Important Tax & Retirement Planning Deadlines for 2005

This article focuses on a number of fast approaching tax filing and document execution deadlines. It is not too early to begin thinking about these and other year-end tax and retirement planning opportunities as you prepare for year-end.

September 30, 2005 – Beneficiary Designation Date. It may be possible for beneficiaries of IRAs and Qualified Retirement Plans (QRPs) to take Required Minimum Distributions (RMDs) based on their own single life expectancy. But only if the deceased IRA or QRP account owner had a Designated Beneficiary(s). Generally, a Designated Beneficiary is a beneficiary designated as of the account owner’s death who still remains a beneficiary on September 30 of the year following death. Thus, any person or entity that was a beneficiary as of the date of theaccount owner’s death, but is not a beneficiary as of September 30, 2005 (either due to distribution or qualified disclaimer), is not taken into account in determining the existence and identity of a Designated Beneficiary.

October 1, 2005 – 2005 Catch-up Contribution Universal Availability Deadline. Individuals who attain age 50 or over on or before December 31, 2005 may make catch-up contributions to applicable employer retirement plans: 401(k)s, Simple IRA, SEP, 403(b), or 457 plans. A plan is not required to permit catch-up contributions, but may do so. A plan that offers catch-up contributions meets non-discrimination requirements only if all catch-up eligible participants are given the same opportunity to make catch-up contributions. An employer that sponsors more than one of the applicable plans and want to provide for catch-up contributions must adopt catch-up contributions provisions for all the applicable plans no later than October 1, 2005.

October 1, 2005 – Deadline To Establish SIMPLE IRA Plan For 2005 Plan Year. An employer may set up a Simple IRA plan any date between January 1, 2005 and October 1, 2005. If an employer doesn’t come into existence until after this deadline, special rules apply and a Simple IRA plan may still be established.

October 1, 2005 – Deadline To Set Up A New Safe-Harbor 401(k) Plan for 2005 Plan Year. The first plan year must be at least a three-month plan year. Therefore, new Safe-Harbor 401(k) plans must be established by October 1 st.

October 15, 2005 – Last Day To Recharactorize A 2004 Conversion To A Roth. Certain taxpayers may want to recharacterize from a Roth IRA to a traditional IRA. These taxpayers are (1) those whose Roth IRA has experienced a drop in market value of the assets following a 2004 conversion from a traditional to a Roth IRA, (2) those who converted and their AGI for 2004 exceeded $100,000, and (3) those who made a Roth IRA contribution and their AGI exceeded $95,000 for a single filer, or $150,000 for a married filer.

Assuming the taxpayer has timely filed their 2004 tax return, the taxpayer has until October 15 th to transfer the monies without incurring a penalty. To claim a refund for any taxes paid on the conversion to the Roth IRA, file an amended return on Form 1040-X and mark the top of the first page “Filed pursuant to section 301.9100-2.”

October 15, 2005 – Deadline To Elect Deemed Sale & Repurchase Capital Gain Election. Assuming the taxpayer has timely filed his 2004 tax return, he has until October 15, 2005 to file an amended return making the deemed sale and repurchase election. The election allows taxpayers to treat (1) readily tradable stock held on January 1, 2004, and not sold before January 2, 2004, as having been sold and reacquired on January 2, 2004 at its closing market value, and (2) any other capital asset or property used in a trade or business and held by the taxpayer on January 1, 2004 as having been sold and reacquired on that date for its fair market value. Gain recognized as a result of this election is taxable at the time of the election. However, losses are disallowed. The election ensures that future gains on property subject to the election will be taxed at no more than 18% if a 5-year holding period is met.

November 2, 2005 – Deadline To Establish A SIMPLE IRA Plan Effective 1/1/2005. An employer may adopt a SIMPLE IRA plan to become effective January 1, 2005, provided the employer will not maintain any Qualified Retirement Plan (QRP) for 2005. A 457 plan is not treated as a QRP for purposes of denying SIMPLE IRA contributions. Note: beginning 2002, salary deferral contributions made to an eligible 457(b) plan no longer reduces the amount an employee may defer to a SIMPLE IRA.

November 2, 2005 – Deadline For Providing SIMPLE IRA Required Notices (Including Notification Of Plan Termination). Employers sponsoring a SIMPLE IRA plan must provide each eligible employee with two required notices 60 days prior to the start of the 2005 plan year. First, employers must provide eligible employees with either (1) a Summary Plan Description (SPD) for the plan, or (2) a copy of the IRS Form 5304-Simple or 5305-Simple (whichever is applicable).

Second, employers are also required to notify each eligible employee that the employee may make or change salary reduction elections during this 60-day period, the “election period.” Such elections or changes will become effective on January 1, 2006. Employers terminating a SIMPLE IRA effective December 31, 2004 must include notification of the termination.

December 1, 2005 – Deadline For Notification Of Switch From Regular 401(k) Or Profit Sharing Plan To A Safe Harbor 401(k) Plan. Employers that have amended their existing 401(k) or PSPs to include a safe-harbor 401(k) provision effective 2005 must provide written notice to each eligible employee between 30 and 90 days prior to the start of the 2005 plan year. The written notice must (1) explain their rights and obligations under the plan, (2) be accurate and comprehensive, and (3) be written in a manner calculated to be understood by the average employee eligible to participate in the plan. Notification that each eligible employee may make, or change, a salary reduction election that will become effective on January 1, 2005.

December 15, 2005 – Last Day to Initiate A 2005 Termination Of A Money Purchase Pension Plan Or (2) Reduction Of Future Plan Year Benefit Accruals To Zero. Beginning 2002, Economic Growth & Tax Relief Reconciliation Act (EGTRRA) increased the deduction limit for Profit Sharing Plans (PSPs) from 15% to 25% of eligible compensation. Because of the new limits, employers will no longer need their existing Money Purchase Pension plans (MPPs) to maximize contributions. Therefore, many employers will either (1) terminate existing MPPs, or (2) change the plan document to cease benefit accruals.

ERISA requires employers that are terminating a MPP, or changing it to cease benefit accruals, to provide written notice to all eligible participants at least 15 days prior to the effective date of the termination or change. December 31, 2005 is the last day to effectively terminate or merge a MPP prior to the beginning of the 2006 tax year. Therefore, the employer must provide the written notice on or before December 15, 2005.

December 31, 2005 – Last Day To Execute Documents To Adopt A Qualified Retirement Plan (other than a Safe-Harbor 401(k)) For 2005. December 31 is the last day an employer may execute document to establish a Qualified Retirement Plan for 2005 to be effective any date between January 1 st and December 31 st, provided the employer did not previously maintain a Simple IRA plan for 2005. Employers whose corporate entity came into being after January 1 should use an effective date coinciding with or following the corporation’s inception date.

401(k) plan notes: A participant may only defer compensation earned after a salary deferral form has been completed and signed. New Safe-Harbor 401(k)s must be established by October 1 st, see above.

December 31, 2005 – Required Minimum Distribution (RMD) Deadline. Taxpayers taking their second and following RMDs, from a QRP or IRA, must take distribution of their 2005 RMD on or before December 31, 2005. Taxpayers reaching age 70 ½ during 2005 may delay taking their 2005 RMD, the initial RMD, until April 1, 2006. Taxpayers electing to delay distribution of their first RMD will then take two distributions in 2006: the 2005 RMD by April 1, 2006 and the 2006 RMD by December 31, 2006.

For more information on these and other year-end tax and financial planning opportunities, please consult with your Financial Advisor or CPA.