Charles Blair, DDS and
John McGill, MBA, CPA, JD
Recently, I read that Congress has passed changes in the retirement-plan rules, one of them involving a simple IRA. I have a staff of seven, mostly full-time employees with combined salaries of $190,000. My wife also is a full-time employee, currently earning $5,000 annually. This salary has been set at a fairly low level to minimize federal and state payroll taxes.
I am interested in establishing a simple IRA to maximize contributions for myself and my wife. Since I earn in excess of $200,000 annually, there should be no problem in obtaining the maximum benefit for myself. If necessary, I can increase the salary for my spouse to gain the maximum retirement-plan benefit.
Our staff is mostly older and they do not view retirement plans as much of a benefit. Rather, they would like to have large increases in their taxable salary or other benefits. As a result, we have not set up a retirement plan. What is the best way to get the maximum benefit for myself and my wife, while minimizing contributions required on behalf of my staff?
In late 1996, Congress passed several tax bills, one of which included provisions allowing doctors to establish simple retirement plans. These plans can be set up either as individual IRAs for each staff member or through a 401(k)-type arrangement. Under the rules, if a doctor maintains a simple retirement plan, he or she can maintain no other plan.
The maximum contributions an employee may defer into a simple plan is $6,000. In addition to the salary deferral, the practice generally matches contributions of up to 3 percent of pay for all participating employees. The percentage can be reduced to merely putting aside 2 percent for all employees (whether or not they defer any of their own salary), provided that certain rules are met.
In your situation, you could elect to defer $6,000 of your salary into the simple IRA and have the practice match an additional 3 percent of pay. Since the maximum compensation that can be taken into account for purposes of computing your retirement-plan contribution is $160,000, this would result in a match of $4,800 ($160,000 x 3%), providing a total contribution on your behalf of $10,800 ($6,000 + $4,800). You could increase the salary of your wife to $6,000 as well, have her defer the entire amount into a simple IRA and then match 3 percent of her salary for an additional $180 contribution. Thus, the total contribution made on her behalf would be $6,180. The maximum contribution for the two of you would be $16,980.
In this particular situation, you would be required to contribute 3 percent of pay to a simple IRA account for each participating employee. Assuming that all employees participated, this would result in a required staff-contribution cost of $5,700 ($190,000 x 3%). Thus, of the total contribution of $22,680, your family would receive $16,980 or 74.87 percent, while the staff costs would be $5,700, or 25.13 percent. This represents an excellent investment for you.
However, you should compare benefits available under other retirement plans as well, and make a final decision based on which plan is most cost-effective for you. Given the current level of your compensation, you would be able to receive the maximum annual allocation of $30,000 under other types of plans, although your staff contributions would increase as well.
My first wife died several years ago and now I am planning to remarry. My new bride and I each own a personal residence and we each plan to sell our home and then jointly purchase a new home. Since we both expect a profit from the sale of our homes, is there any way we can avoid paying capital gains taxes on these profits?
Yes; Section 1034 of the Internal Revenue Code allows a tax deferral on the gains arising from the sale of your personal residence where certain requirements are met. In order to qualify, the two of you must jointly buy a new home that costs more than the sales prices (net of selling expenses) of the individual personal residences that you are selling.
In addition, the new home must be completed, or purchased, within 24 months after, or as much as 24 months before, the sale of your previous residences.
The information in this column is based upon the current Internal Revenue Code, regulations, Internal Revenue Service rulings and recent court cases. This column is not to be construed as legal or tax advice with respect to any particular tax situation. It is recommended that you contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217; or call (704) 523-5882.