Paul’s Paint-N-Plumbing, Inc. Case Scenario: Paul’s Paint-N-Plumbing, Inc. (3P)
ID: 2556248 • Letter: P
Question
Paul’s Paint-N-Plumbing, Inc. Case Scenario: Paul’s Paint-N-Plumbing, Inc. (3P) has been in business for 33 years. Paul is retiring and passing the business on to his two children in equal shares to manage and operate according to their skills and experience. The children, Paula and Prescott, decide to adopt a retirement plan for both current and future employees in an attempt to attract and retain talent. They have decided to adopt a SIMPLE IRA, funded by both employee and employer contributions. Answer the following questions: 1. What are the advantages and disadvantages of offering a SIMPLE IRA over a qualified plan, such as a 401(k) plan? 2. If Philip (age 55), a long-time employee of 3P, wants to contribute both to the SIMPLE IRA at work and to a traditional IRA, what are the limits on his contributions and deductibility regarding the traditional IRA?
Explanation / Answer
a) Advantages and Disadvantages of offering a simple IRA over a qualified plan Particulars Qualified plan such as 401(k) SIMPLE IRA Maximum Employee Deferral $18,500 $12,500 Roth 401(k) Contribution Option Yes; subject to deferral limit No Catch-up Contributions (For participants 50 or Older) $6,000 $3,000 Employer Contribution Optional 100% up to 3% match; or 2% non-elective contribution Vesting Options available Immediate Loans Yes No ADP/ACP Testing Yes No Top-Heavy Testing Yes No Investment Providers Choice of many Single b) Limits on his contributions and deductibility regarding the traditional IRA total annual contributions under traditional IRA cannot exceed the lower of earned income for the year or the annual maximum amount. Contributions to a traditional IRA might be fully deductible, partially deductible or entirely nondeductible depending on whether you and/or your spouse are covered by a retirement plan through your employer. If a taxpayer is covered by a retirement plan at work, his income determines whether his IRA deduction will be limited. Use a modified adjusted gross income formula to measure income for the purpose of figuring out how much can be deducted for traditional IRA contributions. Formula for computing Modified adjusted gross income:- Modified adjusted gross income is adjusted gross income (AGI) figured without the IRA deduction, after including any taxable Social Security benefits, after applying the passive activity loss limitations to passive income, and the following modifications: 1 Exclusion for savings bond interest 2 Adoption assistance excluded from income 3 Deduction for domestic production activities 4 Deduction for interest paid on student loans 5 Deduction for tuition and fees 6 Foreign earned income exclusion, housing exclusion and housing deduction. Conclusion Figure out if contributing to a traditional IRA will be fully deductible, partially deductible or nondeductible. If some of your traditional IRA contribution is nondeductible, consider contributing the deductible portion to a traditional IRA and the remaining non-deductible portion to a Roth IRA if you're eligible. If all your traditional IRA contribution is not deductible, you might want to contribute to a Roth IRA instead.