Funding a Roth IRA With Disposable Income

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You have funded your 401(k) enough to receive a full company match (either traditional or Roth.)  You are paying all of your bills when they are due each month.  You have enough cash set aside for emergencies.  There is some cash left over.  Now you want to continue to save for retirement.  Continuing to fund your traditional or Roth 401(k) is a good idea. Even better is to fully fund a Roth IRA before moving back to your 401(k).  With a Roth IRA, you are able to take out your contributions at any time-one day…one year…ten years.  Any dollar you take out first comes out of your contributions so there is no chance that a portion of earnings will become taxable with possible penalties.  This is not the case for either a traditional or Roth 401(k).

If you are over the income levels to contribute directly to a Roth, no worries.  Contribute to a traditional IRA and then convert this to a Roth IRA the next day.  Since the first contribution was nondeductible on your tax return, the conversion is tax free.  Subsequently, any withdrawals at any time first come out of this converted amount, which will be tax free since you had basis in the full amount of the original conversion.

The only downside of doing this versus opening a taxable, non-retirement investment account, is that any growth is unable to be taken out without penalty.  This is the same downside to any retirement account.  The growth must be used for “retirement” (after you are 59 1/2 years old with a few other exceptions) to avoid penalty.

There are other nuances to Roth IRAs, such as what happens if you have a traditional IRA that has grown in value and you convert that to a Roth? Are those dollars able to be taken out of your Roth after the conversion without penalty? If you have these or any other questions, please do not hesitate to give us a call at 314-993-4285.

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The Benefit of Donating Your Required IRA Distributions to Charity

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Under Qualified Charitable Distribution (QCD) rules, an IRA can make a contribution directly from the IRA to a charity. The donation is not claimed as a deduction, though the distribution from the IRA is not reported in income, either. In fact, since the IRA itself is a pretax account, contributing directly from an IRA to a charity is the equivalent of a “perfect” pretax contribution.

Read more information about QCD rules and the discussion of donating to charity directly from your IRA at the Wall Street Journal:

http://blogs.wsj.com/experts/2016/07/04/the-benefit-of-donating-your-required-ira-distributions-to-charity/

4 Tips on Getting Free Money for Retirement

It goes without saying that retirement advice is always appreciated and is highly sought after. That’s why we are featuring Retirement Tuesday every Tuesday in June!


While retirement advice is often complicated and must be personalized, we have four tips on picking up free money for retirement that everyone can follow.

free-money

  1. Max out your 401(k).
    Your 401(k) is an excellent tool for getting your retirement money. In order to do this, you should focus on maximizing your contributions and making sure you always get the company match.
    ** To learn how to make your 401(k) work for you, tune in to our blog next week where we will go into 401(k)s in depth.
  2. Open a spousal IRA.
    If your spouse does not have access to a 401(k) (for example, if your spouse is a homemaker), you can open up a spousal IRA. With this type of IRA, you can set aside money each year into your spouses account for you to access after retirement. As a bonus, it will cut your joint taxes down in the meantime.
  3. Max out your Roth IRA.
    Contributions to Roth IRAs can be taken back out immediately if needed with no tax consequences. It is like having a tax free savings account. Therefore, it is smart to max out your contributions every year. If you make over the threshold for contributing to a Roth IRA, call us and we can go over your options. Often, the benefits outweigh the initial cost.
  4. Consider a health savings account (HSA).
    With HSAs, you are essentially taking the money you would be spending on health care and putting it into a separate account… only the money is now pre-tax. As an added bonus, any money not used will roll over every year with interest. For those with high-income, it’s like having a second IRA!

If you have any questions on picking up free money for your retirement, feel free to call us at (314) 993-4285 or email us at office@hkaglobal.com.

Why funding a Roth IRA with disposable income first makes sense.

 

You have funded your 401(k) enough to receive a full company match (either traditional or Roth.)  You are paying all of your bills when they are due each month.  You have enough cash set aside for emergencies.  There is some cash left over.  Now you want to continue to save for retirement.  Continuing to fund your traditional or Roth 401(k) is a good idea.  A great idea would be to fully fund a Roth IRA before moving back to your 401(k).  You are able to take out your contributions to a Roth IRA at any time.  One day…One year…Ten years.  Any dollar you take out first comes out of your contributions so there is no worry that a portion of earnings will become taxable with possible penalties.  This is not the case for either a traditional or Roth 401(k).

If you are over the income levels to contribute directly to a Roth, no worries.  Contribute to a traditional IRA and then convert this to a Roth the next day.  Since the first contribution was nondeductible on your tax return, the conversion is tax free.  Subsequently, any withdrawals at any time, first come out of this converted amount, which will be tax free since you had basis in the full amount of the original conversion.

The only downside of doing this versus opening a taxable, non-retirement investment account, is that any growth is unable to be taken out without penalty.  This is the same downside to any retirement account.  The growth must be used for “retirement” (after you are 59 1/2 years old with a few other exceptions) to avoid penalty.

There are other nuances to Roth IRAs, such as what happens if you have a traditional IRA that has grown in value and you convert that to a Roth?   Are those dollars able to be taken out of your Roth after the conversion without penalty?  If you have this or any other questions, please do not hesitate to give us a call at (314) 993-4285.

The Real Value of a 401(k) Plan

We all know putting money aside in a tax deferred account is a good idea.  Businesses should offer these to employees for many reasons, not the least which is that an employee that saves is a good employee.  The cost of administering retirement plans can be daunting.  SIMPLE’s are the cheapest and Defined Contribution plans tend to be the most expense.  The traditional 401(k) plan isn’t always the best bang for the buck, however, these plans pack punch that often go overlooked by the small business owner.  Two great reasons to consider a traditional 401(k) are as follows:

 

  • The extra $10,000.  In 2014 an employee may contribute up to $17,500 toward their retirement.  But, if your plan is so designed they may then be able to contribute an additional $10,000 as an after tax in-plan IRA contribution.  This additional contribution is without regard to whether or not regard to discrimination testing, short answer, the business owner can also make this contribution!  So a business owner who is also an employee participating in the Company 401(k) plan can contribute up to $39,500 to a retirement plan without having to set up pension and profit sharing plans and be subject to nondiscrimination testing.  Here’s the math for an owner/employee older than 50:

 

Traditional 401(k) contribution:                                  $17,500

Catch-up 401(k)                                                            5,500

After tax in-plan contribution                                       10,000

     Total 401(k) plan contributions                            $33,000

Traditional self-directed IRA contribution                   $5,500

Catch-up IRA                                                               1,000

     Total IRA contribution                                           $6,500

Total retirement account contributions                    $39,500

 **PLANNING NOTE:  Roll this extra $10,000 over into a self-directed IRA and convert both contributions to a Roth immediately for a $16,500 Roth contribution in spite of earnings limits.

 

Like it?  Call your financial advisor ASAP!

Tax Return Forget Me Nots

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Before you submit your tax documents to your accountant for completion of your tax return, take a look at the top 5 most commonly overlooked items below to make sure you’ve included everything:

1. Long term care insurance:  Missouri allows for a deduction from taxable income for a portion of your long term care insurance. Many other states allow a deduction or sometimes a tax credit for these premiums.  Although this is one of the questions in the full version of the organizer, because we are so conditioned that medical expense is limited to 10 % of AGI, we forget that the state may allow for some benefit of these itemized deductions. Long term care insurance should be included on your return to take full advantage of this opportunity.

2. Electronic 1099s:  Many brokerage firms now have the option of sending your 1099s directly to your CPA.  All firms are different, but you may be able to save our email address as your CPA in your brokerage online account and have the 1099s securely emailed to us when they are ready.

3. Business expenses and AMT:  The top marginal tax rate is now 39.6%.  This could mean you are out of the Alternative Minimum Tax (AMT) now or will be in the near future.  While you were not deducting any unreimbursed business expenses while in AMT, now you could deduct them.  If you do not track and send them to us, you will not deduct them.  Remember to send us all business expenses (including mileage driven) with your tax documents so you are not missing out on these deductions.  Also, although there are a few states that do, most states do not have AMT so your expenses would be deductible on the state side even if you are still in AMT so go ahead and send everything to us even if you think you will be in AMT.

4. Non Cash Charitable Donations:  Donating items to charities such as the Salvation Army or Goodwill can save you substantial tax.  Websites such as www.itsdeductible.com and www.satruck.org/valueguide give the approximate values of used furniture, clothing, or appliances.  They make what used to be a difficult process, tracking values of donated items, easy and it will save you real money.  Many times, the values these websites give for items in good condition are higher then you may expect.

5. Charitable Mileage and Supplies:  If you use your vehicle for charitable organizations, you can deduct these miles as charitable donations.  If you purchase supplies on behalf of a charitable organization to use at an event, these are charitable donations.  There is a place on your organize for each of these items so remember to include them if they apply to you.

Thanks for allowing the HKA family to work with you again this year on your 2013 tax returns.  If you are not currently a client and wish to learn more about us and what we can do for you, please click here.

Purchase Real Estate with A Self-Directed IRA

self_directed_IRA_investments

It is a known fact that you cannot use your Individual Retirement Account (IRA) to invest in real estate.  Although this is true with a traditional 401(k) or traditional IRA, you can invest in real estate through the use of a self-directed IRA.

A self-directed IRA is an IRA like any other under IRS guidelines in terms of annual contributions, required minimum distributions, and types such as Traditional, ROTH, Simple, and SEP.  While most traditional IRAs limit your investments to publicly traded securities, self-directed IRAs are open to almost any investment, except for life insurance, collectibles, and S-Corporations.

Below are some key points you should review before you decide to use your self-directed IRA to purchase real estate:

  1. The property must be a new purchase directly into the IRA and cannot be a property you already own or a personal residence.
  2. You must have enough cash to purchase the property.  You cannot take out a mortgage in your IRA to finance the purchase.
  3. You cannot borrow money from the property or use it as security for a loan.
  4. You and your relatives are barred from occupying or working on the property.  If you are considering renting the property, you need a property manager to find tenants and all expenses for repairs and improvements must come out of the IRA.

While it is possible to use a self-directed IRA to purchase real estate it may become more complicated to manage its use than if it were purchased and operated outside of the IRA.

Feel free to give us a call if you have any questions or want to discuss this further.