The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in South Carolina is representative of a common inquiry regarding available tax credits for retirement plan sponsors and participants. The advisor asked:
“Since it is tax season, are there any special tax credits available for retirement plan sponsors and plan participants?”
Highlights of Discussion
Yes, there are special tax credits available for both businesses that start new plans and participants who make contributions to IRAs or workplace retirement plans. Employers and plan participants should be encouraged to discuss these tax credits with their tax professionals.
A small employer (defined below) may be able to claim a tax credit for starting a workplace retirement plan. Details of the credit appear in IRS Publication 560 (note: the IRS has not yet released the Publication 560 for 2013 tax filings). In general, the plan start-up tax credit:
• is available to employers with 100 or fewer employees who received at least $5,000 in compensation in the preceding year and have at least one participant who is a non-highly compensated employee;
• covers part of the ordinary and necessary costs of starting a simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE) IRA, or qualified plan;
• equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first three years of the plan; and
• is claimed by the employer by using IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs.
Retirement plan participants (including self-employed individuals) may qualify for a retirement savings contribution tax credit. Details of the credit appear in IRS Publication 590 for 2013 tax returns.
In general, the contribution tax credit is available to individuals who: (1) are age 18 or older; (2) not a full-time student; (3) not claimed as a dependent on another person’s return; and (4) have income below a certain level. The credit:
• equals an amount up to 50%, 20% or 10% of the taxpayer’s retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040 or 1040A);
• relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan; and
• is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.
Conclusion
Every deduction and tax credit counts these days. Many employers and plan participants are unaware of the retirement plan related tax credits for which they may qualify. Financial advisors who are aware of these tax credits and suggest to their clients that they discuss them with their tax advisors are providing a valuable service.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
