Which type of IRA is right for you?

roth_or_traditional_iraAsk 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

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11 Reasons Why Year-End Tax Planning Matters

15to16.jpgAs the end of the year draws to a close, it is a great time to consider some planning strategies that can help lower your tax bill. While good tax planning may help save you money, it can also you achieve a variety of other financial goals.

Here are a just a few benefits that year-end tax planning may provide: Continue reading

Retirement Planning: Claiming Social Security Benefits

claimingmoney

In our most recent blog post, we discussed the import role that Social Security benefits play in the retirement income plan of most Americans, and provided a framework for understanding the various types of benefits. While sometimes dismissed as inconsequential, Social Security benefits provide a critical source of guaranteed income for most retirees. To wit, Social Security benefits comprise over fifty percent of the retirement income for two-thirds of current retirees and, critically, allow many seniors to live independently. In this blog post, we review how Social Security benefits are taxed and provide guidance on how and when to claim benefits. We encourage readers to review our previous blog post, A Primer on Social Security Benefits, as it provides important information that will aid in your understanding of the strategies outlined below. You can find that blog entry by clicking here.

To begin, an understanding of Social Security retirement benefits requires reviewing a few common terms that are key to making informed claiming decisions.

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What Can Marathon Training Teach Us About Surviving Tax Season & Retirement Planning? A Lot!

marathon

Anyone that has run a marathon knows that it can be a long and punishing journey to the finish line, filled with a slew of physical and mental obstacles along the way. Yet, despite the challenges, or for many of us because of them, participants line up year after year to collect another finisher’s medal.

Sound a little like working as a tax accountant during tax season, or, for that matter, planning for retirement? Well, aside from the finisher’s medal, blood blisters and aching quadriceps. To be successful, all three require endurance, a little luck and the execution of a thoughtful strategy.

Continue reading

Last Minute Tax Tip: How Entrepreneurs can get BIG Tax Breaks through Retirement Savings

With Tax Day in 2 weeks, you might be wondering whether there are any last minute things you can do to save on taxes from latax-dayst year’s income.  Good news: if you’re an entrepreneur, there is!

Did you know that if you’re self-employed or a small business owner there is a special type of pension plan available for you (and your employees)?  Available for businesses of any size, a simplified employee pension plan (SEP-IRA)is a written arrangement that allows a self-employed individual or a business owner to contribute to a pension plan with significantly higher limits than a traditional IRA.

A self-employed individual can contribute (pre-tax!) between 0-25% of their compensation (maximum contributions up to $51,000 for 2013, $52,000 for 2014); here’s the small catch: each eligible employee has to get the same percentage.

There are distinct advantages to setting up a plan like this:

  1.      You can contribute more (up to $51,000) to a plan like this than the traditional IRA maximum annual contribution of $5,500
  2.      The contribution is tax deductible
  3.      The account grows tax deferred until you withdraw the money
  4.      There are no annual reporting requirements for SEPs as long as each participant or individual who is in the plan receives a copy of the plan agreement and disclosure form (this is unlike a traditional 401K, defined contribution plan, or defined benefit plan, which have an annual 5500 form filing requirement)

In order to deduct the contribution, you must establish the plan by April 15th and contribute to the plan by April 15th (or the due date of your return including extensions – check with your accountant).

There are very few drawbacks to setting one of these plans up.

How to set up a SEP-IRA:

SEP-IRAss can be set up through a financial advisor, through a brokerage house, or through a bank.

Participants are eligible to sign up for a wide variety of investment opportunities including mutual funds, stocks, bonds, ETFs, and many more.

There should be no establishment fees to launch the plan and annual fees are minimal.

This great way anyone who is self-employed who has a profit to shelter some of that income from taxation.   We recommend using this worksheet to figure out your savings or, as always, contact us.

Secrets to Claiming a Home Office Tax Deduction

Over 25 Million Americans work from home, but only 3.4 Million claim the home office Home-Office-Workspace-Furniture-White-Simplededuction.  Whether you’re a homeowner or a home-renter, if you work at home or use your home for business at all, you may be eligible to claim a home-office deduction this tax season.

There are some new home-office deduction rules that apply. But before we dive into those, let’s go over the requirements for claiming the tax deduction.

If you use your home for business, in order to claim a home-office deduction, the home–office:

1. Has to be used regularly and exclusively for business

2. Has to be your principal place for business

What do these two requirements mean?

1. Has to be used regularly and exclusively for business. You must use the area on a regular basis as your place for doing business and the area must be used exclusively for that business.  It doesn’t need to be an entire room, but it does need to be an area that has clear boundaries (for example, the desk set-up in the corner of a room).  Merely working at your kitchen table filing paperwork because you couldn’t get all your work finished in the office does not qualify.

2. Has to be your principal place for business.  The rule of thumb here is that no substantial portion of your business is carried out in another fixed location (i.e. office).  If you’re having face-to-face meetings at home or use it for the administrative portion of your business, even if you carry out business elsewhere, you can still qualify for the deduction for that room that is regularly and exclusively for business (for example with a carpenter or an interior designer who spends most of their time in other people’s homes).

  • If you have a separate, freestanding building – a studio, barn, garage behind your house, that too, can qualify.
  • For Freelancers:  You may have a full-time job at an office, but freelance on the side (writer, blogger, entrepreneur).  Good news: you can still qualify for their business as long as it is regularly and exclusively for business and used as your principal place of that business.
  • If you are an employee and you use part of your home for business, you also may qualify for a deduction, but, in addition to the two tests above, you also have to prove that: 1) it is for the convenience of the employer (there are no hard and fast rules for that) and 2) you must not rent any part of your home to the employer and use the rented portion to perform services as an employee for that employer

There are 2 methods for calculating the home-office deduction.

1. Simplified method.  Effective, January 1, 2013, this is a new simplified option (outlined methodology in detail in IRS Revenue procedure 2013-13) which significantly reduces the record keeping burden by allowing you to multiply a proscribed rate by a percentage of square footage used by the home-office.  The proscribed rate is $5 per square foot for a maximum of 300 square feet or $1500 dollar of tax savings.

2. Regular method. This method has been around for many years, whereby you must determine the actual expenses for your home office.  The expenses that can be allocated towards home office use can include things such as insurance, light, heat, power, repairs, depreciation, real estate taxes, and mortgage interest.

We suggesting calculating both ways to see which method will result in a bigger deduction.

For more information, call us.

Is The PBGC is going bankrupt? How it affects your retirement.

monopolyLast week, in it’s annual report, the PBGC announced a record deficit of $35.7 billion.

The Pension Benefit Guaranty Corporation (PBGC) is a United States Federal Agency that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect companies’ pension benefits[1].  For companies whose pension plans are insured by the PBGC, the PBGC will pay employees a portion of the pension funds if the company goes bankrupt.

The PBGC’s deficit has been increasing annually over the past several years due to a variety of factors.  Unless the government steps in, this will result in the PBGC going bankrupt.

As you review your own company’s retirement plan options (for example taking an annuity option versus a lump sum distribution), knowing the back-up plan is important. If the company cannot meet its payout obligation, and the PBGC is having its own financial challenges, what are you to do in order to protect your pension payouts?

Why does this matter for you? If you were to take an annuity option from your employer when you retire and the company were to go bust, what will the PBGC do for you?

  1. The PBGC does not guarantee every dollar owed to you from your company pension plan – there is an annual cap.  For 2013, the maximum guaranteed about is $ $57,000/year (for people who begin receiving benefits at age 65).
  2. The PBGC is running a deficit that will eventually bankrupt it, voiding your pension guaranty.
  3. The time has come for people to start saving outside of their employer’s plans for their retirement.

There are some major misconceptions about what retirement is and how much money you need to put away to have a comfortable retirement.

  • The typical American household will experience a 28% income shortfall in retirement?[2]
  • 4 out of 10 retirees do not have sufficient income to cover their monthly expenses.

It is time to take additional steps to prepare for your retirement. You should not solely rely on your company being able to pay your pension, nor the PBGC to pay you either.

Call us today to schedule a retirement savings assessment and discuss retirement planning and year-end planning opportunities to minimize taxes today so you can have a more secure future.


[1] In private defined benefit pension plans

[2] 2012 Fidelity Retirement Savings Assessment