Tag Archives: IRA

Why not to add AFTER tax funds to your IRA!

Every penny we save is great. On a daily basis we are bombarded with buy now pay later, so while it may sound contradicting, there are less complicated ways to save and more difficult ways in the end to save.

Perils of After Tax Dollars in an IRA

After tax dollars as opposed to PRE-TAX (deductible from your income taxes) funds in and IRA are not your friend.

  • Upon eventual distribution you must calculate a distribution basis which will be different from your actual distribution – Easy for the IRS to confuse
  • You must carry the basis on your tax return- forever- IRS Form 8606 must be filed to keep up with your basis
  • Your heirs may also have to deal with this basis upon your death
  • From a really high level, it is confusing

How Do After Tax Funds get into an IRA?

There are two basis ways after tax funds enter or get added to an IRA:

  • After-Tax – Non-Deductible IRA contribution: (Very popular about 15 years ago)- Please save the money, but look for a better way to save it and avoid this method
  • 401k or other Corporate Pre-Tax retirement plan is rolled into an IRA along with the after tax funds- Easy fix- Look to take the after tax distribution directly thereby separating the PRE and AFTER tax funds-
  • Watch rollovers that contain a Roth contributions as these are after tax and may be directed to their own separate account, once again simplifying the process

It’s not the end of the world if you have after tax funds in your IRA, great work for saving the funds … But if you have the choice, avoiding comingling after and pre-tax funds in your IRA or other similar retirement account may save complications later!

Have a Great “KISS- keep it simple” day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

 

 

When to contribute to a Roth, when not to contribute to a Roth, benefits and limitations

Recently we have received several questions about the Roth IRA. While many studies show only about 1 in 4 would benefit from a Roth, there are times when a Roth is the best choice. There are distinct differences in Roth’s versus other pre-tax plans which make appropiate tax planning very important when implementing a Roth contribution.

Roth Versus 401k or other Pre-tax Plans

The most important factor in determining to contribute to a Roth or not is understanding one key component:

A Roth is a bet your tax rate will be higher at retirement or in the future rather than currently!

Due to the tax benefits, all other items being equal, a Roth is most beneficial when one expects to be in a higher tax rate later or at retirement. Under normal circustances most families are in a LOWER tax bracket at retirement than during their working years, making a pre-tax plan more appropriate.

As a refresher, a Roth is an after tax contribution that grows tax deferred until used. No tax deduction up front makes for less immediate tax benefits but greater benefits during retirement or later in life when draws are taken on a tax free basis, under current tax laws.

Roth plans have less stringent RMD (Required Minimum Distribution) requirements than many other IRA/401k type plans. Pre-tax plans have mandatory distribution requirements due to their “never taxed” status. Since the contributions to funds and growth in pre-tax plans are without taxes, the IRS wants to get their taxes. 70.5 is the latest age one can defer the distributions of a pre-tax plan in most cases. Contrasting that to a Roth; Since taxes were originally paid on the contributions, distributions are not mandatory in most cases as the IRS receives no benefit under current law and thereby deems no mandatory distributions unless a Roth has been received as a beneficiary in which is it subject to similar mandatory distributions of pre-tax plans.

When a Roth is correct? 

Since a Roth is a bet taxes will be higher in retirement or later in an earning career, lower income periods of employment/careers tend to be the most beneficial for making contributions. Think early in a career or on off years of regular work for most tax beneficial Roth contribution times.

In a year of negative or low income the conversion of IRA to Roth may be an optimal strategy. Under certain situations a regular IRA may be converted to a Roth showing the income from the IRA. This would essentially pull forward the taxes from the IRA to the current year, which may be beneficial during very low or even better during a negative earning year. There are very few limitations on converting a IRA to a Roth as the IRS is benefiting early from the pull forward to taxes. These conversions, done correctly are without the normal early IRA 10% penalty.

Since a Roth is after tax and growth is tax deferred, the earlier the better for maximizing a Roth’s full potential. Tax deferred growth over longer periods of time will have greater benefits than short periods of time. In fact, VERY short periods of tax deferred growth in a Roth make it MUCH less appealing, if even appropriate at all!

Roth contribution limits

Single filers cannot make a Roth contribution once their income is greater than $133k in 2017 and married filing joint cannot make a contributions with incomes greater than $196k.

Roth contribution limits in total are $5500 regular plus $1000 catch up for those greater than age 50. Some employers offer Roth 401k plans which allow higher contribution amounts similar to the $18k and $6k catch up of regular 401k plans, however mandatory RMD distributions do come with these types of plans.

Conversion from IRA as mentioned above has no limits on income or earnings to qualify. Since the IRS is receiving tax dollar early, all other things considered, the rules are much more flexible for converting an IRA and creating a tax liability earlier than may otherwise have occurred (as mentioned above, carefully timed conversions may lead to very little tax liability if other outside factors have lowered the tax exposure.)

In closing, we agree with the studies that most do not need a Roth and many may never have the option for a Roth at all. This being the case, there are always certain circumstances that may make a Roth or a Roth conversion an ideal tax planning tool to offset unique income years as mentioned above.

Have a Great Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

Fund a Roth? … Versus Deductible IRA … Might be surprised!

Knee deep in the middle of tax season we are reminded of the puzzling Roth. First rolled out as the best thing since sliced bread, after careful review … maybe not!

The Main Reason to fund a Roth

If you believe your taxes will be higher in retirement than now, you are a strong candidate for a Roth. Our experiences, and the vast studies show lower effective tax rates after retirement than while working. See below, but all other items being equal, deductions now are better. Roth V IRA

Roth V Deductible IRA

A Roth is the opposite of a regular deducible IRA. A Roth is funded with after tax dollar and grows tax deferred. Distributions are made at retirement without taxes. An IRA is funded with pre-tax dollars, grows tax deferred and is taxable upon distribution.

We will spare you the calculations, but if your tax rates are exactly the same in pre and post retirement, a Roth and an IRA have exactly the same end result!

In closing, if you can do both, certainly do so, but if it is either or, in most cases a deductible IRA is better.

Lastly be sure you qualify for any of these as the rules have changed and continue, via income and other plan participation.

Have an Awesome Day!

John A. Kvale CFA, CFP
http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225

Late Arriving Form 5498 On the Way

Just when you thought it was safe to put your tax stuff down, lick the wounds, and forget about it for another nine months, a pesky form may be headed your way.

Form 5498 Mailed End Of May5498 blank

Form 5498 reports all contributions and rollovers to all IRA’s and SEPS. If you fall into one of these situations … it’s in the mail.

DO NOT WORRY ! This form is for reconciliation on a delayed year basis. Toss it into your tax files and you are done.

Have a Great Day!

John A. Kvale CFA, CFP

http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225

Required Minimum Distribution (RMD) Part Two: Techniques … Should You Take Your First RMD Early ? … Maybe

In our continuing three part series on RMD (Required Minimum Distributions) started last week here, this week we discuss a few more complicated techniques and items.

RMD Distribution Technique

While the IRS mandates our RMD amount each year (click here for RMD Calculator) they do allow us the option of  lumping our various accounts together and only taking a distribution from one account if desired. RMD

Withdraw from your most liquid and keep your best earning IRA while avoiding any withdrawal penalties may be a possibility by directing your TOTAL distribution from just one IRA. Do not forget to add them all together as that number is what the IRS wants to see us take our distributions based upon.

Keep Up With After Tax Contributions

If you have any after tax contributions in any of your qualified/IRA/RMD accounts be sure to keep up with the basis. Withdrawals from a taxable RMD account are taxed pro-rata and will not be taxed on your after tax basis. Check with your tax professional, but this basis should also be showing up on form 8606 EVERY YEAR in your tax return.

Taking Your Frist RMD Early

Uncle Sam gives us first time RMD ‘ers a break and allows that you take your first RMD as late as April of the following year.  Ahhh ….. but there is a catch, if you wait/defer your first RMD, you will be faced with TWO RMD’s in this tax year. Every situation is different, so choose carefully, but be aware if you delay the max you will double up!

These are not recommendations as there are many moving parts when it comes to RMD’s. No matter what, do not forget your obligation to take your RMD and know there are multiple items you may want to consider when taking.

Have a Great Day!

John Kvale CFA, CFP

http://www.street-cents.com
www.jkfinancialinc.com
8222 Douglas Ave # 590
Dallas, TX 75225

Required Minimum Distribution (RMD) Part One … What and Why??

For many, once we reach the age of 70.5 IRA and other Qualified plans mandate a distribution so Uncle Sam can get his fair share of taxes. For some, RMD’s or Required Minimum Distributions occur even sooner.

What is an RMD ?

A Required Minimum Distribution (RMD) occurs most frequently for those turning age 70.5 with IRA or other Qualified (fancy word for never taxed $$) funds. In certain instances, as an example, if a stretch IRA has been commenced, in order to avoid taxes, any age person may be required to complete a RMD.

Why an RMD ?RMD

Taxes, taxes, taxes… In almost all cases the underlying reason for the mandatory distribution is to pay Uncle Sam his due. Before getting too upset, remember, these funds most likely have been deferred without taxes, grown/compounded tax deferred, and are just now becoming taxable.  Taxes are ONLY on the funds withdrawn … Not a Bad deal!!

Required means Required … DO NOT FORGET

Uncle Sam has the right to charge a 100% tax on funds not distributed that were in need. While there are certain workarounds if you forget, be safe, keep good records, and make sure you are taking those RMD’s in a timely fashion.

Next week, more neat techniques, time-saving ideas, and special circumstance options with our RMD series !

We as a firm are beginning the distributions now for clients, most often just moving funds from a tax deferred/qualified account to a taxable account and withholding taxes … More on this technique later.

Have a Great Day!

John Kvale CFA, CFP

http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225

Tax Savings Ideas in Time for 2009

As we near the end of 2009, while there is time to change taxes due in April of 2010, we wanted to give you a few tax savings ideas.

Please consult your tax advisor or call our office before taking any action.

The following are ideas, not recommendations:

  1. Sell after tax securities that have a loss, if you were planning on making adjustments, do it now (Never let the tax tail, wag the investment dog, realizing more than $3k of net losses most likely will not help much)
  2. Make sure you are maxing all of your company pre-tax contributions (Those of us 50 years young or more get extra contributions, be sure you are getting the maximum contribution)
  3. Gifting to charities is often a deductible event, if you plan to gift to your favorite organization, think of gifting stock or securities you have a gain in, and keep that other cash in the bank (You may get the full deduction for the entire amount, in most cases and don’t have to pay capital gains in the process)
  4. Medical expenses might want to be accelerated. If you have had an expensive medical year, and have a procedure that is set for early next year, you might want to go ahead and complete the procedure this year in order to gain possible tax benefits (Restrictions based on your Income will apply.)
  5. Possible distribution from your IRA (If you have a low tax income year and have to take funds from our IRA, this may be a good year to take a small distribution that will not dramatically affect your tax rate.)
  6. Make a gift to a beneficiary (2009 Limit of $13,000 to beneficiaries.)
  7. Gifting those unwanted items to your favorite charity, keeping your receipts, may help your taxes too.

These are just a few items that we thought might help with our April 2010 “settle up with” Uncle Sam!

JK