Tag Archives: Distribution

Self-Directed 401(k), Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA

Required Minimum Distributions for 2011

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Question: Mom received two RMD letters one for her Roth IRA and one for her Roth 401k. As these are both Roth’s isn’t she exempt from mandatory distributions? Regardless she hasn’t owned the accounts for at least 5 years.

Answer: Regarding the RMD letters, your Mom does NOT need to take an RMD from her Roth IRA.  They centralized the process of sending out RMD letters this year, and someone erroneously failed to delete the Roth IRAs from the list.  I apologize for the error made by Quest IRA, Inc.  The only time you ever have to take an RMD from a Roth IRA is if the Roth IRA is an inherited IRA.

However, if your Mom has reached age 70 ½ she DOES have to take an RMD from her Roth 401(k).  Nothing in the 401(k) regulations exempts Roth 401(k)s from the mandatory distribution requirements.  As a 5% or more owner of the company, she cannot defer distributions as she could if she was just a worker bee.  The fact that she has not met the 5 year requirement to make it a qualified distribution doesn’t change the distribution requirements.  Essentially, her contributions and the profits will come out pro rata, so that if 75% of the money in her Roth 401(k) is her contribution and 25% is profit, then the taxable portion of her distribution will be 25% until she meets the 5 year requirement.

Let me know if you have any questions. Have a great day!

 

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

How can I take possesion of a real estate property without selling it from my IRA?

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Question:

Can I make a total distribution without selling the property in my IRA?  I would like to make a 60 day rollover and replace the IRA property with cash.  This would allow me to purchase another property.  Ultimately, I want my business to own the property outright.  Can I have an investor willing to buy the property and sell back to my business at a market rate?

Answer:

Yes, you can take a distribution of property from your IRA without selling it.  Simply get an appraisal of the property and request a distribution.

Unfortunately, you would not be able to replace the property with cash, since you can only roll over the same property as you distributed.  Also, if the IRS was able to detect that you sold the property to an investor who turned around and sold it to your business this would be an indirect prohibited transaction which would cause your IRA to be distributed as of January 1 of the year in which you did the prohibited transaction, so that should not be a path you pursue.

Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can I or When Can I Take Tax Free Penalty Free Distributions From My Converted Traditional to Roth IRA?

Question: My 35 year old son is converting $160,000 form a tradtitiional IRA to a Roth. Assuming a $50,000 tax bite, and assuming he pays the $50,000 with outside money so he converts the whole $160,000, can the $160,000 be accessed penalty free immediately because it becomes the basis and the tax has been paid?

Answer: Unfortunately not.  Assuming the conversion represents the only Roth money your son has, the conversion amount cannot be removed within 5 tax years without paying the premature distribution penalty of 10%.  The ordering rules for distributions from a Roth IRA are 1) contributions 2) conversions, and 3) profits.  So if your son has made contributions to a Roth IRA he can withdraw those at any time without penalty.  Beyond the contributions, conversions can be removed only after 5 years without penalty, unless he meets one of the other exceptions to the penalty rules (most commonly 59 ½).  Profits can only be withdrawn tax and penalty free as qualified distributions, meaning your son has had a Roth IRA somewhere for at least 5 years and meets one of four other tests (again, most commonly 59 1/2).  You may find the description of the ordering rules beginning on page 66 of IRS Publication 590, which you can review and download from the IRS at www.irs.gov.  Good luck with your investing!

Follow Up Question: Thank you for a quick response. I did go to the irs.gov. site. From the website and your email, this is what I understand. Please forgive any repetition. I have received very different answers from seminars and regional offices, so your  expert help is hugely valuable! I want my son to be clear and comfortable as he is concerned about accessible, penalty free rainy day money prior to age 59 1/2. I also want to be able to deliver correct information to other investors. Is this correct: if my son converts $160k of traditional IRA money and pays the taxes out of pocket, in 5 tax years he can access the $160k without penalty at approximately age 41?  He currently has $15k in an existing Roth he has had for 7 years. The contribution portion of the $15k can be taken today penalty free and the profit portion will be penalized if accessed prior to age 591/2. Correct? Any profit is subject to regular Roth rules and those conditions are clearly defined and I understand them. I will not continue to bother you, but knowledgeable experts are hard to find.

Follow Up Answer: Yes, according to the paragraphs describing the additional tax on distributions beginning on page 64 of the 2009 IRS Publication 590, your son must pay the 10% penalty for distributions of his conversion contribution from his Roth IRA made within 5 tax years of the conversion – in other words, if he converts in 2010 and takes a distribution before January 1, 2015 he will be subject to this penalty to the extent that this distribution exceeds his regular contributions to his Roth IRAs.  To figure the taxable part of any non-qualified distribution (as opposed to the penalty) use the Worksheet 2-3 on page 67 of Publication 590.  You will see from that worksheet that the amount of his regular Roth IRA contributions are not includible in income (line 12 subtracts these amounts out) and are therefore not subject to the 10% premature distribution penalty either (see the paragraph entitled Other Early Distributions  at the top of page 66, which indicates “you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions”).

 
Having said this, as you know from the disclaimer at the bottom of my prior emails you are not able to rely on this email as tax advice, so you should absolutely contact your own tax advisor to verify the implications for your individual tax situation.  I would be curious to learn what you have heard from seminars and regional offices if you care to share it.  I know there is a lot of confusion out there on this topic, even by some professionals such as CPAs.  Perhaps the most confusing thing is the fact that there are 2 different 5 year clocks when it comes to Roth IRAs, one being the 5 years necessary for a distribution to be a qualified distribution and the other being the 5 year clock for conversion contributions before you can escape the 10% premature distribution penalty, as we have been discussing here.  Anyway, thank you for your question.  Let me know if I can assist you further. Have a great day!

Self-Directed IRA & Qualified Plan Information

The Saver’s Tax Credit – How to get up to $2,000 FREE from the U.S. Government

By H. Quincy Long

            Tax time is coming, and many of you are considering whether or not to make a 2007 contribution to your Traditional or Roth IRA.  I have good news!  If you are at least 18 years old, you are not a full-time student, you are not claimed as a dependent on another person’s tax return and you meet the income requirements listed below, you are entitled to a tax credit of up to 50% of your contribution to almost any type of retirement plan, including a Roth IRA!  If you then take your refund from the government and put it back into your IRA, your retirement savings will increase by as much as 50%!

            Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code as part of the Pension Protection Act of 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.  To qualify for the Saver’s Tax Credit, you must have Modified Adjusted Gross Income (MAGI) within the following limits for 2007:

            Credit              Income for Married     Income for Head of    Income for

            Rate                 Filing Jointly               Household                   Others

            50%                 up to $31,000              up to $23,250              up to $15,500

            20%                 $31,001 to $34,000     $23,251 to $25,500     $15,501 to $17,000

            10%                 $34,001 to $52,000     $25,501 to $39,000     $17,001 to $26,000

            The maximum tax credit allowed for 2007 is $1,000 (with a $2,000 contribution), or up to $2,000 if married filing jointly and each spouse makes a contribution.  Simply attach Form 8880, Credit for Qualified Retirement Savings Contributions, to your income tax return, and you will receive up to a $2,000 tax credit.  A tax credit is a dollar for dollar reduction in your tax bill, as opposed to a tax deduction, which only reduces the amount of money on which you pay income taxes.  You may get more information on this credit from IRS Publication 590.

            To prevent abuse, the IRS has rules which will reduce the amount of contribution which qualifies for the saver’s tax credit if the IRA owner has taken distributions from any eligible employer plan or IRA during a specified testing period.  The testing period includes the two taxable years prior to the year the credit is claimed, plus the taxable year the credit is claimed and the following year up until the tax filing deadline for the year the credit is taken, including extensions.   For example, if Josh contributes $2,000 to his Roth IRA for 2007 but had previously removed $500 from his IRA in 2006 and removes an additional $500 in 2008 before October 15, only $1,000 of his $2,000 Roth IRA contribution for 2007 may be used toward the saver’s tax credit on his 2007 tax return.

            Let me give you an example.  Lucky Larry, a married man, was downsized from his job in the corporate world in December, 2006.  Larry decided that he wanted to be a real estate investor instead of looking for another j-o-b.  Things went fine in 2007, but Larry’s modified adjusted gross income after all of his expenses will be $30,000 due to his various write-offs, and his taxable income after the standard deduction and 2 exemptions will be $13,500.  Therefore his taxes before the tax credit will be $1,353 (see instructions for Form 1040, page 65).  He and his wife contribute $1,353 each to a self-directed Roth IRA at Quest IRA, Inc. which they can use to purchase real estate options, debt-leveraged real estate, and many other things.  Larry and his wife will receive a tax credit of $1,353 (50% of each of their contributions). 

            Although the maximum contribution for purposes of the tax credit is $2,000 each, the tax credit is non-refundable.  This means that the maximum tax credit Larry and his wife can receive is equal to the taxes they would otherwise pay.  With the tax credit, Larry’s income tax for 2007 is ZERO!  Larry and his wife wisely decide to contribute the tax refund back into their Quest IRA, Inc. self-directed Roth IRAs.  Each Roth IRA grows by 50% to $2,029.50 absolutely FREE, courtesy of the United States government!

Self-Directed Roth IRA, Self-Directed Traditional IRAs

Do Roth Conversions Make Sense? How to Analyze the 2010 Roth Conversion Opportunity

By: H. Quincy Long           

            How would you like to have tax free income when you retire?  Would you like to have the ability to leave a legacy of tax free income to your heirs when you die?  The great news is that there is a way to achieve these goals – it is through a Roth IRA.

            Historically, because of income limits for contributions to a Roth IRA and for converting a Traditional IRA into a Roth IRA, high income earners have not been able to utilize this incredible wealth building tool.  Fortunately, the conversion rules are changing so that almost anyone, regardless of their income level, can have a Roth IRA.  But is it really worth converting your Traditional IRA into a Roth IRA and paying taxes on the amount of your conversion if you are in a high tax bracket?  For me, the answer is a resounding yes.  I firmly believe it is worth the pain of conversion for the tremendous benefits of a large Roth IRA, especially given the flexibility of investing through a self-directed IRA.

            For Traditional to Roth IRA conversions in tax year 2009, the Modified Adjusted Gross Income (MAGI) limit for converting to a Roth IRA is $100,000, whether you are single or married filing jointly.  However, the Tax Increase Prevention and Reconciliation Act (TIPRA) removed the $100,000 MAGI limit for converting to a Roth IRA for tax years after 2009.  This means that beginning in 2010 virtually anyone who either has a Traditional IRA or a former employer’s retirement plan or who is eligible to contribute to a Traditional IRA will be entitled to convert that pre-tax account into a Roth IRA, regardless of income level.

            Even better, for conversions done in tax year 2010 only you are given the choice of paying all of the taxes in tax year 2010 or dividing the conversion income into tax years 2011 and 2012.  If you convert on January 2, 2010, you would not have to finish paying the taxes on your conversion until you filed your 2012 tax return in 2013 – more than 3 years after you converted your Traditional IRA!  One consideration in deciding whether to pay taxes on the conversion in 2010 or dividing the conversion income into 2011 and 2012 is that 2010 is the last tax year in which the tax rates are at a maximum of 35%.  Tax rates are scheduled to return to a maximum tax rate of 39.6% in 2011, and other tax brackets are scheduled to increase as well, so delaying the payment of taxes on the conversion will cost you some additional taxes in 2011 and 2012.  The benefit of delaying payment of the taxes is that you have longer to invest the money before the taxes need to be paid, whether the payment comes from the Roth IRA or from funds outside of the Roth IRA.

            The analysis of whether or not to convert your Traditional IRA to a Roth IRA is a complex one for most people, because it depends so much on your personal tax situation and your assumptions about what might happen in the future to your income and to tax rates, as well as how you invest your money.  From my own personal perspective, I make the simple assumption that tax free income in retirement is better than taxable income.  I can afford to pay my taxes now (not that I like it), and I would like to worry less about taxes when I retire.  I also don’t believe that tax rates will be going down in the future.  For me, the decision comes down to whether I want to pay taxes on the “acorn” (my Traditional IRA balance now) or the “oak tree” (my much higher IRA balance years in the future as I make withdrawals). 

            The way I analyze whether or not to convert to a Roth IRA is to calculate my “recovery period” – that is, the time it takes before my overall wealth recovers from the additional taxes I have to pay on the conversion.  If I can recover the cost of the taxes on the conversion before I might need the money in the Roth IRA, then I say it is worth doing, especially since the gains after the conversion are tax free forever.  Fortunately, with a self-directed IRA you are in total control of your investments, and the recovery period can be quite short.  There may also be a benefit if you are able to convert an asset now that may have a substantial increase in value later.

            Using my own situation as an example, I have been planning on doing a conversion in 2010 ever since the passage of TIPRA was announced in 2006.  My first step was to immediately begin making non-deductible Traditional IRA contributions.  Even though I am covered by a 401(k) plan at my company and earn more than the limits for making a deductible Traditional IRA contribution, this does not prevent me from making a non-deductible contribution since I am under age 70 ½.  The main reason I have been making non-deductible contributions to my Traditional IRA is to have more money to convert into a Roth IRA in 2010.  The best thing about this plan is that only the gains I make on the non-deductible contributions to the Traditional IRA will be taxed when I convert to a Roth IRA, since I have already paid taxes on that amount by not taking the deduction.

            I plan on converting approximately $100,000 in pre-tax Traditional IRA money in 2010.  The actual amount converted will be more like $150,000, but as I noted above my wife and I have been making non-deductible contributions to our Traditional IRAs since 2006, so the actual amount we pay taxes on will be less than the total conversion amount.  This means that my tax bill on the conversion will be $35,000 if I pay it all in tax year 2010 or $39,600 divided evenly between tax years 2011 and 2012, assuming I remain in the same tax bracket and Congress doesn’t make other changes to the tax code.

            To help analyze the conversion, I made some calculations of how long it would take me to recover the money I had to pay out in taxes at various rates of return, assuming a taxable conversion of $100,000 and a tax bite of $35,000.  I calculated my recovery period based on paying the taxes with funds outside of the IRA (which is my preference) and by paying taxes from funds withdrawn from the Roth IRA, including the early withdrawal penalty I would have to pay since I am under age 59 ½. 

            If I pay taxes with funds outside of my Roth IRA and can achieve a 12% return compounded monthly, my Roth IRA will grow to $135,000 in only 30 months, at which point I will have fully recovered the cost of the conversion.  A 6% yield on my investments will cause my recovery period to stretch to 60 months, while an 18% yield will result in a recovery period of only 20 months!  Of course paying taxes with funds outside of the IRA reduces my ability to invest that money in other assets for current income or to spend it on living expenses.  But if I have to withdraw the money from the Roth IRA to pay taxes and the early withdrawal penalty, the recovery period for my Roth IRA to achieve a $39,000 increase ($35,000 in taxes and a $3,900 premature distribution penalty) increases to 50 months at a 12% yield and 99 months for a 6% yield.  Paying the taxes from funds outside of my Roth IRA will result in a much larger account in the future also since the full $100,000 can be invested if taxes are paid with outside funds, while only $61,000 remains in the Roth IRA after withdrawal of sufficient funds to pay the taxes and penalties.

            I believe that since my IRAs are all self-directed I can easily recover the cost of the conversion (i.e. the taxes paid) in less than 3 years based on my investment strategy.  From that point forward I am building tax free wealth for me and my heirs.  How can I recover the taxes so quickly?  It’s easy!  Self-directed IRAs can invest in all types of non-traditional investments, including real estate, notes (both secured and unsecured), options, LLCs, limited partnerships and non-publicly traded stock in C corporations.  With a self-directed IRA you can take control of your retirement assets and invest in what you know best.

            In my retirement plan I invest in a lot of real estate secured notes, mostly at 12% interest with anywhere from 2-6% up front in points and fees.  I also own some stock in a 2 year old start up bank in Houston, Texas which is doing very well, and a small amount of stock in a Colorado bank.  As the notes mature I plan on purchasing real estate with my accounts, because I believe now is the best time to buy.  In some cases I may purchase the real estate itself and in other cases I will probably just purchase an option on real estate.  The bank stock will be converted at the market price in 2010, but when the banks sell in a few years I expect to receive a substantial boost in my retirement savings since banks most often sell at a multiple of their book value.  In the meantime, the notes and the real estate will produce cash flow for the IRA, and if I have done my investing correctly the real estate will also result in a substantial increase in my Roth IRA when it sells in a few years.

            Note that I have written this article from the perspective of someone who is in a high tax bracket.  A lower tax bracket will reduce the recovery period and is an even better bargain, especially if you can afford to pay the taxes from funds outside of the Roth IRA.  If you take advantage of the opportunities afforded to you by investing in non-traditional assets with your self-directed Roth IRA, you can truly retire wealthy with a pot of tax free gold at the end of the rainbow.

            H. Quincy Long is Certified IRA Services Professional (CISP) and an attorney and is President of Quest IRA, Inc., with offices in Houston, Austin,  and Dallas, Texas. In addition to Texas, Qunicy has opened an office in Mason, MI this year in December of  2011 and is planning to open an office in Seattle, Washington within the next 12 months.  He may be reached by email at Quincy@QuestIRA.com Nothing in this article is intended as tax, legal or investment advice.

Self-Directed Roth IRA, Self-Directed Traditional IRAs

What’s in a Name? – Why It’s Important to Name a Beneficiary for Your IRA

By H. Quincy Long

             Many people probably don’t think too much about how important it is to name a beneficiary for their IRAs.  However, as my family recently found out, ignoring this important detail when setting up your IRA can be costly from a tax perspective.

             I recently received a distribution check from an IRA of my father, who passed away last year.  My father was a very careful planner, so I was quite shocked at his lack of tax planning with his IRA.  When setting up his IRA he named his estate as the beneficiary of the IRA (this is equivalent to not naming a beneficiary at all).  This meant that when he passed away the estate had to be probated, even though the IRAs were the only assets requiring probate in his estate.  IRAs that have named beneficiaries are generally non-probate assets, meaning that they pass directly to the beneficiaries instead of passing through a will.  That was the first problem. 

The larger problem came because of the lack of choices he left us by naming his estate as beneficiary.  In a Traditional IRA, required minimum distributions must begin no later than April 1 of the year after the IRA owner turns age 70 ½.  This is known as the required beginning date.  My father died before his required beginning date.  Since his estate is a non-individual beneficiary, the IRA had to be distributed within 5 years, or by December 31, 2011.  If my father had died after his required beginning date without having a named individual beneficiary, the yearly required minimum distributions would have been based on his remaining life expectancy in the year of his death reduced by one for each year following the year of his death. 

In contrast, the choices available to our family had my father simply named beneficiaries would have been much more favorable.  Assuming my father wanted his wife and 3 sons to split the IRA in the same percentages he listed in the will, he could have named us specifically instead of requiring the distribution to be made through his estate.  If the IRA was not split into separate IRAs by September 30 of the year following the year of his death, then required minimum distributions would have been based on the remaining life expectancy of the oldest beneficiary, which was of course his wife.  As his wife is a few years younger than he was, this certainly would have been a large improvement over taking the entire IRA over the next 5 years.

Had my father named the 4 of us as beneficiaries specifically, an even better plan would have been to separate the IRAs into 4 beneficiary IRAs with each of us as the sole beneficiary prior to September 30 of 2007 (the year following his death).  In his wife’s case this would mean that she could choose to take all the money out within 5 tax years, leave the IRA as a beneficiary IRA, thereby allowing her to take distributions without penalty even if she was under age 59 1/2, or she could have elected to treat the IRA as her own.  In the case of his sons, we could have

taken the IRA over 5 years or we could have stretched the distributions over our life expectancy.  For example, in my case I could have elected to take the distributions over the next 39 years instead of all at once!

Since I expected nothing from my father’s estate and have no critical need for the funds, I would have taken the longer distribution period.  Instead I must add the distribution check to my taxable income for this year, which in my tax bracket means a substantial bite out of the money for taxes.  Since I am reasonably good at investing in my self-directed IRAs, having the ability to stretch the distributions out over 39 years would have meant an inheritance of many times what I will end up with after taxes because I had to take it all within 5 years.

The problem is even worse for my father’s wife, who will have an extraordinarily large tax burden this year, since she chose to take her share of the IRA out all at once instead of over a 5 year period.  While I am certainly grateful that my father thought of me in his will, simply naming specific beneficiaries would have made his legacy worth so much more to his family. 

Don’t let it happen to your family!  Review your IRA beneficiary designations, and if you haven’t already done so, name your beneficiaries.  Your family will be glad you did.

Self-Directed IRA & Qualified Plan Information

How the Richer Family Grows Richer

H. Quincy Long

Ira N. Richer, a 56 year old self-employed consultant, his wife, Hope Tobe Richer, Ira’s 51 year old stay at home wife, and their 17 year old son, Will B. Richer are interested in saving money in self-directed accounts at Quest IRA, Inc. How much money can they contribute based on Ira’s $30,000 net earnings from his consulting practice?

Roth and Traditional IRAs

Roth IRA – Anytime from January 1, 2008 through April 15, 2009, Ira and Hope can both contribute to a Roth IRA for 2008.Even though Hope does not earn wages, she can still contribute to a Roth IRA based on Ira’s income, assuming they are married filing jointly for federal tax purposes.Even if he doesn’t claim net earnings from self-employment of over $30,000, Ira can contribute $6,000 into each Roth for 2008 ($5,000 base contribution plus a $1,000 catch up contribution since they were both at least 50 years of age by December 31, 2008).Assuming their son Will has compensation of at least the amount of his contribution, he may also contribute $5,000 to his own Roth IRA for 2008.

Traditional IRA – Ira and Hope could have contributed the amounts described under the Roth IRA into Traditional IRAs, but their total contributions to both their Traditional IRAs and their Roth IRAs cannot exceed the annual contribution limit of $6,000 per person over the age of 50.In this case they elected to put the entire contribution into their Roth IRAs.If neither Ira nor Hope were covered by a retirement plan at work, their contributions to a Traditional IRA would be fully deductible, no matter how much income they earned.

Roth Conversion – If Ira or Hope has money in a Traditional IRA (including a SEP IRA), that money can be converted into a Roth IRA provided that their Modified Adjusted Gross Income (MAGI) is $100,000 or less in the year they do the conversion.Any amount they convert is added to their taxable income for the year, but no penalties are assessed for doing a Roth conversion.Important Note:in 2010 the amount of modified adjusted gross income made by Ira and Hope will not affect their ability to do a Roth conversion.Also, they may split the taxes from the 2010 conversion and pay 50% in 2011 and 50% in 2012.For conversions in 2011 and after, taxes must be paid on the conversion income in the year the Traditional IRA was converted to the Roth.

Work Plans

Ira can also have an employer plan based on his self-employment consulting income.With any of the work plans discussed below, Ira must also cover any other employees under the plan.This may affect which of the plans he chooses for his business.We will assume that Ira has no employees.Having any of the work plans discussed below does not affect Ira’s or Hope’s ability to contribute to a Traditional or Roth IRA, but above certain income levels it will affect the deductibility of a Traditional IRA contribution.

SEP IRA – Ira can choose to have a SEP IRA plan into which he can contribute up to a maximum of 20% of his net earnings from self-employment, or 25% of his W-2 wages if he is paid through a company.Net earnings from self-employment are calculated for SEP IRA purposes by deducting one-half of his self-employment tax from his net profits as shown on Schedule C.The plan can be set up and funded at any time prior to Ira’s tax filing deadline, including extensions (ie. October 15, 2009 if Ira files for an extension).Since Ira’s net earnings from self-employment were $30,000 in our scenario, he can contribute up to $6,000 into his SEP IRA at Quest IRA, Inc. (the contribution limit would be $7,500 if Ira were paid W-2 wages from a company instead of reporting his income on Schedule C as self-employment income).If he wants to, in January of 2009 Ira can begin making contributions for 2009 to his SEP IRA.

SIMPLE IRA – Another alternative is for Ira to have a SIMPLE IRA for his consulting business.This type of plan is appropriate for those with lower income levels or for those who have employees and who don’t want to contribute an equal percent into their employees’ retirement plans as they do for themselves.Assuming he had the plan set up by October 1, 2008, Ira can contribute $10,500 of his net earnings from self-employment for 2008, plus an additional $2,500 catch up because he is over age 50 by December 31, 2008.The $13,000 is considered salary deferral and must be contributed by January 30, 2009.Ira can also contribute an additional $900 as an employer contribution by his tax filing deadline, including extensions (ie. October 15, 2009).For SIMPLE IRA purposes, net earnings from self-employment are calculated based on 92.35% of Ira’s net Schedule C income.Ira is considered both the employer and the employee since he is self-employed.The total 2008 SIMPLE IRA contribution is $13,000 in salary deferral and $900 in employer contribution for a total of $13,900.This is an improvement over what he can contribute to a SEP IRA at his income level, but at income levels above around $60,000 (or around $48,000 if under age 50) the SEP is more advantageous, absent other factors.

Profit Sharing/401(k) Plan – The plan into which Ira can put the most money is an Individual 401(k)/Profit Sharing plan.An Individual 401(k)/Profit Sharing plan must be set up by December 31, 2008 if Ira wants to contribute or defer compensation for 2008.In this plan Ira can defer $15,500 plus $5,000 catch up for 2008 out of his $30,000 net earnings from self-employment.Net earnings from self-employment is calculated for Individual 401(k)/Profit Sharing planpurposes by deducting one-half of his self-employment tax from his net profits as shown on Schedule C.In addition, Ira can contribute up to 20% of Ira’s net earnings or 25% of his wages if he is paid by a company into the plan, or $6,000.These contributions must be made by Ira’s tax filing deadline, including extensions.This means that for 2008, Ira can contribute $26,500 into his Individual 401(k) plan with only $30,000 in earned income!

Even better, starting in 2006, Ira’s salary deferral can be a Roth 401(k), which means that he will pay taxes on his salary deferral when he contributes, but will pay NO TAXES when the funds are distributed to him, provided they are qualified distributions.What an opportunity!Although Ira qualifies for a Roth IRA because of his income level, even if he makes too much money to qualify for a Roth IRA he can defer salary into a Roth 401(k).The employer contribution ($6,000 in Ira’s case) is pre-tax, so part of Ira’s withdrawals from the plan will be taxable and the portion relating to the Roth 401(k) will be tax free.

Additional Choices

Besides Traditional or Roth IRAs and an Individual 401(k) plan, SEP IRA or SIMPLE IRA for Ira’s consulting business, the Richer family can also have two other types of accounts.These are the Health Savings Account (HSA) and the Coverdell Education Savings Account (ESA).Like the other accounts they have at Quest IRA, Inc., the HSA and the ESA can be self-directed.Neither of these types of accounts is directly related to how much money Ira earns, although above certain income levels Ira and Hope could not contribute to Will’s Coverdell Education Savings Account.

Health Savings Accounts – Ira and Hope can save on taxes for 2008 by opening a Health Savings Account, or HSA.In order to do this, they have to have a special type of insurance plan, called a High Deductible Health Plan, or HDHP.Just having a plan with a high deductible does not necessarily qualify you for an HSA.Assuming Ira and Hope have a family plan, they can contribute up to $5,800 for 2008 up until April 15, 2009.Because Ira is over 55 years old, he can add a $900 catch up contribution for 2008 in addition to the regular contribution.Ira and Hope can split the contribution into 2 separate accounts or put all of it into one account.Starting in 2007 contributions are no longer limited by the deductible amount, as they were in years past.Even if Ira and Hope have the minimum deductible of $2,200 for a family plan, they can contribute the maximum of $5,800 for the year plus the catch up contribution. Contributions to HSA accounts are tax deductible, and there is no tax on the distributions if the money is used for qualified medical expenses.This truly is the best of both worlds!

Coverdell Education Savings Accounts (formerly Education IRA) – Since Will is under age 18, Ira can put up to $2,000 into a Coverdell ESA for 2008.Ira will receive no deduction for the contribution, but any earnings which are withdrawn for qualified education expenses are tax free.Qualified education expenses include certain expenses for grade school and high school as well as for college.

Summary

For the tax year of 2008, here is the maximum amount of money that the Richer family can put into self-directed accounts at Quest IRA, Inc. :

Maximum Contribution

For Richer Family

Ira’s Roth IRA$6,000

Hope’s Roth IRA$6,000

Will’s Roth IRA$5,000

Ira’s Individual (k)$26,500

Ira’s HSA$6,700

Will’s ESA$2,000

Total$52,200

Assuming all distributions are qualified distributions, the earnings from the Roth IRAs, the Roth 401(k), the HSA and the ESA are tax free forever!This means that the Richers can get richer by investing as much as $46,200 tax free and the balance on a tax deferred basis.All of these accounts can invest in real estate, real estate options, promissory notes, both secured and unsecured, LLCs, limited partnerships, private stock and much more.They can invest individually or in combination with each other.To find out more about these accounts, contact your closest Quest IRA, Inc. office today!