It's Not Too Late for an End Run Around the Tax Grinch

This week, Gail has a list of some things you can do in the remaining days of 2001 to reduce this year's taxes and answers a "SEP"-related question.

Dear Readers,

Hard to believe 2001 is nearly over. It will be a year none of us will forget for a multitude of reasons, the most significant being 9/11. If you are reading this you have a lot to be grateful for. I am grateful for you and your loyalty to this column. Please keep your questions and comments coming. I'm not always able to get to them immediately, but I try to respond to each one eventually.

I wish you a holiday filled with the warm company of those you care about. That is, really, the best gift of all.

God bless,


Glad Tidings: It's not too late for an end run around the Tax Grinch! There are still some things you can do in the remaining days of 2001 to reduce this year's taxes. Here's a list.

1. If possible, push off any remaining income into next year. This annual advice is particularly important this year because starting in 2002, income tax rates drop again. For example, if you were in the 28% tax bracket at the start of 2001, you'll be in the 27% bracket in 2002. So if your boss embodies the spirit of the holidays, ask him/her to pay your bonus (ha ha) in January.

2. For exactly the same reason (income tax rates are higher this year than next), you want to take as many losses and pay as many expenses before the end of this year.

Hey, Mom and Dad! You could end up saving money if you pay Jr' s spring term tuition now rather than waiting until next year.

Yo, Investors! If you own securities in a taxable account (stocks, bonds, mutual funds that are not in a retirement account) that are worth less than what you paid for them, consider selling them by December 31st. If you really , really think they're poised to re-bound, you can buy them back 30 days later and still write off the loss against your 2001 taxes.

Or, you can buy back the security immediately and put it into a tax-deferred retirement account such as an IRA.

Madam/Sir Business Owner! Stock up now on the supplies you know you're going to need in 2002 (toner, paper clips, pink slips-just kidding!). That way, it becomes a 2001 expense to write off.

3. If your modified adjusted gross income is less than $100,000 and you've been toying with the idea of converting your traditional IRA to a Roth, the decline in securities prices we've experienced could make this transaction less costly. As I've written here before, in order to do this you have to pay income tax on the amount you're converting (remember, you don't have to convert the whole IRA). However, if the investments in your traditional IRA have gone down in price, there's a corresponding drop in the taxes you'll owe. Once you make the conversion to a Roth IRA you're home free. You will never again owe taxes on the growth in your Roth retirement account (so long as you hold it for five years and make withdrawals after age 59 1/2).

4. Check with your company's Human Resources department to see if you're on track to maximize your 2001 retirement plan contribution. If not, see if you can come up with some additional cash from your last paycheck. At least make sure you've contributed enough to get your full allotment of matching dollars from your company. Every dollar you contribute to, say, a 401(k) reduces your income tax.

5. If you are self-employed, think about starting a retirement plan for yourself and your employees. There are several specifically designed for small businesses which minimize the paperwork and the cost. You've got to

act fast if you want to establish a Keogh plan because the deadline is Dec. 31. But you've actually got until April 15 to set up a "SEP" (see below). Of course, the sooner you starting funding it, the better chance you have of catching any recovery in the economy and financial markets.

6. Yoo-hoo, Grandma! If you'd like to help a special someone with their college education, consider making up to a $500 contribution to an Education IRA. The deadline for your 2001 contribution is Dec. 31, not April 15, as with other IRAs. As regular readers of this column know, this account has a new, more appropriate name: the "Coverdell Education Savings Account." Starting in 2002, the maximum contribution jumps to $2,000.

If you want to go even further to help out a grandchild, you can give larger amounts through a 529 college savings plan... and junior never gets control of the money.

7. Hey, Moneybags! If you're feeling flush, sharing some of your good fortune with a charity will get you a tax deduction. There are many who could really use your help right now. Two of my favorites are the Salvation Army and the Humane Society of the United States.

8. Attention, Procrastinators! Beat the last-minute madness at the malls and give the gift that always fits: cash! This year you can give up to $10,000 apiece to a many individuals as you want without owing any federal gift tax.Next year, you can be even more generous: the federal gifting amount jumps to $11,000.

Merry Christmas,



I work for a non-profit that has a SEP plan. The corporation contributes an annual amount to a SEP IRA in my name, over which I have investment discretion. I have been told that I am not able to contribute to this plan or to any other plan (such as a traditional IRA).

Is this true? If so, why am I penalized like this?

I have searched for this answer on this issue, but obviously just not in the right place. Can you help?


Dear Jim,

Let me clear up the confusion here. "SEP" stands for "Simplified Employee Pension." It is a streamlined retirement plan designed for small businesses of 25 or fewer employees. In order to keep the costs and reporting to a minimum, by law only the employer can make contributions to this plan.

This year, the maximum is 15% of salary for non-owners. This is scheduled to increase next year. Unlike more complicated retirement plans such as 401(k)s, your money "vests" immediately, there is no waiting period of several years. It's your money the minute it goes into your account. If you leave your firm the next day, you get to take it with you.

However, your company's contribution to a SEP does not preclude you from contributing to another type of IRA such as a traditional, tax-deductible one or the after-tax Roth variety. You are still eligible, provided you meet the income limits.

This year, you can make the full $2,000 tax-deductible contribution to an IRA if you are single and your adjusted gross income is under $33,000; if you are married and file jointly, the limit is $53,000. The limits are higher for a Roth IRA: $95,000 and $150,000. If your income exceeds all of these limits, you are always eligible to make a non-deductible contribution to a traditional IRA. (Bill Gates could make a non-deductible contribution to a traditional IRA!)

If you are serious about saving more for retirement, I strongly suggest you sit down with a financial advisor and review the full range of choices at your disposal. The 2001 Tax Act makes it easier for small businesses to establish retirement plans and you might suggest that your company check out some of the advantages other plans can offer under this legislation.

But by all means, despite its limitations, please appreciate the fact that your employer has provided you with a SEP; most people who work for a small company have no retirement plan at all.

All the best,


If you have a question for Gail Buckner and the Your $ Matters column, send them to along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.