Ask a financial planner whether to save for retirement using a Traditional IRA or a Roth IRA and you may receive an unsatisfying answer: it depends. While the Roth IRA is a much-loved planning tool, whether it’s the best option for you will depend on several factors, but math is not one of them. Continue reading
President Obama’s proposed 2015 budget would limit tax deductible contributions to 401(k)s and IRAs to 28% of income and cap retirement savers’ tax-deferred accounts to an amount needed to produce a joint and 100% survivor annuity of $210,000 beginning at age 62 (presently $3.2 million). The budget would also eliminate the carried interest provision that allows income from managed retirement investments to be taxed at the capital gains rate, while dropping the “chained” consumer price index proposal reducing Social Security cost-of-living adjustments.
Additionally, it would require that Roth IRAs follow the same required minimum distribution rules as other retirement accounts (RMDs at 70 ½ similar to traditional IRAs). It also establishes a 5-year rule for IRAs inherited by (most) non-spouse beneficiaries (requiring that distributions be taken out over a five-year period of time) and establishes 60-day rollover rule for IRAs inherited by non-spouse beneficiaries. Finally, the budget includes mandatory automatic IRA enrollment for small businesses and RMD elimination for small retirement accounts of $100,000 (cumulative across all retirement plans).
Even though these provisions may not be enacted, it’s helpful to know what the President’s legislative agenda for this year is. We will monitor and keep you apprised of any developments.
What is does “Required Minimum Distribution” mean?
The Required Minimum Distribution, or RMD as it is often called, are minimum amounts the federal government requires you to withdraw from your traditional IRA each year.
When do I begin withdrawing my RMD?
You must begin withdrawing the required minimum distribution from your IRA by April 1st of the year following the year in which you reach the age of 70 ½. For example, if you turned 70 ½ in 2013, you have until April 1st, 2014 to withdraw your RMD.
What happens if I don’t withdraw my RMD as required?
Failure to withdraw your annual RMD subjects you to a federal penalty tax. This IRS excise tax is equal to 50% of the amount you should have withdrawn. For example, if your RMD is $10,000 and you withdraw only $6,000, the penalty is 50% of the additional $4,000 you should have withdrawn, subjecting you to a penalty of $2,000.
Avoid the unnecessary 50% penalty by properly planning for the withdrawal of your RMD.
What if I am younger than age 70 ½ ?
There are some general rules for IRA withdrawals that are critical to understand, even prior to age 70 ½.
Anytime you withdraw money from an IRA or retirement account, you are subject to tax.
If you are under the age of 59 ½, there is an early withdrawal penalty equal to 10% of the amount withdrawn (in addition to the federal and state income taxes).
If you are between ages of 59 ½ and 70 ½, if you withdraw money from an IRA account, you will be subject to federal and state income taxes.
If you are over the age of 70 ½, you must begin withdrawing money from your IRA account (see above for more information).
I turned 70 ½ this year, what are my options?
If you turned 70 ½ in 2013, you are allowed to take your first RMD any time between January 1, 2013 and April 1, 2014. For all future years, you can withdraw that particular year’s RMD between January 1st and December 31st of that year.
This does not necessarily mean you should wait until April 1, 2014 to withdraw your 2013 RMD. If you withdraw your 2013 RMD in 2014, you will still be required to withdraw your 2014 RMD by December 31, 2014; this would result in two IRA distributions in the same year and could increase your overall tax bill.
Proper planning should be done before the end of the year to determine the optimal tax and financial strategy for you. Contact us to discuss your options.
With November around the corner, we’re beginning to think about year-end tax & financial planning.
In fact, now is a great time to focus on last minute tax and financial planning moves to save money for 2013 (and possibly longer!).
Here are a few ways to save $ before New Year’s Day:
1. Make charitable gifts of appreciated stock. If you have appreciated stock that you’ve held for more than a year and you plan to make a significant charitable contribution before the end of the year, you’re probably best off keeping your cash and donating the stock instead. Why? You’ll avoid paying tax on the appreciation and you’ll be able to deduct the entire charitable gift at its full fair market value. It’s a win for you & for the recipient of your gift.
2. If it looks like you will owe taxes for 2013, adjust your federal income tax withholding before the end of the year. If you missed the mark on planning ahead, there is still time to make adjustments and avoid penalties.
3. If you have a healthcare Flexible Spending Account (FSA), use it, don’t lose it! Make sure to take advantage of spending the pre-tax money in the account before the end of the year for any remaining amounts over $500. Anything under $500 can now be “rolled over” into the new year, a newly modified ruling by the IRS.
4. If you pay quarterly estimated taxes (which are due on January 15, 2014), you can prepay the state estimated tax payment by the end of the year to receive a tax deduction (subject to certain limitations and the alternative minimum tax).
5. If you are a senior over the age of 70.5:
- Make charitable donations from your IRA account, which are set to expire this year.
- Make sure you take your required minimum distribution (RMD) from your IRA. Failure to take your RMD results in a penalty of 50% of the amount not withdrawn.
6. If you work & have a 401K:
- Make sure to maximize your 401K contributions – don’t miss out on money you can contribute on a pre-tax basis (not to mention employer matching opportunities).
7. If you’re self-employed:
- If you are a sole proprietor, don’t miss the opportunity to minimize taxes by employing your children under the age of 18. Paying wages to children under 18 shifts income to your child who is in a lower tax bracket; in fact, you may be able to avoid taxes entirely because of your child’s standard deduction (assuming the wages paid are less than or equal to the 2013 standard deduction of $6100). Additionally, since your child is earning income, he/she is eligible to contribute to an IRA account, thereby getting an early start on saving for retirement.
- If you are looking to reduce your tax bill while saving for retirement, you may wish to consider establishing a retirement plan before the end of the year (such as a defined contribution plan or a defined benefit pension plan). These plans need to be established before the end of the year and contributing money now to these accounts starts the tax-deferred growth on your contributions.
Now is a great time to make year-end adjustments. If you are interested in learning more about year-end financial planning, call us.