Smart Planning Options
The American Taxpayer Relief Act of 2012 (ATRA)
ATRA is a US law effective for tax years beginning in 2013. ATRA permanently extended many of the Bush-era tax cuts that were enacted in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA 2001); however, ATRA imposes higher income tax rates on certain high-income taxpayers. ATRA also made permanent extensions to the gift, estate and generation-skipping transfer tax exemption amounts ($5 million, indexed for inflation annually). The pension provisions of EGTRRA including increased IRA and 401(k) deferral limits, the higher contribution and benefit limitations for qualified plans, the higher compensation limit, catch-up contributions, Roth 401(k) provision, etc. which were scheduled to expire in 2010 were permanently extended by the Pension Protection Act of 2006 (PPA).
Profit Sharing Plans
Profit Sharing Plans are flexible and therefore best suited to new businesses or firms whose income fluctuates from year to year. A Profit Sharing Plan is a Defined Contribution (DC) Plan in which contributions each year are discretionary and cannot exceed 25% of the sum of all eligible participants' salaries. It is an individual account plan, thus, the ultimate retirement benefit/amount is the actual account value that has been credited with contributions and investment experience through the years. There are various types of Profit Sharing Plans:
- Age-based Profit Sharing Plan
- Integrated Profit Sharing Plan
- New Comparability Plan
- 401(k) Plan
Each type is dependent on the contribution allocation method and plan features.
Defined Benefit Plans
Defined Benefit Plans allow employers to assure employees of their retirement income by defining the benefit at retirement age. The amounts that participants will receive at retirement are determined (or defined) upon becoming a participant in the plan, and are not based on future investment returns. To fulfill the benefit (or promise to pay at retirement), these plans require annual contributions determined by an actuary. Defined Benefit Plans offer business owners the greatest potential for tax benefits by maximizing contributions to a plan.