the Simple 401k.

By contrast, an employer who runs a Simple IRA for his employees is not permitted to run any other retirement program no matter what. Therefore if an employee does not qualify for making contributions to a Simple IRA while his employer only administers a Simple IRA, then too bad for that employee!

ii) Employees – Employees are normally required to perform at least 1 year of service before they are eligible to participate in an employer’s Simple 401k plan. They must also be at least 21 years of age. By contrast, there is no age requirement for Simple IRA and no minimum 1 year service. Any employee who has earned at least $5000 in annual compensation in the last 2 years, and is reasonably expected to earn $5000 annual compensation this year is permitted to contribute to a Simple IRA plan.

The deadline to establish a Simple 401k or a Simple IRA is January 1st to October 1st of any given year. If a new business or corporation is formed after October 1st, then they are permitted to set up a Simple 401k or a Simple IRA. This deadline allows employees to make salary deferral contributions before the year end.

Also, because a Simple IRA is part of Individual Retirement Accounts, no loans are allowed to be withdrawn. By contrast, a hardship withdrawal or loan is permitted under the Simple 401k. Go here to learn more about 401k hardship withdrawals. Also, all contributions to a Simple 401k or a Simple IRA are 100% immediately vested.

Making Contributions to Simple 401k or Simple IRA

Employees are eligible to make salary deferral contributions to these retirement plans while employers can make matching contributions. For matching contributions, employers can make contributions of up to 3% of the employee’s total annual compensation. Here are the deferral limits for both the Simple 401k and Simple IRA programs:

Investors who are 50 years of age or older can make 401k catch up contributions. Also, the matching contributions that employers can make varies from the Simple 401k to the Simple IRA. All employer matching contributions to the Simple 401k are subject to a compensation cap of $245,000 for 2009 and $245,000 for 2010. Here’s an example to illustrate this concept:

Wood Corp. established a Simple 401k for its 95 employees. The company has elected to make matching contributions to each employee’s 401k for the year 2007. Joe who is the Chief Financial Officer of the company is eligible to receive $250,000 in annual compensation from the company. Joe decides to make his salary deferral contribution to the maximum limit of $10,500 for 2007. The amount of matching contribution that Joe receives from his employer depends on whether it is a Simple 401k or a Simple IRA.

i) Simple IRA – Joe would receive a matching contribution of 3% x $250,000 = $7500

ii) Simple 401k – Joe would receive a matching contribution of 3% x $225,000 = $6750
Note how only $225,000 out of Joe’s total compensation of $250,000 is taken into account. This is because under a Simple 401k, the employer would consider no more than $225,000 on which to make matching contributions.

3% Matching Contributions?

For the Simple IRA, an employer that decides to make matching contributions may reduce the percentage from 3% to 1% or more, for 2 out of every 5 years. The matching contribution percentage cannot be reduced to less than 1%

Further Readings

For further readings, go to IRS Publication 560 – http://www.irs.gov/publications/p560/index.html It gives very useful information on setting up Simple 401k or Simple IRA plans, contribution limits, notification requirements, tax treatment of contributions, minimum funding requirements, due dates and more!

Introduced in January 2006 under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Roth 401k is different from the traditional 401k plan because contributions are made after-tax (meaning after tax has been deducted off your pay). The Roth 401k is very similar to the Roth IRA; investors receive no tax deduction on annual contributions, but any withdrawals or proceeds will not be subject to tax either. Investors who own 403b plans are also eligible to contribute to Roth 401k. The government was more than happy to introduce this new piece of legislation because it means investors will pay more tax now, rather than making salary deferral contributions as in the case of traditional 401k plans.

The Roth 401k works inversely with a traditional IRA. With a traditional IRA, an investor receives current tax deduction after making contributions. Instead of this money going to the IRS now, it will stay with the investor and he can invest it in stocks/bonds/mutual funds or real estate. Over time, this money will grow tax-deferred. The government likes this idea too because say after 30 years of investing in various stocks/commodities/real estate, an investor has grown his money from $50,000 to $200,000. If he withdraws this money from his IRA, he will have to pay taxes not on the initial $50,000 but on the whole $200,000!

The Roth 401k works inverse with the above idea. The money you earn this year is taxed this year. You make contributions to a Roth 401k from your after-tax earnings. When you reach the age of 59.5 or more, you are eligible to make withdrawals that are not taxable (because they have already been taxed). The prospect of receiving tax-free money upon retirement is an idea liked by many investors. The idea of receiving tax dollars now is very much liked by the government such that some senators have proposed getting rid of traditional 401k plans or IRAs.

Roth 401k Works Best if:

• The federal government increases taxes over time
• You are a high income earner who has a compensation cap on Roth IRAs (maximum compensation cap of $245,000 in 2011)
• The mutual funds or stocks where you put your Roth 401k capital experience significant returns
• You are a young investor and need more time for your account to grow across various investments such as mutual funds, stocks, commodities, etc.
• You are in a lower tax bracket now and will be in a higher tax bracket upon retirement

Understand the Advantages of Roth 401k

i) Unlike the Roth IRA that has income limitations that will restrict high income earners from deducting the maximum tax off their earnings, the Roth 401k has no income limitations. The maximum compensation cap for Roth IRA is $101,000 for 1 individual, or $159,000 for for joint tax payers. In the case of the Roth 401k, there is no such compensation cap.

Note: The contribution limit for Roth 401k for 2011 is $16,500 for people under the age of 50, and $22,000 for people over the age of 50.

ii) Roth 401k provides tax-free withdrawals upon your retirement, and this idea is very appealing to investors.

iii) Also because of uncertainty regarding future tax legislation, it is better to lock in a lower tax rate now, than to wait upon retirement and pay taxes then. This is especially true for young investors who are earning lower incomes.

Disadvantages of Roth 401k

i) If you get terminated from your job or laid off and are forced to take a distribution of your Roth 401k assets, you are NOT exempt from paying taxes and will have to pay them.

Important Things You Should Know

Here are some of the important characteristics of Roth 401k that you should know about

i) Roth 401k is Voluntary – That’s right, Roth 401k is voluntary for employers. In order to offer Roth 401k for their employees, employers have to set up a tracking system that segregates Roth assets from the company’s existing plan. This tracking system is expensive to build and maintain, and employers may not choose to do it at all. If so, your employer will not be eligible to offer Roth 401k.

ii) Also, any matching contributions that your employer makes towards your Roth 401k must be deposited into a traditional 401k plan. Go figure!

iii) Unlike Roth IRAs, people who reach over the age of 70 and 1/2 must take minimum required distributions (MRDs) from their Roth 401k. This forces investors to take distributions even if they don’t want them or need them. Why wouldn’t they want them? Some investors like to leave behind inheritances for their children and grandchildren, and taking MRDs is not an option.

iv) If you think you are in a lower tax bracket now and will be in a higher tax bracket upon retirement, use a Roth 401k. If you think you will be in a lower tax bracket upon retirement and are thus in a higher tax bracket now, a traditional 401k makes sense.

v) Assets in a traditional 401k cannot be converted into a Roth 401k.

The Roth IRA was created by the Taxpayer Relief Act of 1997, pioneered by the late Senator William V. Roth, Jr. and was made effective on January 1st, 1998. Before 1998, investors who wanted to contribute towards an IRA would either make a deductible or non-deductible contribution to a Traditional IRA. Distributions taken from a traditional IRA were taxed as normal income, and early withdrawals before the age of 59 and a 1/2 were subject to a 10% early withdrawal penalty. The Roth IRA allows investors to take tax-free qualified distributions from their Roth IRAs without having to pay the 10% penalty. Here’s how it works.

Qualified Roth IRA Distributions?

Non-qualified Roth IRA distributions will be subject to normal income tax and a 10% early withdrawal penalty. A qualified distribution on the other hand must meet these criteria:

i) The distribution occurs at least 5 years after the investor established and funded his Roth IRA account. For this purpose, the five year period begins with the first day of the year for which the first contribution was made. For example, if the contribution was made on April 14th, 200, the 5 year period begins January 1st, 2000.

ii) The distribution must be taken under one of the following circumstances:

• the Roth IRA investor must be 59 and 1/2 years or older at the time of the distribution
• the Roth IRA investor becomes disabled at the time of taking the distributions
• the Roth IRA investor dies and his/her beneficiary receives the assets contained in the plan
• the distributions taken from the Roth IRA will be used in the purchase or building of a new home for the Roth IRA holder or qualified family member. This is limited to $10,000 per person per lifetime. Qualified family members include:
• the Roth IRA investor
• the Roth IRA investor’s spouse
• children of the Roth IRA investor
• grandchildren of the Roth IRA investor
• parent or ancestor of the Roth IRA investor

Taxing the Non Qualified Roth IRA Distributions

How non-qualified Roth IRA distributions are taxed depends on the source of the Roth IRA’s assets. There are 4 possible sources of Roth IRA assets:

• Normal contributions by the investor
• Earnings received on all contributions made by the Roth IRA investor
• Roth conversion of taxable traditional IRA assets
• Roth conversion of nontaxable traditional IRA assets

The IRS uses the source of the Roth IRA’s assets to determine ‘ordering rules’ of how assets will be distributed from the Roth IRA account. They are distributed in the following order:

1. Normal Roth IRA contributions by the holder
2. Taxable traditional IRA conversions
3. Non-taxable traditional IRA conversions
4. Capital gains and earnings made on all Roth IRA assets

Important Fine Print

i) Distributions of Roth IRA assets from normal participant contributions and from non-taxable conversions of traditional IRA assets can be taken anytime, tax free, if the 2 above criteria are met.

ii) Non qualified distributions of taxable traditional IRA conversion assets are subject to 10% early withdrawal penalties.

iii) Non qualified distribution of capital gains & earnings on normal contributions may be subject to income tax and 10% penalty.

Illustration

Simon established his first Roth IRA in 2002 and made annual participant contributions of $2000. In 2006, he converted his Traditional IRA assets to his Roth IRA for $40,000 (which was established in 2002). In 2007, Simon turns 55 years of age and wants to make some distributions of his assets. Here is his Roth IRA asset account at this time.

Assets Source

Simon wants to know the tax consequences if he distributes assets from his Roth IRA. Remember that assets are distributed in the following order; i) normal participant contributions ii) traditional IRA conversions iii) earnings.

i) Distribution of $10,000

A distribution of $10,000 is tax and penalty free because it comes from normal participant contributions made by John. Normal participant contributions have no waiting period for distributions and are tax free according to the IRS.

ii) Distribution of $25,000

The first $10,000 out of the $25,000 is tax and penalty free because it comes from normal participant contributions made by John (in Case i). The other $15,000 comes from taxable traditional IRA conversions made in 2006. Because these conversion assets were taxed when converted, they are not subject to tax now. However, they will be subject to the 10% early withdrawal penalty fee unless 5 years have passed since the conversion was made. The penalty can still be waived if any of these criteria is met:

i) Simon is 59 and 1/2 years of age or older (Simon is 55 at this time so this does not apply)
ii) Simon plans to use the distributed funds to purchase or build a new home for himself or his children, grand parents, spouse. There is a limit of $10,000 that can be distributed tax free.
iii) Simon becomes disabled before the distribution occurs
iv) Simon dies and his beneficiary takes over the assets
v) Simon uses the funds for medical expenses that are not reimbursable
vi) Simon uses the funds for higher education, college and university tuition fees
vii) Simon pays for medical insurance after an unfortunate job loss
viii) Simon’s assets are distributed as part of an IRS levy

iii) Distribution of $60,000

The first $10,000 withdrawn is penalty and tax free as in Cases i and ii. The other $40,000 is not subject to tax because the conversion assets were already taxed when the conversion occured, as in Case ii. The remaining $10,000 is attributed to non-taxable conversion assets and is not taxable because no deductions were allowed when assets were contributed to the Traditional IRA.

iv) Distribution of $65,000

Up to $60,000 of the funds will be treated as explained in Cases i to iii. The remaining $5000 is not subject to tax because Simon has had his Roth IRA for 5+ years and if he meets one of the following criteria:

i) Simon is 59 and 1/2 years of age or older (Simon is 55 at this time so this does not apply)
ii) Simon plans to use the distributed funds to purchase or build a new home for himself or his children, grand parents, spouse. There is a limit of $10,000 that can be distributed tax free.
iii) Simon becomes disabled before the distribution occurs
iv) Simon dies and his beneficiary takes over the assets

If none of these 4 rules apply to Simon, then his $5000 will be subject to income taxes as well as the 10% early distribution penalty.

Conclusive Points

• If an IRA holder does multiple Roth conversions, the 5 year period for each conversion is determined separately.
• If excess contributions are made to a Roth IRA and later withdrawn, these contributions cannot be included as part of ‘normal participant contributions’ for qualified distributions
• Roth IRA holders should keep a record of all their transactions and file the appropriate documents with the IRS for each of their transactions.

The important benefits of contributing towards an IRA are the tax deductions against annual income, tax-free growth of earnings and the non-refundable tax credits. You want to maximize the returns you get from contributing to your IRA, therefore it is essential to know the rules & limits placed behind these privileges we just mentioned.

i) IRA Tax Deductions: In a traditional IRA, any contributions you make are tax-deductible and any withdrawals you make will be taxed by the federal government upon withdrawal. However, if you contribute to an SEP IRA, Simple IRA or a Qualified IRA plan, you are considered an ‘active participant’ and the deductibility of your contributions is determined by your modified adjusted gross income (MAGI). The deductibility of your contributions is also determined by your tax-filing status; whether you are ‘married filing separately’, ‘married filing jointly’ or ‘single.’

If your Traditional IRA contributions are not tax-deductible, you can still contribute towards a traditional IRA. Alternatively, you can contribute towards a Roth IRA, here are the modified adjusted gross income (MAGI) limits.

Note: If your income falls in between the ranges that allow only ‘partial contributions’, you can use a special formula to determine that partial contribution.

Tip: If you are married but have lived away from your spouse for the entire tax year, you are not considered as ‘married’ for tax filing purposes. Your Roth IRA MAGI limits will be based on single limitations.

Note: If you make a non-deductible contribution to your traditional IRA, make sure you fill out IRS Form 8606. This form will help you and the IRS keep track of non-taxable balances in your Traditional IRA, should you make any withdrawals upon retirement. Download IRS form 8606 @ www.irs.gov

Split Your Contributions: Splitting your contributions between a traditional IRA and a Roth IRA can be beneficial in some cases. These cases are if:

i) You are eligible only for partial contributions to a traditional IRA. Instead of contributing the non-tax deductible amount to the traditional IRA (and grow it tax-deferred), contribute it to a Roth IRA where it grows tax-free.

ii) You are eligible only for partial contribution to a Roth IRA. To maximize your contributions for the year, contribute the remaining difference to a traditional IRA.

Note: Your combined contributions to a Roth IRA and a traditional IRA should NOT exceed stated IRA contribution limits of $5000 for the year 2010.

IRA Tax Credits: You might be eligible for a non-refundable tax credit of up to 50% of your IRA contributions depending on your adjusted gross income and tax-filing status. Here is the table specifying tax credits under each tax-filing status.

These non-refundable tax credits are allowed in addition to any deductions you get for your IRA contributions. To claim the non-refundable tax credits, be sure to file IRS Form 8880.

More than 100 million Americans are eligible for a 401(k) or other employee-directed retirement plan with a total of $6 trillion currently invested. Nearly 80% of this market is served by 100 top record keepers, asset managers and retirement plan advisory firms. There are at least 500,000 firms in the USA with a potential need for the iJoin solution. The iJoin platform is a turnkey mobile web solution that dramatically improves the efficiency and effectiveness of the 401(k) retirement planning and enrollment process.

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Many plan sponsors want to know how their 401k plan stacks up to the typical or average plan. This is often the first question asked when attempting to determine whether an effort should be made to upgrade the features and benefits of the plan.

Eligibility: Short service requirements (less than three months of service) are now common for participant contributions. In 1998, only 24 percent of plans allowed employees to begin contributing to their 401k plans immediately upon employment. Now, 60.3 percent of all plans permit immediate participation in their 401k programs. Short service requirements are even more common at large companies — 74.2 percent of companies with 1,000 or more employees provide immediate eligibility and 89.7 percent provide eligibility within three months.

• Immediate (one month or less)   60.3%
• 3 months or 90 days        15.3%
• 6 months or 1000 hours                 9.8%
• 1 year    11.2%
• Other    3.3%

Minimum Age Requirements: The common minimum age requirements for participation are:

• None     43.1%
• 18 Years Old       20.1%
• 21 Years Old       35.4%
• Other Minimum Age      1.5%

Vesting Schedules: Thirty-nine point five percent (39.5%) of plans provide immediate vesting for matching contributions, while 23.0 percent provide immediate vesting for profit sharing contributions. Among plans that do not have immediate vesting, graduated vesting is the most common arrangement for all plan types.

Automatic Enrollment: Thirty-eight point four percent (38.4%) of plans have an automatic enrollment feature. Automatic enrollment is most common in large plans — 53.7 percent of plans with 5,000 or more participants report having automatic enrollment. The most common default deferral is 3 percent of pay, present in 58.0 percent of plans. 53.1 percent of plans automatically increase the default deferral percentage over time.

Seventy-two percent of plan sponsors use a life-cycle or target date fund (TDF) as the default investment option, and 13% use a balanced or lifestyle fund. Sponsors of smaller plans are more likely to use TDFs — 78% of plans with $10 million to $99 million in assets use TDFs compared with 68% of plans with $1 billion or more.

Employer Contributions: Company contributions average 2.1% of payroll.

Numerous formulas are used to determine company contributions. The most common type of fixed match, reported by 27% of employers, is $1.00 per $1.00 up to a specified percentage of pay (commonly 6%). Twenty-three (23%) of all plans match $0.50 per $1.00 up to a specified percentage of pay (most commonly 6%).

Company Stock as Match: Only 17% of employers invest the employer matching contribution exclusively in company stock. Of those that do default the match exclusively to employer stock, there are fewer restrictions associated. Currently, 84% of these plans allow employees to diversify or transfer employer matching contributions at any time.

Employee Participation Rate: Eighty-nine percent (89%) of U.S. employees at companies offering a 401k program are eligible to participate. On average, 87.3 percent of eligible employees have a balance in the plan. Twenty-two point four percent (22.4%) of plan participants are no longer actively employed by the plan-sponsoring company.

Investment Options: The number of funds offered to plan participants appears to be leveling out after many years of steady increase. Plans offer an average of 18 funds for both participant and company contributions. The funds most commonly offered are actively managed domestic equity funds (87.3 percent of plans), actively managed international equity funds (86.0 percent of plans), and indexed domestic equity funds (82.4 percent of plans). The availability and use of target-date funds continues to grow. 62.3 percent of plans now offer them.

Investment Committee: Thirty-three percent of plan sponsors have no investment committee, though it varies heavily by plan size. More than half the plans with less than $5 million in assets did not. Fewer than one in 10 of plans with more than $5 million in assets did not have such a body.

Investment Policy Statement: Ninety percent of all plans have a written investment policy statement, but only about half of those with less than $5 million in assets do.

Investment Advisors: Sixty-six point seven percent (66.7%) of companies retain an independent investment advisor to assist with fiduciary responsibility. For 54.2 percent of those companies, the fee is a fixed amount and for 36.1 percent the fee is percentage of plan assets.

Investment Advice: Advice is offered in 60.1 percent of plans. Twenty-one point six percent (21.6%) of participants used advice when it was offered. Participant usage tends to be greatest in small plans.

Roth 401k: Among plans that permit participant contributions, 41.3 percent allow participants to make Roth after-tax contributions. Only 13.0 percent of participants make Roth contributions when offered the opportunity.

Catch-up Contribution: Catch-up contributions for participants aged 50 and older are permitted in 98.0% of plans. Thirty-one percent (31.0%) of these plans offer a match on the catch-up contributions.

Self-directed Brokerage Accounts: Self-directed brokerage accounts are offered in 15.5 percent of plans, while open mutual fund windows are offered in 8.3 percent of plans. On average, plans invest 2.2 percent of plan assets through brokerage windows and 1.5 percent through mutual fund windows.

Loans: Sixty-one percent of the 401k plans offer a plan loan provision to participants. The loan feature is more commonly associated with large plans (as measured by the number of participants in the plan). Ninety-four percent of plans with more than 10,000 participants included a loan provision, compared with 35 percent of plans with 10 or fewer participants. There is modest variation in participant loan activity by plan size, ranging from 17 percent of participants with loans outstanding in 401k plans with 26-100 participants to 23 percent of participants in 401k plans with more than 5,000 participants. Loan ratios vary only slightly when participants are grouped based on the size of their 401k plans (as measured by the number of plan participants). Among participants in plans with 100 or fewer participants, the loan ratio was 18 percent of the remaining assets, while in plans with more than 10,000 participants, the loan ratio was 15 percent.

Hardship Withdrawals: Hardship withdrawals are permitted in 85.6 percent of plans. The most common reasons for permitting hardship withdrawals include purchase of a primary residence or to prevent eviction or foreclosure (97.9 percent), medical expenses (97.2 percent), and post-secondary education expenses (93.5 percent). 1.9 percent of participants took a hardship withdrawal, when permitted.

Safe Harbor Plan Design: Thirty-four point two percent (34.2%) of plans have a Safe Harbor plan design in lieu of ADP/ACP testing.