Wasatch Phantom

H R 7327 was signed into law by President Bush late last month. This was something that ALPA PAC was pushing for. Though ALPA didn't get all they wanted, they did get some very significant benefits for us.

Disclaimer: I am not a CPA or financial planner, this is only my opinion.

As I understand it, airline employees (pilots) who received a distribution from their employer as restitution for their lost defined benefit retirement plan can put that money into a Roth IRA without regard to the Roth income limitations.

Fellas (and ladies) this is a good deal. Scratch that: Great deal!

I don't know all the details, but, for example, DAL filled up each pilots 401K to the maximum allowed by law in 2007 and 2008. Any amount over that was distributed to the pilot as ordinary income, and was taxed as such. What the legislation does (as I understand it) is allow that pilot to put those funds into a Roth IRA. I think the Roth income limitations are something like $100K for single filers and $160K for married filing jointly. (Those numbers are based on adjusted gross income.)

In a Roth, the money grows (hopefully) tax free and when you take it out in retirement you do so without paying taxes on it. Additionally, conventional IRA's have minimum withdrawal rules once you reach a certain age, Roth IRA's have no such limitation.

I urge all of you to check with your tax professionals / financial advisors on how you can individually maximize this opportunity.

DAL4EVER

I'm surprised we didn't get any ALPA letter on this. If it did pass, then does that mean the taxes that were taken out for this get to go back in towards our IRA. That would mean an additional $45k for me which is desperately needed right now.

Pineapple Guy

It was signed by the President into law on December 23rd. Can you think of anything between then and now that has occurred that might have slowed down the ALPA communication machine? Any holidays, maybe? I'm sure ALPA will put something out relatively soon. We've got 180 days to make our contribution.

No. The legislation that passed permits you to make a deposit to a Roth IRA, which is after tax money. That money, and all its gains forevermore, will be tax free when you pull them out of the account in 20, 30, or 40 years from now. That's a great deal for all of us. My hats off to those who made this a reality.

PG

Wasatch Phantom

In talking with my financial advisor about this issue he mentioned that under current law the Roth IRA income limitations are scheduled to expire in 2010.

That means in 2010 and thereafter anyone (with earned income) can contribute to a Roth regardless of income limitation.

My hope is that ALPA is working (with the various airlines) to give pilots the option of their contributions being deposited in either a conventional 401K or a Roth 401K (with tax being paid on those contributions)..

For a young pilot, with decades to go until retirement, this difference could be huge.

DAL4EVER

I wasn't being critical of ALPA just asking a question. This is a huge win but I was also under the impression that the taxes that were taken out would be reinstated provided we rolled that money into a retirement plan. I understand how ROTH plans work, but I thought they were going to allow you to roll this money into your normal 401k.

slowplay

The Delta 401k already has a Roth feature. I don't think you'll ever see company contributions allowed to a Roth for a whole bunch of reasons, but the biggest is the company doesn't pay FICA on employer contributions to a qualified retirement plan. Making them Roth contributions would expose a company to a whole bunch of new taxation that they don't currently have to pay.

Pineapple Guy

The original legislation ALPA tried to get passed had both options, traditional IRA and Roth IRA. They were successful in getting the Roth portion passed; not sure whether they are gonna keep trying for the other.

Congress just couldn't see refunding our taxes. With all the hundreds of billions of dollars they need to throw at the investment bankers, insurance companies, auto companies, and banks, they just couldn' see giving us BACK a little of the windfall the IRS got as a result of me losing my pension.

Wasatch Phantom

Slowplay,

Employee paid FICA taxes have an annual cap. For 2008 that was $102,000. Income earned above that is not subject to FICA taxes. My understanding (disclaimer) is that employers must match FICA taxes on their employees earnings.

If that's the case, any earnings above $102,000 in 2008 would not be subject to FICA taxes for the employee or employer.

I think I'm right when I say the majority of DAL pilots (for example) make more than $102,000 per year, so there would not be any additional FICA taxes owed by the company for those pilots.

The pilots whose earnings are under the FICA cap would trigger additional FICA taxes on Roth 401K contributions. I don't know how much that would cost in total.

Pineapple Guy

Wasatch, your understanding is incorrect. FICA taxes are broken down into two components: FICA-OASDI (social security) is taxed at 6.2% of first $106,800 for 2009; and FICA-MED (medicare) which is taxed at 1.45% on ALL wages (no upper limit). The company also pays an identical amount for each.

Thus, slowplay is correct re: FICA taxes. There will be savings for all and sadly, there are still plenty of airline pilots making less than $106,800.

PG

Wasatch Phantom

Thanks for setting me straight PG.