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 October, 2005 THE NEW ROTH 401(k) AND 403(b) If you like tough decisions, you'll love the new Roth 401(k) or 403(b). Your employer can begin to offer you this twist to these already popular retirement savings plans on January 1, 2006. Employers who offer 401k or 403b plans aren't required to provide their staff access to a Roth version of their plans, so now's the time to ask your employer's benefits department whether they have started the process of amending their plan documents. Don't be surprised if your employer balks, however, since Roth 401k's are scheduled to sunset on December 31, 2010 - meaning you'll have only five years to contribute to this type account unless a future tax bill extends their shelf life. Wondering what's the difference between your traditional salary deferral plan and its Roth counterpart? While contributions made to your current 401k or 403b plan reduce your taxable earnings, you'll be taxed on money withdrawn from these retirement savings accounts down the road. With a Roth account, you forego a tax savings today, but the money invested within the account grows tax-free - provided you're at least 59 1/2 and the account has been open for at least five years before any money is withdrawn. Let's say your Roth 401k account is worth $50,000 when you retire. You can withdraw the full $50,000 from that account and not pay a dime in income taxes. In the old days, tax planning was easy. "Do what you can to save taxes today" was the motto of the times. And the government, by having a habit of tinkering with the tax rules, gives credence to this motto. Check out our article in the July, 2003 Newsletter, Why Good Tax Planning Backfires, for proof of the government changing the rules. Keep in mind that these Roth accounts contradict this philosophy since they force you to forgo a tax savings today. If your employer provides you with the opportunity to contribute to a Roth 401k or 403b account, what should you do? If you trust the government not to substantially change the Roth rules between now and when you retire, consider going with the Roth if:
For 2006, you can elect to contribute a total of $15,000 into a 401k or 403b account through salary deferrals. Anyone 50 or older by the end of the year can contribute an extra $5,000. If your employer offers a Roth, you'll allocate your salary deferrals between your Roth and non-Roth accounts. Even so, any matching contributions made by your employer go into a non-Roth account. Amounts contributed to a Roth account at work don't limit the amount you can contribute into your own Roth IRA. For 2006, you and your spouse can each contribute up to $4,000 ($5,000 if 50 or older) into a Roth IRA. Eligibility phases out for single individuals earning between $95,000 and $110,000 and for married couples earning between $150,000 and $160,000. Here are a few other rules about Roth 401k's. Contributions made into a Roth account must be segregated from your non-Roth money. Elections to contribute to a Roth are irrevocable, and money can't be transferred between Roth and non-Roth accounts. If you change jobs, you'll roll the money from your Roth account into your new employer's Roth 401k, or into a Roth IRA. There has been quite a bit written about these new retirement savings accounts. Check out our message board to find information and links posted about Roth 401k's. And don't worry too much about this decision. As long as you take full advantage of the 401k or 403b plan provided by your employer, you've already made the right choice. Wait...don't skip this article if you bought an item from out of state or over the internet, and the vendor didn't collect sales tax on your purchases. In most cases, if you live in a state that assesses a sales tax, you'll owe this tax at your state's rate on supplies, equipment (both office and medical), computers, furniture, and other items purchased for your practice. And get this. When an out-of-state vendor isn't required to collect sales taxes on your purchases, you become the one responsible for determining what you owe, and remitting those taxes in a timely manner. At this point, the name of the tax switches from a sales tax to a "use tax". So who's to know? With states strapped for cash, they have begun to aggressively audit for sales and use tax compliance. One of our colleagues in this network reports that sales tax auditors in his state visited the state port and reviewed customs documents as one of their audit techniques. Based on their findings, a sales and use tax audit was initiated for a medical practice that had bought an expensive piece of equipment from Germany without even considering that they owed a use tax on the purchase. The auditor also found other untaxed items such as mail order purchases of office supplies. Since the audit was such easy pickings for the sales tax auditor, the state decided to audit every medical practice in the building, enriching their coffers with not only unpaid use taxes, but also interest and penalties. Many states have made it a lot easier for you to pay your use tax liability by adding a line to your personal tax return. Some have gone as far as to provide a table to help you estimate the use tax you owe based on your income. Do you think these tables are skewed towards the state or towards the taxpayer? So what's the point? Revise your purchasing procedures to make sure you're in compliance with your state's sales and use tax rules. And if you aren't, now's the time to catch up...it'll be cheaper for you in the long run. TAX AND FINANCIAL PLANNING CALENDAR FOR OCTOBER, 2005
2004 & 2005 TAX FACTS
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