Discussion Both nondeductible contributions to a traditional IRA and contributio
ID: 2729066 • Letter: D
Question
Discussion Both nondeductible contributions to a traditional IRA and contributions to a Roth IRA are similar in the sense that neither provides a tax deduction at the date of contribution. Which of the two types would be most advantageous to taxpayers and why? Your client is about to establish his own business and hires at least 10 employees. They ask you for advice concerning establishing a qualified versus a non-qualified retirement plan. What do you advise your client? Would your answer change if you were a potential employee? Why or why not?
Explanation / Answer
part 1:-
The major differences between contributions to traditional IRA and Roth IRA are
1. there is no restriction on income limits if an individual wanted to contribute under Traditional IRA whereas the adjusted gross income should be between $117000 and $133000 for individuals and for couples $184000 to $194000
2. The individual must be under 70 to contribute under traditional IRA whereas no such age restriction to contribute under Roth IRA.
3. People get tax benefit when contributions made as it can be claimed as deduction and later the withdrawls will be taxed under Traditional IRA but the contributions made were not allowed as deduction under Roth IRA but these are tax free withdrawls as these are taxed already.
as per economists research or even based on our general thinking as time gets increased inflation gets increased so federal tax rates gets obviously gets increased than current rates. So current tax rates are always less than future tax rates. so it is preferred to contribute under Roth IRA as withdrawls are tax free and we wont be effected with the increase in tax rates.
part2:-
difference between qualified and non qualified retirement plans are:-
1. It gives an added tax benefit to the employee as the employer deduct some amount from pre tax wages of employee and make contribution under this plan where post wages i.e. after contribution is only taxed which means these contributions are allowed as deductions for the respective current year but taxed when withdrawn but non qualified plan taxes even the contribution made i.e. no deduction is allowed for tax purpose.however no tax on withdrawal amount.
2.There are many restrictions under qualified plan those are
i) The employer should have specific number of employees. otherwise he wouldnot be eligible to contribute under the qualifies scheme.
ii) Employees can withdraw only after specfied duration i.e. vesting period got expired and the it should be like a non discrimination benefit which means every employee should be benefited equally
whereas the non qualified plan is generally for highly paid employees which means key personnel.
by analysing all the above factors it is advisable to company to adopt qualified plan as it equally benefits all the employees.
If iam the potential employee then i would recommend to go with non qualified plan as there are no such restrictions like vesting period, equal benefit to all employees and that too non qualified plan withdrawls are tax free as these will be taxed earlier indirectly by not allowing deductions which i do believe that the future tax rates will be higher than the current tax rates.