Newsletter Correction and Some Good News!
We hasten to correct a misstatement made in our 2016 First Quarter Newsletter. In the article entitled “IRAs, Required Minimum Distributions, and the New DOL Regulations” we stated:
“Taxpayers over age 70.5 may not make contributions to a deductible IRA. Nor may they make contributions to their employer’s qualified plan if they own more than 5% of the company which eliminates single participant 401(k)’s and similar plans.”
While the first statement was correct, sadly, the second was incorrect. Taxpayers who own more than 5% of the company that sponsors their qualified plan may continue to make contributions past age 70.5. In fact, there is no IRS regulation preventing contributions to a 401(k) plan based upon age. The difference is this: taxpayers who own more than 5% of the company that sponsors their plan are required to begin taking required minimum distributions (RMD’s) at age 70.5. Now, making tax deductible contributions to a qualified plan while taking RMD’s may seem a lot like pouring water into a leaky bucket but, this technique can reduce your taxes from taking RMD’s. In fact, depending upon your circumstances, contributing to a qualified plan after age 70.5 may even result in deferring more income than the RMD forces you to recognize! For individuals working as independent contractor consultants, single person 401(k)’s are an excellent tool. Other plans may work for you as well. Check in with us or your tax preparer should you like to discuss this further.