Avoiding the 10% Early Withdrawal Penalty – What every Traditional IRA owner should know

1. Medical Insurance Premiums if Unemployed. If you have been receiving federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.
2. Qualified Higher Education Expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10% penalty.
3. Medical Expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 7.5% of your Adjusted Gross Income you may do so penalty-free.
4. First-Time Homebuyer Expenses. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. Even better, to qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.
5. Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10% penalty.
6. You’re the Beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.
7. Qualified Reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10% penalty.

Annuity Distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life (or your life expectancy)”. This option is complicated and must use an IRS-approved distribution method to qualify.

Some Final Thoughts.

• Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.
• While the above events allow you to avoid the 10% early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.
• While generally the same, the 10% early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.
• Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your Traditional IRA until you retire.

The preceding information is not intended to replace the services of a professional. Consult a CPA or an Attorney who can better understand your particular circumstances. Please contact us.

South Florida CPA Firm

Pension Plans-Some Basic Selections for Smaller Companies

Starting and managing a company has its difficulties, plus in spite of the fact you are devoted to the company, the business cannot run indefinitely.Ultimately, every owner stops working; your employees will stop working and retire too. As a company owner here are some basic options to help plan for the golden years.

§401(k) – Most owners consider a §401(k) plan an option for larger companies, however this kind of retirement plan can be set up for a one owner/employee business. This is known as a Solo §401(k). A lot of clients think the company has to match employee contributions, this is not true. Matching is typical however the plan’s founders can arrange the plan to not match employee contributions. The companies that have enough money to match employee contributions usually see employee morale go higher. Participants usually elect to have a set percentage or dollar amount deducted from their paycheck. The employee limits on contributions to a retirement plan for 2012 is $17,000 for those under 50 years, and $22,500 for those over 50. §401(k)s are available in Traditional and Roth versions. A Roth or Traditional plan version permits the employee to choose between, paying taxes in the beginning or paying taxes when money is withdrawn from the account. Roth §401(k) account owners pay taxes in the beginning. Traditional §401(k) account owners pay taxes when money is withdrawn. 401(k) regulations also permit loans if the plan is setup with that option.

SEP- SEP (Simplified Employee Pensions) IRAs are an easy option for many small companies. These plans are comparatively undemanding to administrate. Participants generally cannot defer salary to the account. The company makes contributions based on a percentage of salary. Some participants in a SEP-IRA plan start additional IRAs to plan for the future. One major benefit to this plan is that a SEP-IRA can be set up after the tax year is closed. The employer contribution can be made as late as the due date (including extensions) of the company’s tax return for that year. IRS regulations do not permit loans, early withdrawals, or catch up contributions.

SIMPLE IRA – means for Savings Incentive Match for Employees. Relative to other kinds of pension plans the name “simple” is true. One downside is that the company is obligated to match employee contributions. Another thing to consider is the max contribution allowed to this type of plan is $11,500. The reporting requirements for this kind of plan are minimal.

The preceding information is not intended to replace the services of a professional. Consult a CPA or an Attorney who can better understand your particular circumstances. Please contact us.

CPA Firm

The Choice Between A Regular §401(K) Plan Or A Roth §401(K)

When we meet clients to review their tax information, there often is a frequent question. “Which retirement option is better, the Roth option of my employer’s retirement plan or the traditional option?”

Roth accounts started in 1998.  The key concept of a Roth accounts is sacrifice a current year deduction for a guarantee the distributions taken when you retire are tax free.

From 1998 until 2005, Roth accounts were only available in the form of an IRA account. A lot of middle-income and high-income taxpayers could not contribute to a Roth IRA, because their incomes exceeded the relatively modest limit based on their filing status.  (The Roth IRA limit for 2012 is $125k for single individuals and $183k for married couples.)

Our elected representatives liked the public giving up a current year tax breaks by opting to go with a Roth IRA instead of to a Traditional IRA. In 2005, politicians decided to expand this opportunity to employer plans.

What’s the difference between the Traditional and Roth versions? Traditional employer plans permit the salary deferrals to reduce your taxable income and grow tax deferred.  Income taxes are paid on distributions taken from these accounts when you retire.

Let’s say you earn $200,000, and you max out your salary deferrals for $17,000 during the year.  In this case, your W-2 will report taxable wages of $183k in Box 1.  Assuming you are in the 33% federal tax bracket, the $17k you contribute saves you $6,667 in federal income taxes.  That’s a pretty good tax break.

What happens if you instead decide defer into a Roth version? When you contribute money to a Roth account, you forego a current year tax-break.  Your W-2, therefore, will report the full $200k as taxable wages in Box 1, instead of $183k that would be reported had you gone with the Traditional version.  The benefit of giving up this tax break is the tax-free treatment of the compounded growth on the $17k of salary deferrals. In other words, you won’t owe any federal income taxes on the distributions taken from this account when you retire.

The Max Benefit Factor:

From a general tax perspective, the Roth IRA is the better choice if your tax rate during retirement will be the same or higher than your current tax rate, as the Roth IRA allows you to pay the taxes now, and receive tax-free distributions when your income tax rate is higher. If your tax rate will be lower during retirement, then the traditional IRA may be the better choice if you are eligible to receive a tax deduction now when your tax rate is higher.

Since the savings you accumulate in traditional employer plans will eventually be taxed at ordinary income rates when you withdrawal, high tax rates during retirement could dramatically reduce the after-tax value of those savings.

As a general rule the Roth accounts are better for savers in their 20s and 30s. This is when the option of paying taxes on your contribution now is generally a better deal than getting a tax break today. When people are in a lower tax bracket and should expect to be in the same or higher tax bracket when  they retire.

The core to financial planning is saving. Saving will start to make you a Money Hero. On the way to becoming a hero there will be others to like us, to help improve your financial well-being.

Tax Prep Deerfield Beach

Tax Tips to Aid in Retiring Early

Wouldn’t it be nice to check out of the workforce early and not have to worry about having enough for retirement? While good financial planning can help you get there, leveraging the tax code as part of your retirement plan is also a good idea. Here are some tax tips that could help you reach your early retirement goal.

1. Maximize tax advantaged retirement accounts. Retirement accounts like Traditional IRAs and 401(k)s allow qualified taxpayers to save pre-tax money, invest the funds, and not pay taxes until the funds are withdrawn during retirement years. The IRS still receives their tax on your income and earnings, but they delay receiving the funds until you withdraw them in the future. In other words, the IRS allows you to invest their potential tax receipts along with your money and will take their share of your investment earnings at a later date.
2. Leverage the “catch-up” provisions within retirement accounts. Most retirement accounts allow older taxpayers to invest even more money in these retirement savings accounts. The key retirement fund limits for 2012 are noted here:
   

   Retirement Plan	2012 Maximum Contribution	Age 50+ Catch-up	Total Maximum Contribution
   401(k), 403(b), 457	$17,000	$5,500	$22,500
   Traditional/Roth IRAs	$5,000	$1,000	$6,000
   SIMPLE IRA	$11,500	$2,500	$14,000

3. Consider Tax Free Retirement Choices. Roth IRAs and Roth 401(k)s are an interesting alternative to other qualified retirement plans. Within Roth accounts you invest money in your plan with “after-tax” dollars, but any earnings are tax-free as long as you follow the withdrawal rules. While this lowers your potential initial investment, you have created a source of funds that can earn money without being taxed in the future. If you expect tax rates to go up during your retirement years, perhaps a Roth IRA should be included in your retirement portfolio.
4. Roth Rollovers. You may also roll money from most qualified retirement accounts into Roth retirement accounts. When you do this, you must pay the tax on the funds rolled over, but the rollover makes any future earnings within this account tax-free as long as you follow the distribution rules. In the past, you were unable to do this type of rollover if your income exceeded $100,000.
5. Consider Health Savings Accounts and their “catch-up” provisions. Health Savings Accounts allow you to set aside money to pay for qualified health expenses in pre-tax dollars. To be eligible to set up this type of savings account, you must be in a qualified high deductible, medical insurance plan. The good news is that unused funds can be invested and carried forward to future years. These funds can then be used to augment your retirement plan.
6. Consider state taxes. Part of your retirement plan should be understanding where you wish to live. It is important to note that states are not created equal on this front. Many states have no state income taxes, while others like Hawaii, are in excess of 10%. And you must project where your chosen state might be in the future. In Minnesota, for instance, recent proposals would make that state’s taxes among the top taxed states in the nation. Many states are also trying to take the position that you must pay them state taxes on all retirement plan withdrawals from money earned while you lived in their state, even though you moved ten years ago! This problem will not go away as long as governments continue spending programs in excess of tax collections.
7. Consider additional deductions and benefits. There are also a number of other benefits that should be considered as you reach retirement age. These include:
   • the additional standard deduction when you reach 65
   • the credit for elderly/disabled
   • the timing of when to commence social security benefits
   • the impact of Medicare and Medicaid plans
   • the potential taxability of retirement benefits including social security and pension plan income

Tax Prep Deerfield Beach

Hiring a Spouse as an Official Employee

Tax Planning

This can create benefits. Here are two easy tax advantages for putting a spouse on the payroll of an S Corporation

 Accumulated tax deferred funds for retirement When the employee meets the tax-law requirements your company can deduct

contributions. The spouse has to be an official employee with a business purpose.

Contributions to a qualified retirement can create real savings. The annual contributions limits are quite generous. The easiest plan to set up is either a Solo §401(k) or a SIMPLE IRA. With a Solo §401(k) plan, your spouse can defer up to $17,000 to the plan (plus an extra $5,500 if he or she  is age 50 or older). Your company can match those contributions wholly or partially up to tax-law limits.

Get more tax deductions from business trips Generally, you can’t deduct the travel expenses attributable to your spouse if he or she accompanies you on a business excursion. However, if your spouse is a bona fide company employee and goes for a valid business reason, you may deduct his or her travel costs, including air fare, lodging and 50% of the meal expenses. The benefit also is tax-free to your spouse.

CPA Deerfield Beach

Get the most benefit from retirement plans

What do you want to be when you retire?

You and your friends may have asked each other a similar question in high school. No matter what your age is now, looking ahead to the future is important — and the retirement plans you participate in have a big impact on that future.
Here are tips for getting the most benefit from retirement plans.

• Maximize your contributions.For 2012, the maximum amount you can contribute to your 401k plan when you’re under age 50 is $17,000. If the plan allows catch-up contributions, which are available when you’re age 50 or above, you can contribute an additional $5,500.For SIMPLE plans, the maximum amount you can contribute for 2012 is $11,500 before catch-up contributions. The maximum catch-up contribution for a SIMPLE plan is $2,500.How you benefit: Contributions are not subject to federal income tax, so amounts you put in your retirement plans reduce your taxes. In addition, income earned in the plan is not taxed until you begin taking withdrawals.

• Take advantage of employer matching contributions.The contribution limits mentioned above do not include amounts your employer can add to your account. “Matching” contributions are based on a percentage of your wages, and can raise the annual maximum contribution limit to as much as $50,000 for 2012.What’s the benefit? Matching means when you designate a certain amount from each paycheck as a plan contribution, your employer contributes, or matches, that amount up to a limit set by your plan documents. The result? Your retirement savings grow faster at no current cost to you.

• Another wise retirement plan move: Participating in all plans available to you, such as opening an Individual Retirement Account in addition to your 401(k) or SIMPLE.

Give us a call for more information about your retirement plans. We’re here to help you maximize the benefits you receive, both today and in the future, so you can achieve the life you envision in retirement.

 

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