Tag Archives: 401(k)

Using a “Back Door Roth” IRA? Be mindful of the IRA aggregation rule

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As many of you know, the concept of a “Back Door Roth” IRA is relatively simple. It allows taxpayers with higher incomes $132,000 or more if you’re single, and $194,000 or more for married couples filing jointly in 2016, to fund their Roth accounts through contributions to traditional IRA accounts and subsequently convert them to a Roth. When the IRS removed income limits on conversions in 2010, anyone with funds in a traditional IRA account became eligible for a Roth conversion.

Planning to use the Back Door Roth IRA technique? Be mindful of the IRA aggregation rule. In a situation when a taxpayer has more than one IRA account, the rule requires that for purposes of computing the taxable amount of any distribution, all of the IRA accounts will be considered as one combined account. Effectively upon conversion, only a pro-rata portion of non-deductible contributions will be converted tax-free even though a separate account has been established for the conversion. Let’s look at the following example:

Facts: Taxpayer (assuming under age 50) has a $100,000 in an existing IRA account; opens a separate traditional IRA account and contributes $5,500 with intent to convert that amount to a Roth account.

Result: Only $286.55 ($5,500/105,500=5.21%) of the $5,500 after-tax contributions will be converted on a pro-rata basis and the difference of $5,213.45, will be treated as a taxable distribution. Therefore, after the conversion the taxpayer will end up with $5,500 in a Roth IRA account and $100,000 in a traditional IRA with a tax basis of $5,213.45.

Please note the aggregation rule applies on an individual taxpayer basis; meaning that for the married couple the husband’s and wife’s IRA accounts are not aggregated together. Also, any employer sponsored retirement plan such as a 401(k) is not aggregated; however, SEP IRA accounts commonly used by self-employed individuals are aggregated.

The resolution for many taxpayers could be rolling IRA funds into an existing 401(k) plan as long as the employer’s plan allows for such roll-in contributions. Similarly, for self-employed taxpayers a solo 401(k) can be set up and IRA/SEP IRA funds subsequently rolled over to that plan. Both of these options will help taxpayers effectively avoid the IRA aggregation rule and effectively perform the Back Door Roth IRA conversion strategy.


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Act by Dec. 31st to Benefit from the Advantages of a Solo 401(k)

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As a self-employed individual or a small business owner you have several alternatives to consider in selecting the right retirement plan that fits your needs and objectives. The two most common choices are a Simplified Employee Pension (SEP) and a solo 401(k). Contributions to either plan are tax-deductible and allow for the tax-deferred growth of your contributions and the investment earnings.

Choosing the right retirement option can be confusing, and the subtle but very important differences between the plans can often be overlooked.

Many defer to the SEP because it is easier to set up than a 401(k), which is more complex and can be more costly to administer. However, a 401(k) allows you to contribute a greater amount toward your retirement.  If you think you may be earning $25,000 or more every year, it may be worth the additional expense and hassle of setting up the solo 401(k). Since with a solo 401(k) plan you are treated as both the employee and the employer, the contributions can be made to the plan in both capacities. As an owner, you can contribute as follows:

  • Employee Share/Elective Deferral – $17,500 ($23,000 if age 50 or over)
  • Employer Share/Nonelective Contribution – 20% of net self-employment income (which is your business income less ½ of self-employment tax)

Total contributions cannot exceed the IRS prescribed limit of $52,000 (not including the catch-up contributions of $5,500) for 2014[1].

To better illustrate: Let’s say you are a 55-year-old consultant with $80,000 of self-employment income. With a solo 401(k) plan you would be able to contribute $23,000 for the employee portion plus 20% of net self-employment income $14,870 for a total contribution of $37,870. Using the SEP scenario, you would only be able to contribute $14,870.

In order to take advantage of the benefits of the solo 401(k), you must act quickly. You must open the solo 401(k) by December 31, 2014 to qualify to make 2014 contributions, even though you have until April 15, 2015 to contribute the money.

In addition to higher annual contributions, a solo 401(k) has a loan feature similar to a traditional company 401(k) plan. Individual 401(k) loans are permitted up to 50% of the total account value with a $50,000 maximum, a nice benefit if you need extra money.

For more information on your individual retirement planning options, please contact your Aronson advisor or Anatoli Pilchtchikov of Aronson’s Personal Financial Services Group at 301.231.6200.



[1] Based on the IRS COLA adjustments the limit for 2015 has been increased to $53,000 ($6,000 for catch-up contributions).

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Another Day, Another Deadline – Don’t Miss the 5500 Deadline for Your 401(k) Plan!

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Congratulations! March 15th has come and gone and your 401(k) compliance testing is done and refunds have been issued.   Now you can relax! Or can you? You still need to make sure your Form 5500 is filed for last year. Failing to file on time or failing to file the Form 5500 with audited financial statements, if required, can be quite costly. Don’t let this deadline sneak up on you.

Form 5500 must be filed electronically by the last day of the 7th calendar month after the plan year-end. For calendar year 2013 plans, this is July 31, 2014. Filing an automatic extension, Form 5558, extends the deadline an additional 2 ½ months, to October 15th for calendar year end plans. A penalty of up to $1,100 a day can be assessed for each day a plan administrator fails to file a complete and accurate return!

That deadline may seem far away, but if you are a large plan filer (generally more than 100 participants at the beginning of the plan year) and you must file audited financial statements with your Form 5500, you need to start the process now. Typically, once compliance testing has been completed, the third-party administrator and your custodian can move forward in providing you with an audit package and certified trust report.   Be on the lookout for these items from the end of March to any time in May, depending on the provider. Once you know when these reports will be available, it is important that you reach out to your audit firm immediately to schedule the plan audit. If you want to file by the July 31st deadline, you need to schedule the audit early enough to allow enough time to resolve any issues identified.

The time that elapses between the onsite audit fieldwork and issuance of the final audit report can vary significantly. In order to minimize the turnaround time, communication between you and your auditor and timely follow-up on open items are key, and must be demonstrated by all involved parties.  Agree upon a timeline with the auditor upfront, meet your commitments and make sure they meet theirs. If issues arise, dedicate resources to resolving the issues as soon as possible. If all parties work together and communicate, you should not have any problem meeting the filing deadlines. However, if you start the process too late, and don’t prioritize effectively, you could find yourself in a stressful position on October 14th.

For more information on Form 5500 or other filing requirements, please contact your Aronson advisor or Jillian Gobbo at 301.231.6200.

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Are You Getting Value from Your Benefit Plan Audit?

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It’s the time of year to start thinking again about the audit of your benefit plan. If you are happy with the service you receive, and your audit goes smoothly and the deadline is met, that’s great! However, if you typically just go through the motion of engaging the same firm you have always used, you may be doing yourself a disservice. Be sure to ask yourself these questions:

  • Has the auditor asked you questions about current developments and changes in plan operations before sending you an engagement letter?
    • Planning is critical to a successful audit. The auditor should know upfront about any changes in order to appropriately quote and plan that year’s audit. If your auditor isn’t asking these questions, it can result in an inefficient audit and extra billing in the end.
  • Does the auditor provide you with a thorough request list well in advance of the fieldwork?
    • No one likes a fire drill. Be sure to let your auditor know how much time you need after getting the list to be completely prepared.
  • Does the auditor send you new audit staff every year without notifying you?
    • While turnover is an unfortunate fact of life in public accounting, firms should let you know in advance if a change is necessary, and you should feel comfortable that the auditors assigned to your engagement are comprehensively trained in employee benefit plan audits.
  • Do you feel like you have been through an audit by the time the engagement is complete?
    • This may seem like a strange question, but the reality is that a valuable audit should be stringent. You should feel like the auditors picked representative samples of your population, understood and properly tested your plan provisions for eligibility, contributions, and distributions, and thoroughly reviewed and understood the activity in your trust reports.
  • If issues were identified, did the auditors help you reach practical solutions or leave you on your own?
    • Sometimes the greatest value in your audit comes from identifying missteps. A valuable auditor can help you work through the resolution to ensure you are protected from future penalties and put controls in place to prevent future problems. Be sure your auditor is proactive in working with you to ensure you reach the right conclusions.

Do you have questions about how the audit can be a valuable tool to you as a plan fiduciary? Contact Aronson LLC’s Employee Benefit Plan Services Group or email Kate Petrillo at kpetrillo@aronsonllc.com.

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Dollar Limits on Compensation and Benefits Announced

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The Internal Revenue Service has announced the 2014 cost-of-living adjustments for various limits affecting employee benefit plans. The more common limits are detailed below for 2013 and 2014.



If you should any questions about how these limits apply to you please contact Mark Flanagan of Aronson’s Employee Benefit Services Group at 301.231.6257.

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