IRA 2017 Changes
There are very few changes from 2016 to 2017. In 2016 and 2017 both the Traditional IRA and Roth IRA contribution limits remain the same at $5,500. For those 50 and over the $1,000 additional catch-up provision remains at $1,000 per person.
The income limits for Roth IRAs rise by $2,000 for joint filers, and the phase out is now $186,000 to $196,000. Single filers the 2017 phase out starts at $118,000 and is phased out at $133,000. This means for joint filers if your income falls below $186,000 you are entitled to your maximum Roth IRA contribution. Single filers with income below $118,000 you also are entitled to your maximum Roth IRA contributions. Above those incomes the contribution is reduced until eliminated at $196,000 for joint filers, and $133,000 for single filers. Employer plans for you or your spouse may also limit/prorate your allowable contributions.
Whether you are reviewing your Traditional IRA, Roth IRA, or an IRA Rollover, you can find complete details available at IRS.gov.
Updated in Rock Hill SC
by Kristin P. Sinclair (803)329-0609
November 28, 2016
Considerations for Charitable Deductions
If you donated money or items to a charity in 2016, then you may be able to claim a deduction on your federal tax return. You should consider the following about charitable deductions.
A.) Qualified Charities: You must donate to a qualified charity. Gifts to individuals, political organizations or candidates are not deductible.
B.) Itemize Deductions: To deduct charitable contributions normally you must itemize deductions on Schedule A of your form 1040.
C.) Return Value: When you receive a thank you gift or most any item of value in return for your donation, then you must reduce your charitable deduction by the return value you received. Examples of return value include merchandise, meals, tickets to events or other goods and services.
D.) Donation Type: When you donate property instead of cash, then your tax deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price you should expect if the property is sold by the charity. When you donate used clothing and household items, those items generally must be in good or better condition. Special rules apply to cars, boats and other types of property donations.
E.) Noncash Charitable Contributions: Use form 8283 for all noncash gifts totaling more than $500 for the year. Complete section-A for noncash property contributions worth $5,000 or less. Complete section-B for noncash property contributions more than $5,000 and include a qualified appraisal to the return. See IRS publication 526 for more details.
F.) Donations of $250 or More: When you donate cash or goods of $250 or more, then you must have a written statement from the charity. The statement must show the amount of the donation and a description of any property given. It must also say whether you received any goods or services in exchange for the gift.
G.) Records: You should normally plan to keep a copy of your tax return and the supporting documents for at least 7 years. More details at www.IRS.gov.
Updated in Rock Hill SC
by Kristin P. Sinclair (803)329-0609
March 28, 2017
2016/2017 Roth IRA and Traditional IRA Considerations
Which is best for you ? Maybe both should be part of your retirement plans. With Traditional IRAs and other pre-tax retirement plans the contributions may be tax deductible in 2016 and 2017. Your earnings grow tax-deferred until you withdraw them. Normally it should be best to withdraw Traditional IRA funds in retirement when you may have less income, and therefore pay less in taxes.
Your Roth IRA will be a post-tax retirement plan and you have already paid the taxes on the contributions. Your earnings should grow tax- deferred or tax-exempt. Those post-tax accounts that feature tax-exempt withdrawals after age 59.5 are excellent complements to pre-tax retirement accounts.
In retirement many people find they have unplanned needs for extra cash. For example this could be the year for a new heating and cooling system; or something much more fun like an extra vacation ! Taking that extra cash from a pre-tax account should increase your current year income and current year income tax obligation. A double whammy could hit if more of your Social Security income is now taxable !
Conversely, it may be more desirable to with draw that extra cash from a Roth IRA or other post-tax retirement plan. Then you should not increase you’re your current year income and your current year tax obligation. Voila – no double whammy from making more of your Social Security taxable.
Therefore the answer may be that Traditional IRAs and pre-tax retirement accounts are best in conjunction with Roth IRAs and other post-tax retirement accounts. It is important to balance your current year tax liability with your future retirement income needs. Please phone Kristin at (803)329-0609 if you need her to work with you on your 2016 tax return.
Kristin P. Sinclair
Updated in Charlotte NC and Rock Hill SC.
November 28, 2016
Earned Taxable Compensation
The IRS describes taxable compensation in general terms as what you earn from working. This specifically includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for personal services rendered. The IRS considers as taxable compensation all amounts properly shown on your W-2 in Box 1, provided that amount is not reduced by any amount entered in Box 11. This does not include unearned income, which may also be taxable. For IRS purposes, scholarship and fellowship payments are taxable compensation only if shown on Form W-2 in Box 1. Consult your tax advisor and/or www.IRS.gov for more information.
Updated in Rock Hill SC and Wilmington NC.
Kristin P. Sinclair A Accu Tax
(803)329-0609 March 7, 2017
What is a Traditional IRA?
One of the first types of IRAs is the Traditional IRA, which is also known as the Original IRA. The Traditional IRA is a tax-deferred retirement savings account: you normally do not pay taxes on your contributions, and only pay taxes on your money later when you make withdrawals in retirement. By deferring taxes, your dividends, interest payments, and capital gains can compound each year without being hindered by taxes. Thus the Traditional IRA has the opportunity to grow much faster than a taxable account. Often retirees find themselves in a lower tax bracket than pre-retirement, and then the Traditional IRA money may be withdrawn and taxed at a lower rate.
Traditional IRAs come in two varieties: deductible and nondeductible. Qualifying for a full or partial tax deduction typically depends on your income, and whether you have access to a work-related retirement account like a 401k.
The Traditional IRA has promising advantages for those qualified:
- You may be able to deduct some or all of your IRA contributions from current income, depending on your circumstance.
- Normally amounts in your IRA, including earnings and gains, are not taxed until they are distributed.
In 2016 Susan is single, and she is covered by a retirement plan at work in Charlotte NC. With a Traditional IRA, she is able to figure out that her adjusted gross income should be less than $50,000, and she should receive a full Traditional IRA deduction for 2016. In May 2017 Susan plans to marry George. He is also covered by a retirement plan at his Rock Hill SC job, and George earns a considerably higher income than Susan. As a result of their upcoming marriage George and Martha will need to determine with their tax advisor if they will qualify for a full or only a partial deduction for their Traditional IRAs in 2017.
How Can a Traditional IRA be Opened?
Now that you are familiar with if you can open a Traditional IRA, and the time to open a Traditional IRA, the next step is finally opening a Traditional IRA. Just how do you go about doing that ? A Traditional IRA can be opened with a variety of organizations, such as your local bank, financial institution, or life insurance company. A Traditional IRA can also be opened through your stock broker and often your life insurance agent.
Once you choose which organization to assist you with opening your Traditional IRA, it is time to decide which type of Traditional IRA is best for your tax and financial situation. For example, your Traditional IRA can be an individual retirement account or annuity. Your Traditional IRA can be part of either a Simplified Employee Pension (SEP) or an employer or employee association trust account.
In 2016 Andrew moved from Rock Hill SC to Charlotte NC to be closer to his new job. With his higher income Andrew has decided to open a Traditional IRA. At age 35 and under an employer retirement plan, he also engages his tax advisor, and Andrew learns that he is eligible and able to contribute up to $5500 annually to his Traditional IRA. Andrew learns about the different types of Traditional IRAs available, and plans to continue to work on his savings and investing for retirement. The ways of the ants and squirrels are often wise choices for the days ahead !
When Can a Traditional IRA be Opened?
After learning that you are eligible to open a Traditional IRA, you may be wondering if it is the right time to do so. Luckily a Traditional IRA can be opened most any time. However, the time for making contributions to your Traditional IRA for any tax year is limited.
Once you open a Traditional IRA you can contribute up to $5500 annually, or up to $6500 annually if you were age 50 or older by the end of that tax year. There is normally no upper limit on how much you can earn and still contribute. For most of us the deadline for your 2016 contribution is Monday April 17, 2017. The 2017 contribution deadline is Monday April 16, 2018.
Linda decides to open a Traditional IRA. She has recently moved from Charlotte NC to Charleston SC, and she also just celebrated her 50th birthday in this tax year. She is covered by an employer retirement plan and she files individually. Due to her age at 50 plus Linda’s tax advisor determines she is able to qualify for a Traditional IRA, and contribute up to $6500 to her Traditional IRA. She may make that contribution by the end of the tax year, or the date she files her tax return with no extensions. This max deadline is Monday April 17, 2017.
Who Can Open a Traditional IRA?
You have decided to pursue a Traditional IRA. Excellent ! But what is the next step ? First, you should check to make certain that you are eligible to open a Traditional IRA for 2016 or 2017. Normally you should qualify to open and make contributions to a Traditional IRA if:
- You (or your spouse if you file jointly) received taxable compensation during that tax year (2016 or 2017).
- You were not age 70 ½ by the end of that tax year (2016 or 2017).
Whether or not you are covered by another retirement plan, you can start your Traditional IRA. If either you or your spouse is covered by an employer retirement plan; however, then it is important to note that your deductible contributions may be limited.
But what if you and your spouse both have compensation ? If you both receive compensation and are under age 70 ½, it is possible that each of you can open a Traditional IRA. However, you cannot both participate in the same IRA. Each should open his/her own IRA. If you file a joint return, then only one of you needs to have compensation and both of you can open your own IRAs !
At age 40 and settled in Charlotte NC, Olivia and Stephen decide to open a Traditional IRA. They file jointly. Only Olivia receives compensation, and she is covered by an employer retirement plan. She and Stephen become concerned that they will not be eligible. Although Stephen and Olivia learn from their tax advisor that they cannot both participate in the same Traditional IRA, they each still qualify for a Traditional IRA because Olivia earned compensation.
What is an Asset Allocation IRA?
Asset allocation refers to the mix of investments inside your IRA portfolio. That is, how much of your IRA portfolio you invest in stocks, bonds, cash, and other asset classes. The IRA could be a Traditional IRA, IRA Rollover, Roth IRA, SEP-IRA, or SIMPLE-IRA. Your allocation should also consider your investments within each asset class and your temperament for risk.
Finding Your Mix
The concept behind asset allocation is very simple: Don’t put all your eggs in one basket. But the implementation may be somewhat complex. The mix of assets you choose for your IRA depends largely on your personal financial situation and your time horizon. Personal financial considerations include: will you and/or your spouse continue to work seasonally or part-time during retirement; how much you have saved to date for retirement; whether your retirement savings are post-tax or pre-tax(IRA, 401k, etcetera). Your time horizon is the length of time you have to invest before you need your retirement funds. Several financial goals may require that your IRA portfolio should have several time horizons; and these different goals may actually be in conflict.
Your Risk Tolerance
This is your financial ability and emotional willingness to take risk in pursuit of reward with your IRA. Calculating your risk tolerance requires you to examine your income, your assets, your responsibilities, and your ability to cope with stock and bond market ups and downs. When you pursue IRA financial goals as a household, then you must also consider your spouse’s risk tolerance.
Rebalance Your IRA Portfolio
Once you calculate an IRA asset allocation that feels right for you, then periodically you should monitor your allocation. A portfolio that starts out with 60% stock funds and 40% bond funds may shift to 50% stock funds and bond funds, if bond funds outperform stock funds for a length of time. Conversely, if bond funds outperform stock funds, then your asset allocation IRA may be overweight in bond funds. Should your asset allocation IRA get out of alignment, then you may rebalance your portfolio by selling or exchanging assets in one category, and buying or exchanging assets in another. Within your asset allocation IRA this should be a no charge and no tax consequence transaction. You should establish regular time periods to review your IRA portfolio, and rebalance your asset allocation as necessary.
Changing Times and Course
As you get closer to your financial goal and you time horizon shortens, then your ideal asset allocation IRA should change. Generally you should pursue a more conservative asset allocation when you have less time to reach your financial goals. Life changes including having children, caring for aging parents, loss of employment, adverse health may also impact your financial goals and risk tolerance.
A Few Words About Risk and Reward in Your IRA
You should carefully consider any savings and investment vehicle’s objectives, risks, expenses, and rewards. Not all savings and investment vehicles may be appropriate for everyone. Every individual is unique, has their own set of financial circumstances, and comfort level with saving and investment risk. Also, prior to any decisions or IRA investing, you should carefully read the available material to better understand the specifics of your selected IRA savings or IRA investment vehicle.
You should consult your tax advisor or www.IRS.gov for more information. This is a great time to check and update the beneficiary designations on your Traditional IRA, Roth IRA, and any IRA-Rollover.
Donn J. Sinclair, MBA (803)329-0609
Updated in Charlotte NC and Rock Hill SC.
March 30, 2017
Donn J. Sinclair, MBA is SC insurance licensed in CT, GA, MS, NC, OR, SC, and VA (NIPR #125783). SC Real Estate License #76530, and NRDS #554027312.. @Sinclair Financial Solutions is independently owned and operated. Securities offered through Fortune Financial Services, Inc, Member FINRA/SIPC.
How Much Can You Deduct for Your Traditional IRA?
You may normally deduct the lesser of:
Your Traditional IRA contributions for a tax year …
Or the then current general limit for that tax year, if applicable it may be adjusted by the Spousal IRA limit for that tax year.
If either you or your spouse are covered by an employer retirement plan at work in that tax year, then your deductible Traditional IRA contributions for that tax year may be less than the maximum.
Note that trustees’ fees and administrative expenses that are separately billed and paid in connection with your Traditional IRA are not deductible as IRA contributions. However, most brokers’ commissions are part of your Traditional IRA contribution and are normally deductible as IRA contributions.
Should either you or your spouse not have been covered by an employer plan for any part of the tax year, then you should each be eligible to deduct up to the full contribution limits. The 2016 and 2017 limits are $5,500 each, and $6,500 each for those age 50 plus for both tax years. These IRA limits may be reduced by contributions made on your behalf to certain 501c organizations.
Certain IRA deduction limits apply to those divorced or legally separated during the tax year. Deductible IRA limits may be reduced by your total compensation during that tax year. Your employer plan coverage is normally designated on your W-2 for that tax year. Reservists and volunteer firefighters may have special exceptions. Consult your tax advisor or see IRS.gov for more details.
Mark and Susan live in Charlotte NC and both work in Rock Hill SC. Mark is covered by his employer 401k plan, and Susan is not covered by an employer plan. Because Mark is covered by his employer’s plan, their deductible Traditional IRA contributions may be reduced or eliminated. Limitations and eliminations are specifically outlined in IRS Publication 590-A.
When Can Your IRA Contributions Be Made?
You can make IRA contributions as soon as you open your Traditional IRA. Most years you may make an IRA contribution as late as April 15th following that tax year end. For 2016 you should be able to make an IRA contribution as late as April 18, 2017. You should be able to make You make your IRA contributions through your chosen trustee or other administrator. Contributions must be in the form of cash, check, or money order. Normally property may not be contributed.
Although property normally cannot be contributed, your IRA may invest in certain property. For example, your IRA may purchase shares of stocks and mutual funds, and even annuities. For other restrictions on the use of funds in your IRA, see Prohibited Transactions at IRS.gov. You may be also able to transfer or roll over certain property from one retirement plan to another. See the discussion of IRA Rollovers and other transfers Can You Move Retirement Plan Assets also at IRS.gov.
You may find it easier to make you IRA contribution by having your income tax refund, or any portion of your refund, paid directly to your Traditional IRA, Roth IRA, or SEP IRA. For complete details see the instructions for your income tax return or Form 8888, Allocation of Refund (Including Savings Bond Purchases).
Contributions normally can be made to your Traditional IRA for each year that you receive compensation and have not reached age 70½. For a year in which you do not work and do not earn wages, contributions cannot normally be made to your IRA – unless you receive alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation. See the earlier article Who Can Open a Traditional IRA.
Even when IRA contributions cannot be made for the current year, the amounts properly contributed in prior years, plus any earnings, still may remain in your Traditional IRA. Contributions can resume for any subsequent years when you do qualify, and must be made by the due date. IRA contributions can be made to your Traditional IRA for a year at any time during that year, or by the due date for filing your tax return for that year(not including extensions). For most people, this means that contributions for 2016 must be made by Friday April 18, 2017.
The Age 70½ rule means that IRA contributions cannot be made to your Traditional IRA for the year in which you reach age 70½, or for any later year. You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. If you were born on or before June 30, 1946, then you cannot contribute for 2016 and all subsequent years.
Normally when you contribute an amount to your traditional IRA between January 1 and April 15, then you should tell the sponsor for which year (the current year or the previous year) the contribution is made. If you do not tell the sponsor for which year it is made, then the sponsor may assume and report to the IRS that IRA contribution is for the current year. This could cost you the opportunity to claim that contribution for the prior tax year.
Filing before a contribution is made. You can file your return claiming your Traditional IRA contribution before the contribution is actually made. Generally the contribution must be made by the due date of your return, not including extensions. Again, for most folks that is April 18, 2017 for tax year 2016.
Contributions are not required. You do not have to contribute to your Traditional IRA for every tax year, even if you can. When eligible to contribute, you retain the right to decide whether or not to contribute to your Traditional IRA. More information is available tat IRS.gov.
Whether you live in North Carolina or South Carolina, today is a great day to review and update the beneficiary designations on your Traditional IRA, Roth IRA, and any IRA Rollovers.
What If You Should Inherit an IRA?
If you or your spouse should die, then the survivor generally has several options for the Inherited IRA:
A.) Spousal survivors can designate themselves as the IRA owner, and then the survivors may elect to treat the Inherited IRA as their own Traditional IRA.
B.) Treat the Inherited IRA as their own by rolling it over into: their Qualified Employer Plan (such as a 401k plan); their Qualified Employee Annuity Plan (403a plan); their Tax-Sheltered Annuity Plan (403b plan); or their state or local government Deferred Compensation 457 plan.
C.) The surviving spouse may also elect to treat themselves as the IRA Beneficiary, rather than treating the Traditional IRA as their own IRA.
Please note that surviving spouses designated as the sole beneficiary, and who have an unlimited right to withdraw funds, will also be considered to have treated an Inherited IRA as their own Traditional IRA if: they do not take the Traditional IRA required minimum distribution (RMD) for a year; or make contributions to the Inherited IRA. Such contributions also include Traditional IRA Rollover Contributions into the Inherited IRA.
Aaron inherited his wife Louise’s 401k plan. Louise’s former Charlotte NC employer sent Aaron the forms to treat this as his own Traditional IRA. Aaron intends to ask his Rock Hill SC tax advisor if he should do an IRA Rollover and treat the 401(k) as his own Traditional IRA. If so, then Aaron may roll the 401k into his Mutual Fund IRA.
Can You Move Retirement Plan Assets?
These tax-favored retirement assets are definitely portable and normally may be easily moved to your Traditional IRA Rollover or other retirement plan. You should be able to do a direct transfer from one trustee to another; a direct or indirect IRA Rollover; or transfers incident to a divorce. In a later article we will discuss how you may even be able to move these retirement plan assets to your Roth IRA.
Trustee-to-Trustee Transfers move your funds directly from one like-type account to another. An example is from a former 401k to your new 401k. You normally can also move Traditional IRA funds via a Trustee-to-Trustee Transfer from one IRA to another like-kind IRA. This is one of the most convenient ways to move funds between IRAS and other retirement accounts. Your current trustee may actually send you the check; however, in this case the check is normally payable to your new trustee for your benefit. You then should forward that check to your new trustee.
IRA Rollovers are tax-free distributions to you normally from non-like retirement accounts. For example from The check may be sent to you, or sent directly to your chosen retirement plan. Chosen retirement plans include: IRA Rollovers, your current employer’s qualified retirement plan; a state or local government’s deferred compensation plan, or a tax-shelters 403 annuity plan.
Some rollover limitations include: starting in 2015 you normally may only make one tax free indirect IRA Rollover in any 1-year period. This applies no matter how many IRAs you own. Direct IRA Rollovers are frequently exempt from this limitation. Also note that you must complete the rollover within 60 days from when the funds left your former trustee. That is, they should arrive at your new trustee within the 60 day rollover period.
Anna recently left her Charlotte NC job for a shorter commute with an employer in Fort Mill SC. She is going to grad school at Winthrop University and wanted a shorter commute from her Rock Hill SC home. Anna had worked at the Charlotte firm for five years and had saved over twenty thousand dollars in her former employer’s 401k program. Anna has decided rather than leave her funds at the old 401k, or move them to the 401k at her new employer, she will start an IRA Rollover. Anna plans to do a direct rollover and have her funds sent direct from her old 401k to her new IRA Rollover. This should be a non-taxable event, and there will be no taxes withheld from her old 401k distribution in the direct rollover to her new IRA Rollover. The check will be payable to her new IRA rollover and mailed to Anna. She will still need to forward the check to her new IRA Rollover. The rollover check is made to her new IRA Rollover, and therefore this is still a direct rollover.
When Can You Withdraw or Use Your Assets?
Normally you may withdraw your IRA Assets at your discretion. These withdrawals may be subject to any trustee or custodian early withdrawal charges. There are also IRS restrictions prior to age 59.5 which may subject your withdrawal to a 10% penalty tax.
Prior to age 59.5 retirement fund redemptions or withdrawals are called Early or Premature Distributions. You normally may make penalty free withdrawals on same year contributions, if you make those withdrawals prior to your tax return due date.
Tom lives in Fort Mill and In 2016 has made three $1,500 contributions to his Traditional IRA. Tom could make withdrawals from his Traditional IRA up to $4,500 prior to his 2016 tax return due date. Thus it would be as if he had never made the Traditional IRA contributions up to any withdrawal amount less than $4,500. As such Tom could make the withdrawals without having to pay the additional 10% penalty tax on that IRA withdrawal. However the funds withdrawn would revert to being 2016 taxable income.
There are additional exceptions to the 10% penalty that may include education expenses, medical bills, and substantially equal distributions. More information on these distributions can be found at IRS.gov in Publication 590-A.
What Actions Result in IRS Penalties or Additional Taxes?
There are definite tax advantages for using a Traditional IRA, and there are also penalties if the rules are not properly followed. There is the consequence of additions to regular income taxes when using your IRA assets to engage in prohibited transactions, there may also be additional income taxes for the following:
- Investing in collectibles
- Making any excess contributions
- Taking early or premature distributions
- Allowing excess assets to accumulate
Prohibited transactions are generally any improper uses of your Traditional IRA account or annuity by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and members of your family. Your family includes spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.
Some examples of prohibited transactions with a Traditional IRA include:
- Borrowing funds from your Traditional IRA
- Selling property to your Traditional IRA
- Using your Traditional IRA assets as security for a loan
- Buying property for present or future personal use with your IRA funds
Please also note that if your IRA invested in non-publicly traded assets, or assets that you directly control, the risk you face for engaging in prohibited transactions may be increased.
Should you or one of your beneficiaries engage in a prohibited transaction with your IRA assets, then the most common consequence is that your IRA ceases to be an IRA as of the first day of that year. This means that your IRA account is treated as distributing all of its assets to you at their fair market values on the first day of the year. If the total of those values is greater than your basis in the IRA, you may also have a taxable gain that normally must be included in your income.
For additional information on prohibited transactions and questions concerning how you might want to utilize your retirement funds, call Kristin Sinclair with A Accu Tax at (803)329-0609.
What is a Roth IRA?
A Roth IRA is an individual retirement plan that is subject to many of the rules that apply to a Traditional IRA. Although there may be some exceptions; just as with a Traditional IRA, a Roth IRA may also be a savings/investment account or an annuity.
The savings/investment account or annuity must be designated as a Roth IRA when it is opened. A deemed IRA can be a Roth IRA, however, neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.
With a Traditional IRA you may be eligible to deduct your current year contributions from your income. However, you cannot currently deduct contributions to your Roth IRA. This is because if you satisfy the requirements, then qualified distributions should be tax free. Contributions can also be made after you have reached age 70 ½, and you can leave amounts in your Roth IRA as long as you live. There are no Required Minimum distributions (RMDs).
Are Distributions Taxable?
Roth IRA qualified distributions, or distributions that are a return of your regular contributions are normally not included in your gross income. Roth IRA distributions that you roll over from one Roth IRA into another normally also are not included into your gross income for that tax year. It may be that you must include part of other distributions into your income.
Your Roth IRA basis of property distributed from your Roth is it fair market value on the date of that distribution. This is regardless of whether or not your distribution is a qualified distribution.
When you withdraw Roth IRA contributions by the due date of your return the for that tax year, in which those contributions were made, including any net earnings on those Roth IRA contributions, then your contributions are treated as if you had never made them for that tax year. If you have filed an extension to your federal tax return, then you have until the extended due date of that tax return to withdraw those Roth IRA contributions. The withdrawal of these same year contributions may be done without a federal tax penalty, but you must consequently include those distributions into your gross income for the tax year in which you made those Roth IRA contributions.
So, what are qualified Roth IRA distributions? Qualified distributions are any payment or distribution from your Roth IRA that meets these requirements:
- Made after the 5-year period beginning with the first taxable year for which a Roth IRA contribution was made to set up your benefit
- Occurs on or after the date you reach age 59 ½
- Made because you are disabled (Contact Kristin Sinclair at (803-329-0609) for further information on a qualifying disability)
- Made to a beneficiary or to your estate are your death, or
- One that meets the requirements listed under a First Home Exception)
If you receive a Roth IRA distribution that is not a qualified distribution, then you may have to pay a 10% penalty tax on that early distribution.
For additional information on early Roth IRA distributions, exceptions, and more in depth questions regarding the tax ramifications of possible actions taken with your Roth IRA, phone Kristin Sinclair at (803)329-0609.
Must You Withdraw or Use Your Roth IRA Assets?
The Traditional IRA rules Required Minimum Distribution (RMD) rules do not apply to Roth IRAs. That is as long as long as the Roth IRA owner is still alive. After the death of the Roth IRA owner, some of the minimum distribution rules that apply to Traditional IRAs, should at that time also apply to the decedent’s Roth IRAs.
Please note that your Roth IRA may not be used to satisfy your RMD from your Traditional IRA. Neither may you use a Traditional IRA distribution to satisfy any RMD from a Roth IRA.
Also please note that should you have a loss on your Roth IRA investments, then you may recognize that loss on your federal income tax return. This is only after all the amounts, in all of your Roth IRA accounts have been distributed to you. The combined total of all distributions must be less than your unrecovered basis. Your basis is the total amount of contributions that you made into all of your Roth IRAs.
The rules that govern the distribution of a decedent’s Traditional IRA, also impact affect the decedent’s Roth IRA. These rules take place as though the Roth IRA owner died before his or her required beginning date.
Normally the entire interest in the Roth IRA must be distributed by December 31st of the fifth calendar year after the Roth owner’s death. There is, however, an exception to this rule. If the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary, then the proceeds are not subject to the five year disbursement rule. So if the proceeds are paid as annuity payments, then the interest must be payable over a period not greater than the designated beneficiary’s life expectancy. Also the distributions must begin before December 31st of the calendar year following the year of the Roth IRA owner’s death. Normally distributions from another Roth IRA cannot be substituted for these distributions. However, there is an exception when the second Roth IRA was also inherited from the same Roth IRA decedent.
There are strict rules governing whether or not an Inherited Roth IRA can be combined with another, and the requirements to satisfy them are:
- The beneficiary inherited the Roth IRA from the same decedent, or
- The beneficiary was the spouse of the decedent, and the sole beneficiary of that Roth IRA.
- The beneficiary must elect to treat the Inherited Roth IRA as if it is his or her own Roth IRA.
For additional information regarding Roth IRAs and tax concerns, please phone Kristin Sinclair at (803)329-0609.
2014 What is a SEP IRA?
The SEP IRA is an excellent low cost retirement plan for small employers to save for retirement on a tax-deferred basis. Eligible small employers may have just one employee. The plans are frequently funded with the same assets as Traditional IRAs.
Other SEP IRA advantages are that the setup is easy and low cost. Annual maintenance costs are low, and often less than $20 per employee. Contribution requirements are flexible and can be profitability dependent. These employer contributions may vary year to year, there are no requirements to make continued contributions, and the plan may be discontinued at pretty much any time.
Paperwork and tax filing requirements are minimal. Eligible employees establish and select their investment allocations which helps minimize the employer’s fiduciary responsibility. Frequently online access allows for simple and secure transactions. Even sole proprietors can establish a SEP IRA Plan. Basically all small businesses, including sole proprietors, small companies (both for-profit and tax-exempt), and government entities are all eligible for SEP IRA Plans.
Your eligible employees are only those that have worked with you three of the past five years, and are 21 years of age or older. Employees that can be excluded are those that earned less than $600 in the plan establishment year, nonresident aliens with no source of U.S. income, and union employees covered by a collective bargaining agreement.
Contributions can vary or not be made at all, depending on profitability, cash flow, or other factors. Participant contributions are not permitted. The 2016 maximum annual employer contribution is 25% of the participant’s compensation up to $53,000. Please note that you may be able to contribute to your 2016 SEP IRA up until October 16, 2017. There are no catch up provisions for those age 50 and older in a SEP IRA.
Self-employed individual contributions are based on self-employment income, minus 50% of any self-employment taxes that have been paid. Self-employed individuals also need to reduce that amount by any deductible plan contributions.
In effect this reduces the contribution maximum from 25% to only 20%, and not to exceed $53,000 in 2016. All SEP IRA contributions are immediately vested.