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Tax Season and IRAs

Tax season is upon us - That means IRA season is here as well. It is a time when we think about contributions, distributions, and conversions. We do our best to be informative when communicating to all of you, but also enjoy adding a little amusement to topics that can otherwise be a little dry. We have finally met our match, there is no way to make this topic entertaining. In many cases, however, this topic is one of the most important we address. Taking advantage of the generous rules that allow for tax free retirement investing greatly improves the wealth of a properly constructed retirement plan. If you are not certain your plan is maximizing these investor benefits, please contact us before April 15th. There are still things we can do to help lower your 2018 taxes. The rules, however, are complicated and it is always a good idea to be acquainted with the basics in order to help avoid costly mistakes. Here is our overview of those basics. After reading this, if you have questions about how these rules apply to your own circumstances, we would like to discuss those with you.

Various parts of the tax code dictate how much you can save for retirement, when withdrawals can be made, and how much can be withdrawn. There are three important birth dates you need to be aware of.

  • At age 50 the maximum amount you can contribute to a retirement savings account increases. These are called “catch up contributions.”

  • At age 59½ you can start withdrawing from a retirement or “qualified” plan without the 10% penalty for early withdrawals.

  • At age 70½ you are no longer allowed to contribute to a traditional IRA and must start taking minimum distributions from your IRAs.

IRA Rollovers

IRA Rollovers are restricted to one person per year if the funds are distributed directly to you. This is called the 12-month rule. If you do receive a check, you have 60 days to “roll” it into another IRA. If the 60 days elapse without a rollover the funds will be attributable to you as income. You will owe taxes on that income and possibly a 10% penalty for premature distribution if you are under 59 ½. This is a common occurance and can be very easily avoided. Please contact us if you are thinking about doing a rollover. We can help you avoid costly and aggravating problems.

The 12-month rule does not apply to direct custodian-to-custodian transfers. As long as you are moving funds directly between custodians you can do as many rollovers as you want. Rollovers from qualified plans like 401Ks are also excluded from the 12-month rule. Many of us have orphaned retirement plans such as old 401Ks, 403Bs, and IRAs that need attention. Consolidating these old plans and IRAs leads to better organization, less investment risk, and a more congruent investment plan.

Deductible IRA Contributions

If you are under 50 and did not have access to an employer-sponsored retirement plan in 2018 you may contribute $5,500 to a deductible IRA. If you are over 50 the amount is $6,500. For 2018, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is phased out if your modified adjusted gross income (AGI) is more than $101,000 but less than $121,000 for a married couple filing a joint return. If you have no retirement plan at work but your spouse does, and you file a joint return, your deduction is phased out if your modified AGI is more than $189,000. The deadline for making contributions for 2018 is April 15 2019.

Contributions to 401Ks and Similar Qualified Plans

For 2019, the maximum annual contribution limit to a 401k or similar plan is $19,000 plus an additional $6,000 for the “catch up” provision if you are over age 50. In 2019, the maximum annual contribution for SEP and Keogh plans is $56,000 or 25% of your compensation, whichever is less. If you are self employed or receive 1099 income from consulting or various activities, please contact us and we can help you navigate qualified plan landscape.

Required Minimum Distributions (RMDs)

Distribution from retirement accounts are required starting at age 70½. These accounts include 401(K)s, 403(b)s (also known as TSAs), 457(b)s, traditional IRAs, SEP IRAs, and Roth IRAs among others. RMDs from from defined contribution plans such as 401(K)s can be postponed beyond age 70½ if you are still working, contributing to the plan, and own less than 5% of the company. Your first distribution can be taken as late as April 1 of the calendar year following the year you turned 70½. Withdrawals from qualified account are considered to be taxable income unless taken from a Roth IRA or Roth 401K. There are many rules that govern how the distribution amounts of RMDs are calculated. Different types of IRAs such as beneficiary IRAs for example, are treated differently and have very specific rules that dictate how to properly comply with their minimum distribution requirements. If you you have inherited or are going to inherit an IRA, please contact us so that we can help you sort out these complex rules and keep your assets in tact.

Roth IRA Conversions

You have the option of converting all or part of your traditional IRA into a Roth IRA regardless of your adjusted gross income. Roth IRAs can be withdrawn tax-free at any time; future earnings are tax-free (with some limitations), and there are no minimum distribution requirements. The downside is that the amount converted is taxable in the year it occurs. The IRS characterizes a conversion as a “taxable Rollover”. This means that there possible tax implications of conversions that must be explored deeply before any conversion takes place. One quick example, RMDs are not eligible for conversion. So if your over 701/2 (or know someone who is) and considering converting an IRA to a Roth please contact us. We’ll help you get it done correctly. The benefits of converting to a Roth could be considerable but you must carefully weigh the upfront tax costs against the long-term tax advantages.

General Planning Considerations Regarding IRAs

IRA's are expensive assets to have in your estate. This is because they are ultimately taxed twice. The RMDs assure that income taxes get paid, and the IRA is also included in the calculation of the net estate for the purpose of paying the estate tax. Depending on tax rates IRA depletion can be as high as 70% as a result of the combination of income plus estate taxes. Make sure that your beneficiary and designated beneficiary information (yes there is a difference) are complete and up to date. We look forward to helping with any IRA questions or concerns. Happy Tax Season, The GreenPort Team

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