New 401(k) Plan Disclosure Rules

You may have heard about new disclosure rules that will soon apply to 401(k) plans. Before describing what’s ahead, however, a look back may be helpful. (While we’ll refer to 401(k) plans in this article, the new rules also apply to other employer-sponsored plans that allow participants to direct their own investments, commonly referred to as “self-directed plans.”)


Most 401(k) plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA) (governmental plans, owner-only plans, certain 403(b) plans, and certain church plans are not). One of the primary reasons Congress enacted ERISA was to protect retirement plan assets, and one of the important ways ERISA does so is through its rules governing the conduct of plan fiduciaries.

In general, plan fiduciaries include the plan administrator, anyone providing investment advice for a fee, and anyone who exercises discretionary authority or control over the plan or the plan’s assets. Plan fiduciaries must discharge their duties with respect to the plan prudently, and solely in the interest of participants and beneficiaries.

A fiduciary who breaches his or her duty to the plan may be personally liable for any losses that occur as a result of that breach. The investment of plan assets is a fiduciary act governed by ERISA’s fiduciary standards.

Section 404(c) plans

But who is responsible for losses in a self-directed plan, where the participants themselves, and not the plan sponsor or an investment manager, select the investments for their retirement accounts? To answer this question, in 1992 the Department of Labor (DOL) issued regulations that allow 401(k) plan fiduciaries to avoid responsibility for losses in self-directed plans that occur as a result of a participant’s exercise of investment control over his or her own account, if specific requirements are satisfied.

To avoid liability, self-directed plans must provide participants with a diversified choice of investments, and must disclose very specific information about the plan and its investments (and comply with certain other requirements). While these rules are voluntary, many (if not most) 401(k) plans choose to comply, in order to shift liability for losses away from the plan’s fiduciaries.

A 401(k) plan that complies with these rules is known as a “Section 404(c) plan,” after the section of ERISA that governs self-directed plans. A plan’s summary plan description (SPD) should indicate if the plan intends to be a Section 404(c) plan.

What’s changing?

As self-directed plans have grown more popular, the DOL has become increasingly concerned that participants might not have access to, or might not be considering, information critical to making informed decisions about the management of their accounts–particularly information about investment choices, fees, and expenses.

As a result, in October 2010, the DOL issued new regulations that require all self-directed 401(k) plans–both those that choose to comply with Section 404(c) and those that do not–to provide the same detailed information to participants about the plan and its investments, on a regular and periodic basis, so that participants can make informed decisions with regard to the management of their individual accounts.

Some information must be provided on an annual basis, and some information must be provided quarterly. For calendar year plans, the initial annual disclosure must be furnished no later than August 30, 2012. The first quarterly statement must be furnished no later than November 14, 2012 (for July through September 2012).

Participants in 401(k) plans that comply with ERISA Section 404(c) are already receiving most of the information required by the new regulations. In general, more detailed information about investment fees and expenses must now be disclosed to participants.

Another change is that plan investment information must now be provided in chart form, so that participants are better able to compare investment alternatives. And plans will no longer be required to automatically provide a prospectus to participants, although one must be provided upon request.

Which plans must comply with the new rules?

These new disclosure rules apply to 401(k) plans and other plans that allow participants to direct their own investments, but they don’t apply to IRAs, SEPs, or SIMPLE IRA plans. They also don’t apply to plans that aren’t covered by ERISA.



This article was prepared for the representative’s use.

In October 2010, the Department of Labor issued new regulations that require all self-directed 401(k) plans–both those that choose to comply with ERISA Section 404(c) and those that do not–to provide the same detailed information to participants about the plan and its investments, on a regular and periodic basis, so that participants can make informed decisions with regard to the management of their individual accounts.


How to Fund a Roth IRA Even If You Make More Than $183,000

How do you fund a Roth IRA  if you make more than $183,000?  You may have to use the backdoor.

High income earners have been the subject of much of the “fiscal cliff” discussions.  It seems that whatever happens to fix this issue it will involve higher taxes on that group of individuals.  If you fall into that group it’s easy to feel picked on, but there is still a way to get some tax advantaged accounts…even if we have to use the perfectly legal back door to get there.

Since 1997 the Roth IRA has been an important planning tool for those saving for retirement and worried about higher tax rates. They work pretty simply; you put money in, it grows (hopefully), you take it out tax free after certain requirements are met.

In the past, high earners had been limited in their ability to take advantage of these tax advantaged retirement accounts due to income restrictions. If you are single you cannot make a direct contribution to a Roth account if you make more than $125,000.  If you are married the income limit is $183,000.  This leaves out a lot of people who are in the best position to utilize these accounts.

However, if you’re willing to put in a little work, there may be a way you can get around those limits and make annual contributions into a Roth IRA.

In 2010 Congress did away with the income limits on “conversions”.  So while you still can’t put money directly into a Roth, you can get money through the backdoor and have it land in the same place as if you had made a direct contribution.

So how does this work?  Here are the steps

  1. Make a non-deductable Traditional IRA contribution
  2. Convert the funds in the Traditional IRA to a ROTH IRA.

While this two-step plan makes it appear easy, you should consult with your tax or financial advisor prior to making this move.

If you already have a large traditional IRA you need to consult with a tax advisor who is familiar with the rules! The pro-rata guidelines could leave you owing an unexpected tax bill.

A direct Roth contribution can be made anytime up until April 15 next year.  However, a 2012 IRA conversion to the Roth IRA must be completed by year-end!  If you plan to do this, you should get started now.

If you have more questions please visit me at or call my office at 870-779-1081.

The Roth IRA offers tax deferral on any earnings in the account.  Withdrawals from the account may be tax-free, as long as they are considered qualified.  Limitations and restrictions may apply.  Withdrawals prior to age 591/2 may result in a 10% IRS penalty tax.  Future tax laws can change at any time and may impact the benefits of Roth IRAs.  Their tax treatment may change.

Traditional IRA account owners should consider the tax ramification, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA.  The converted amount is generally subject to income taxation.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor. 

If you have more questions please visit me at, send an email to or call my office at 870-779-1081.

Should You Make Large Gifts in 2012?

Currently, the exemptions for federal gift tax, estate tax, and generation-skipping transfer (GST) tax are at historic highs, and the gift, estate, and GST tax rates are at historic lows. But, in 2013, the exemptions are scheduled to substantially decrease, and the tax rates are scheduled to substantially increase. This raises the question of whether 2012 might be a good time to make large gifts that take advantage of the current exemptions while they are still available.

Looking into the future

When you transfer your property during your lifetime or at your death, your transfers may be subject to federal gift, estate, and GST tax. (Your transfers may also be subject to state taxes.) Currently, there is a basic exclusion amount (sometimes referred to as an exemption) that protects up to $5,120,000 from gift tax and estate tax, a $5,120,000 GST tax exemption, and a top tax rate of 35%. Unless new legislation is enacted, in 2013 the gift tax and estate tax exemption will decrease to $1,000,000, the GST tax exemption will decrease to $1,000,000 (as indexed), and the top tax rate will increase to 55%.

No one knows what the future holds for these taxes, but there is a lot of speculation about what Congress might do. Among the possible scenarios, tax rates could increase and exemptions decrease, tax rates could decrease and exemptions increase, or current tax rates and exemptions could be extended. The question then arises: “Should large gifts be made in 2012 to take advantage of the large $5,120,000 exemption while it is still available?”

To answer that question, you should generally consider the following: the size of your estate and the rate at which it can be expected to grow (or decrease), whether you can afford to make large gifts, what the future of the transfer taxes might be, and whether “claw back” would apply in future years.

Claw back

Claw back refers to a situation where the benefit of certain tax provisions is essentially recaptured at a later time due to changes in tax law. There is some split in opinion as to whether claw back applies to the estate tax. A couple of examples will illustrate the difference.

Example(s): Assume the gift and estate tax change as currently scheduled in 2013 and claw back applies. Assume you make a taxable gift of $5 million in 2012 that is fully protected by your gift tax exemption and you have a taxable estate of $5 million when you die in 2013. Estate tax, after reduction by the unified credit but not the state death tax credit, is $4,795,000. The result is essentially the same as if you had not made the taxable gift in 2012 and your taxable estate is $10 million in 2013.

Example(s): Assume the same facts as above, but with no claw back. Estate tax, after reduction by the unified credit but not the state death tax credit, would be $2,750,000. So, the federal estate tax is $2,045,000 lower if there is no claw back.

Guidelines for large gifts in 2012

If you expect that you can keep your estate down to around $1 million ($2 million total for both spouses if you are married) using annual exclusion gifts (generally, up to $13,000 per recipient per year; effectively, $26,000 for gifts by married couples) and qualified transfers exclusion gifts for medical and educational expenses, there may be no advantage to making taxable gifts in 2012. If you have a larger estate, you may wish to consider making taxable gifts sheltered by exemptions in 2012, depending on your evaluation of how the guidelines here apply to your particular circumstances.

If you make taxable gifts sheltered by the gift and estate tax exemption in 2012, and the gift and estate tax rates later increase, the exemptions decrease, and there is no claw back, you may save gift and estate taxes by making the gifts in 2012. Even if there is claw back, your gift and estate taxes will probably be no worse than if you hadn’t made the gifts. And, if the gift and estate tax rates later decrease or stay the same and the exemptions increase or stay the same, your gift and estate taxes will probably be no worse than if you hadn’t made the gifts.

If you make generation-skipping transfers sheltered by the GST tax exemption in 2012, and the GST tax rate later increases and the exemption decreases, you may save GST tax by making the GST in 2012. Even if the GST tax rate later decreases or stays the same and the exemption increases or stays the same, your GST tax will probably be no worse than if you hadn’t made the GST in 2012.

In each of these scenarios, it has been assumed that values do not appreciate. If the property transferred by gift increases in value after the gift, there may also be transfer tax savings from removing the appreciation from the transfer tax system.

You’ll want to consider how these guidelines for large gifts in 2012 might apply to your specific circumstances. An estate planning professional can help you evaluate them.


This article was prepared for the representative’s use.

Breaking Down the Taxpaying Population: Where Do You Fit In?

Every quarter, the Statistics of Income Division of the Internal Revenue Service (IRS) publishes financial statistics obtained from tax and information returns that have been filed with the federal government. Recent reports reflect data gleaned from 2009 individual federal income tax returns. These reports offer a snapshot of how Americans break down as taxpayers.

Sources for data: IRS Statistics of Income Bulletin, Spring 2012 and Winter 2012, Washington, D.C.; IRS, Data on the 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes, 2009 Update to Statistics of Income Bulletin, Spring 2003, Washington, D.C.

The big picture

Individuals filed roughly 140 million federal income tax returns for 2009. Of those returns, just under 82 million (approximately 58%) reported federal income tax greater than zero–representing the lowest percentage of taxable federal income tax returns in 24 years.

Half of all the individual income tax returns filed showed adjusted gross income of under $32,396. (Adjusted gross income, or AGI, is basically total income less certain adjustments–e.g., deductible contributions to a traditional IRA.) As a whole, this bottom-50% group accounted for just 13.5% of the total AGI reported on all federal income tax returns. Put another way, 86.5% of AGI was concentrated in the top 50% of returns filed.

A look at the top

What did it take in AGI to make the top 5% of all individual filers? Probably not as much as you think. If your return showed AGI of $154,643 or more, you would have been one of the almost 6.9 million filers comprising the top 5%. This group reported about $2.5 trillion in AGI–31.7% of the total AGI reported–and was responsible for 58.7% of the total income tax for the year.

The roughly 1.3 million returns showing AGI of at least $343,927 made up the top 1% of all filers. This group reported 16.9% of total AGI; in other words, over $1.3 trillion of the $7.8 trillion in AGI reported was reported by the top 1% of filers. This group was responsible for 36.73% of the total income tax for the year.

There were just under 138,000 tax returns with AGI exceeding $1.4 million. These returns, making up the top 0.1% of all filers (that’s the top one-tenth of one percent), accounted for approximately $610 billion in AGI (about 7.8% of all AGI), and paid just over 17% of the total income tax.

Not all high-income returns showed tax

There were just over 3.9 million returns filed with AGI of $200,000 or more. Of these returns, 20,752 (0.529%) showed no U.S. income tax liability. Why did these returns show no income tax? The IRS report that provided the data noted that high-income returns generally show no income tax as a result of a combination of factors, including deductions for charitable contributions, deductions for medical and dental expenses, and partnership and S corporation net losses.

Average tax rates

Simply dividing total income tax paid by total amount of AGI results in the following average federal income tax rates:

  • Top 0.1%–Average federal income tax rate of 24.28%
  • Top 1%–Average federal income tax rate of 24.01%
  • Top 5%–Average federal income tax rate of 20.46%
  • Top 10%–Average federal income tax rate of 18.05%
  • Top 50%–Average federal income tax rate of 12.5%


This article was prepared for the representative’s use.

Four Retirement Planning Mistakes to Avoid

We all recognize the importance of planning and saving for retirement, but too many of us fall victim to one or more common mistakes. Here are four easily avoidable mistakes that could prevent you from reaching your retirement goals.

1. Putting off planning and saving

Because retirement may be many years away, it’s easy to put off planning for it. The longer you wait, however, the harder it is to make up the difference later. That’s because the sooner you start saving, the more time your investments have to grow.

Don’t make the mistake of promising yourself that you’ll start saving for retirement as soon as you’ve bought a house or that new car, or after you’ve fully financed your child’s education–it’s important that you start saving as much as you can, as soon as you can.

2. Underestimating how much retirement income you’ll need

One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to accumulate by the time you retire. It’s often repeated that you’ll need 70% to 80% of your preretirement income after you retire. However, depending on your lifestyle and individual circumstances, it’s not inconceivable that you may need to replace 100% or more of your preretirement income.

With the future of Social Security uncertain, and fewer and fewer people covered by traditional pension plans these days, your individual savings are more important than ever. Keep in mind that because people are living longer, healthier lives, your retirement dollars may need to last a long time. The average 65-year-old American can currently expect to live another 19.2 years (Source: National Vital Statistics Report, Volume 60, Number 4, January 2012). However, that’s the average–many can expect to live longer, some much longer, lives.

In order to estimate how much you’ll need to accumulate, you’ll need to estimate the expenses you’re likely to incur in retirement. Do you intend to travel? Will your mortgage be paid off? Might you have significant health-care expenses not covered by insurance or Medicare? Try thinking about your current expenses, and how they might change between now and the time you retire.

3. Ignoring tax-favored retirement plans

Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans like 401(k)s, 403(b)s, and 457(b)s. The reason these plans are so important is that they combine the power of compounding with the benefit of tax deferred (and in some cases, tax free) growth. For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis.

If your employer’s plan has matching contributions, make sure you contribute at least enough to get the full company match. It’s essentially free money. (Some plans may require that you work a certain number of years before you’re vested in (i.e., before you own) employer matching contributions. Check with your plan administrator.)

4. Investing too conservatively

When you retire, you’ll have to rely on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. It’s common for individuals approaching retirement to shift a portion of their investment portfolio to more secure income-producing investments, like bonds.

Unfortunately, safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement nest egg. On the other hand, if you invest too heavily in growth investments, your risk is heightened. A financial professional can help you strike a reasonable balance between safety and growth.

Fiscal Cliff and Income Tax Rates

If you have been paying attention to the election news lately then you have no doubt heard about the “fiscal cliff”.  This term does not refer to any single condition, but to a combination of things that are set to occur unless Congress acts to stop them.

One item of particular interest is the expiration of the Bush tax cuts which lowered marginal income tax rates. You can see the effect of allowing the tax cuts to expire in the chart below.


Marginal Rates

2012    10%     15%      25%     28%     33%     35%

2013     15%     15%     28%     31%     36%    39.6%

How would this pan out for the average household in Texarkana? According to the U.S. Census Bureau, average household income in Texarkana, Texas is about $55,000. Using this data, a rough estimate gives us an increase in income tax of about $800-$1100 for that mean income household depending on filing status.

The takeaway here is to be mindful of how these changes, if allowed to occur, will affect you. We encourage our clients and the general public to work closely with their CPA or other tax professional in order to be prepared.


The opinions voiced in this material are for are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Year-End Investment Planning and the Fiscal Cliffhanger

Investment planning at the end of 2012 revisits issues that have complicated the planning process for the last two years–tax cut extensions and spending cuts designed to reduce the U.S. budget deficit. Uncertainty about both and whether they will lead to what’s been called a “fiscal cliff” in 2013 is likely to affect year-end investment planning yet again.

Despite the uncertainties–or perhaps because of them–it might be worth starting early to look at various “what-if” scenarios in case you need to make last-minute changes to your portfolio. Even though you may not be sure of exactly what will happen in 2013, here are some factors to keep in mind as you plot your year-end strategy.

Review timing of your investment sales

As of January 1, tax brackets are scheduled to return to their pre-2001 levels. That means the current six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) are scheduled to become five (15%, 28%, 31%, 36%, and 39.6%). Also, absent further changes, the maximum tax rate on long-term capital gains, currently at 15%, will increase to 20% (10% for those in the 15% tax bracket); those in the 10% or 15% marginal income tax bracket, who now pay a 0% rate on capital gains, will lose that special rate. Finally, qualified dividends, now taxed at a maximum of 15%, will once again be taxed at ordinary income tax rates.

Another factor for high-income individuals in 2013 is a new 3.8% Medicare contribution tax on some or all of the net investment income of individuals with a modified adjusted gross income over $200,000 ($250,000 for married couples filing jointly, and $125,000 for couples filing separately).

Ordinarily, higher rates in 2013 might suggest taking profits in an investment before those higher rates go into effect. However, the November election could affect the scheduled expiration date of those tax cuts, or even whether they expire at all. As a result, it’s especially important this year not to let tax considerations be the sole factor in any investment decision. If you’re uncertain about a sale, remember that another way to minimize capital gains taxes is to harvest investment losses that may offset gains.

Consider the potential economic impact of 2013

The nonpartisan Congressional Budget Office has warned that the tax increases and the roughly $109 billion in spending cuts could hamper an already sluggish economic recovery. Also, a 2% reduction in the Social Security portion of the payroll tax is scheduled to expire in January, leaving consumers with less to spend. Though there has already been talk about revisiting the spending cuts and tax cut expirations, you might want to consider how your portfolio might be affected.

Some companies are highly sensitive to economic cycles; others offer products and services that people need regardless of how the economy is doing and generally suffer less from a downturn (though any industry or company can have its own challenges). Also, the spending cuts could disproportionately affect some specific industries, such as defense, and companies that rely heavily on government contracts.

Interest rates and European instability

Partly because of the Federal Reserve’s monetary policy and partly because of the European debt situation, interest rates have been at historic lows in recent months. This has meant higher prices for U.S. Treasury bonds, because bond yields move in the opposite direction from bond prices. However, investors who have relied on Treasuries for income and now want to roll over the proceeds of maturing bonds might be disappointed with available rates, which the Federal Reserve expects to remain low well into 2014. If that’s the case for you, you may need to explore supplemental sources of investment income, or reexamine your Treasury holdings to see whether they now represent too much of your portfolio.

Even if you decide to wait and see what happens at year-end, planning for multiple scenarios now could help improve any last-minute decisions.

This article was prepared for the representative’s use.

Should You Tap Your Retirement Account?

Since the housing and stock markets collapsed several years ago, millions of unemployed and even working Americans have found themselves in need of cash, either for short-term or longer-term expenses. Those who have contributed regularly to a workplace retirement plan, such as a 401(k) or 403(b), may find it tempting to tap into those accounts to help cover their bills, either through a loan or a distribution. But before any preretirement withdrawal is made, it’s important to know the facts and consider the consequences. 

Your decision should be influenced, in part, by the severity of your needs and the tax implications of the option you choose. Loans are not considered taxable distributions unless they fail to satisfy plan rules regarding the amount, duration, or repayment terms. But distributions (including hardship withdrawals) are generally taxable as ordinary income, and workers who receive retirement plan distributions before reaching age 59 1/2 may be required to pay an additional 10% early withdrawal penalty.

Loan Considerations

When considering a loan, there are several rules to keep in mind.

  • The IRS generally limits the amount of a loan to 50% of your vested account balance, up to a maximum of $50,000.
  • Most retirement plan loans must be repaid within five years, although loans used to purchase the participant’s primary residence may be paid back over a longer period of time.
  • You may not be able to make new contributions to your plan until the loan is paid off. Additionally, loans are repaid with after-tax contributions, and interest (usually 1% or 2% above the prime rate) is due.

 It’s important to remember that not all plans allow loans. A violation of any of the plan’s loan rules may cause the loan to be treated as a taxable distribution. Additionally, an employer may require participants who have taken a loan to repay the entire amount immediately upon leaving the company, regardless of the original repayment schedule. If an ex-employee fails to do so, the employer is required to report the loan to the IRS as a distribution.

Hardship: A Last Resort

The government has made the rules around applying for and receiving a hardship withdrawal of your retirement plan assets difficult for a reason: they want to ensure that the need for those funds is vital. Most plans only allow a hardship if all other means (including loans) have been exhausted.

Hardships can be taken if they meet certain requirements, including:

  • Unreimbursed medical expenses for you, your spouse, or dependents.
  • Purchase of a principal residence.
  • Payment of college tuition and related educational costs (such as room and board) for you, your spouse, dependents, or nondependent children.
  • Payments necessary to prevent eviction from your home, or foreclosure on the mortgage of your principal residence.
  • For funeral expenses.
  • Certain expenses for the repair of damage to the employee’s principal residence.

Ordinary income taxes (both federal and state, if applicable) are due on the withdrawal amount, but the 10% early withdrawal penalty may not apply in certain situations, such as when the distribution is made:

  • Because of a qualifying disability.
  • To pay medical expenses that exceed 7.5% of the participant’s adjusted gross income.
  • To an alternate payee under the terms of a qualified domestic relations order (QDRO).
  • On account of certain disasters for which IRS relief has been granted.
  • Due to a “separation from service” (i.e.,ceased to be employed by the company sponsoring the plan) during or after the calendar year in which the participant reaches age 55.

Note also that a hardship withdrawal cannot be repaid into your account. Your retirement plan administrator and financial professional can help you determine your options.

This article was prepared for the representative’s use.