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 Real Value of a 401(k) Plan

401k

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 of which is that an employee that saves is a good employee. However, the cost of administering retirement plans can be daunting. SIMPLE’s are the cheapest and Defined Contribution plans tend to be the most expensive. The traditional 401(k) plan isn’t always the best bang for the buck-however, these plans pack a punch that often go overlooked by the small business owner. A great reason to consider a traditional 401(k) is the extra $10,000:

  • In 2016, an employee may contribute up to $18,000 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 discrimination testing so 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 $40,500 to a retirement plan without having to set up pension and profit sharing plans and be subject to discrimination testing. Here’s the math for an owner/employee older than 50:
    • Traditional 401(k) contribution: $18,000
    • Catch-up 401(k): $6,000
    • After tax in-plan contribution: $10,000
    • Total 401(k) plan contributions: $34,000
    • Traditional self-directed IRA contribution: $5,500
    • Catch-up IRA: $1,000
    • Total IRA contribution: $6,500
    • Total retirement account contributions: $40,500

PLANNING NOTE: Roll the $10,000 and the $6,500 contributions to a Roth immediately for a $16,500 Roth contribution in spite of earnings limits.

If you have any questions please call our office, 314-993-4285.

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.

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  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.

How To Calculate Your Taxes Owed in 2014

calculateWe know that taxes can be complicated. When it comes to items like Medicare surtax, Roth contributions, and the like, it can be confusing where your taxes fall. Below are the rules for calculating your taxes owed in 2014 in regards to some of the most complicated items:

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!