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May 18th, 2018 by

spousal IRA

A spousal IRA — funded for a spouse who earns little or no income — offers an opportunity to help keep the retirement savings of both spouses on track. It also offers a larger potential tax deduction for a married couple.

Being a stay-at-home mom or dad, or working part-time to help take care of the children, can make a big contribution to the balance and well-being of a family. Unfortunately, time out of the workforce could put the caregiving spouse at a disadvantage when it comes to retirement savings.

Making Contributions to Spousal IRA

For 2018 tax years, an individual with earned income can contribute up to $5,500 to his or her own IRA. Also, you can contribute up to $5,500 more to a spouse’s IRA — regardless of whether the spouse works or not. There are a few rules. The couple’s combined earned income must exceed both contributions and the couple must file a joint tax return. You can make an additional $1,000 catch-up contribution a spouse who is age 50 or older.

If neither spouse actively participates in an employer-sponsored retirement plan, contributions to a traditional IRA are fully tax deductible. However, if one or both are active participants, tax deductibility for joint filers phases out at a modified adjusted gross income (MAGI) of $101,000 to $121,000 for a participating spouse and $189,000 to $199,000 for a nonparticipating spouse. Thus, some participants in workplace plans who earn too much to deduct an IRA contribution for themselves may still be able to deduct an IRA contribution for a nonparticipating spouse.

Contributions to a Roth IRA are not tax deductible regardless of participation in a workplace plan. However, eligibility to contribute to a Roth IRA phases out for joint filers with a MAGI of $189,000 to $199,000 in 2018.

Distributions from traditional IRAs are taxed as ordinary income. They may be subject to a 10% federal income tax penalty if withdrawn prior to age 59½. Roth IRA contributions can be withdrawn penalty-free and tax-free at any time. However, a Roth IRA distribution must meet the five-year holding requirement and take place after age 59½.

Smart Planning Starts Early!

Your family should be setting goals early for retirement. Let me show you how to get the most from your retirement planning. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

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March 12th, 2018 by

Contributing to a Roth IRA or a designated Roth account in an employer retirement plan do not reduce current income, but qualified withdrawals are generally free of federal income tax as long as they meet certain conditions. Moreover, withdrawals from a Roth IRA can tax-free and penalty-free at any time, for any reason.

Repositioning Your Retirement Dollars

  • If you have a traditional IRA but prefer the advantages of a Roth, you can open a Roth IRA and make contributions to either or both accounts. However, you are subject to the combined annual contribution limit.
  • You could also convert all or part of your traditional IRA money to a Roth IRA. You can convert contributions to an employer’s retirement plan to a designated Roth account if the plan allows for conversions.
  • Conversions of monies to a Roth account are subject to federal income tax in the year of conversion. Under current tax law and if you meet all conditions, the Roth account will incur no further income tax liability for the rest of your lifetime.
  • The prospect of a substantial tax bill can be daunting, but paying taxes now may be a worthwhile tradeoff for potential tax-free growth and tax-free income in retirement. And because you do not have to take required minimum distributions (RMDs) from a Roth IRA, you have more flexibility when taking withdrawals.
  • To make the tax liability of a Roth conversion more manageable, you could spread out smaller conversions over several years. Recharacterizations should take place by October 15 of the year following the tax year of the conversion.

Contribution and Distribution Rules

  • Eligibility to contribute to a Roth IRA phases out at higher income levels. (Income limits also apply for tax-deductible contributions to a traditional IRA if you’re an active participant in an employer plan.) IRA contributions for 2017 can be made up to the April 2018 tax filing deadline; however, employer-plan contributions and Roth IRA conversions for 2017 must be made by December 31.
  • To qualify for tax-free and penalty-free withdrawals, distributions from a Roth IRA or a Roth employer plan account must meet a five-year holding requirement and take place after age 59½ (with some exceptions).
  • RMDs from traditional IRAs and employer-sponsored retirement plans (including Roth accounts) must start in the year you turn 70½.
  • Beneficiaries of all IRAs and employer plans generally must start taking RMDs in the year after the original account owner’s death.

These things get confusing!

With multiple accounts in different places, it can get a bit confusing to know what to do with your monies. Let me show you how to get the most from your retirement planning. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

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March 2, 2018
March 2nd, 2018 by

IRS rules for inheriting retirement accounts are complex, and an uninformed decision could result in unexpected taxes and penalties. Your options depend on your relationship to the original owner and the owner’s age at the time of death.

Beneficiaries of both traditional and Roth IRAs must take required minimum distributions (RMDs), with one exception for spouses (described below). If the original owner died after reaching age 70½ and did not take an RMD for the year of death, you may also have to take the owner’s RMD by the end of the calendar year.

Special Rules for Spouses

A surviving spouse can roll the inherited IRA assets to a new IRA in his or her own name. If the spouse is the sole beneficiary, the inherited IRA can simply be redesignated in the surviving spouse’s name (if allowed by the account trustee). Because the spouse becomes an owner of the account, he or she can make additional contributions, name beneficiaries, and avoid RMDs from a Roth IRA. A surviving spouse must take RMDs from a traditional IRA. However, this only has to start when the surviving spouse reaches age 70½.

Options for Designated Beneficiaries

Nonspouse beneficiaries, as well as a spouse who does not treat an inherited IRA as his or her own, cannot contribute to the IRA and can only name “successor beneficiaries.” In most cases, the funds must be transferred directly to a properly titled beneficiary IRA; for example, “Joe Smith (deceased) for the benefit of Mary Smith (beneficiary).”

All designated beneficiaries typically have four distribution options:

  1. Life expectancy method. A “stretch IRA” typically involves taking RMDs over the life expectancy of the beneficiary. A non-spouse beneficiary must start taking distributions no later than December 31 of the year following the year of the IRA owner’s death. A spouse beneficiary may be able to delay payments until the year the IRA owner would have reached age 70½.
  2. Five-year rule. If the original owner died before reaching age 70½, the beneficiary can satisfy RMD rules by withdrawing all assets — in one or multiple distributions — within the five-year period that ends on December 31 of the fifth year after the IRA owner’s death.
  3. Lump-sum distribution. Regardless of the original owner’s age, the beneficiary can withdraw his or her entire share of the inherited IRA by December 31 of the year following the original owner’s death. This may be appropriate for small accounts, but you should think twice before liquidating a large account.
  4. Disclaim the inherited funds. This may be appropriate if you do not need the funds and prefer that they pass to another beneficiary with greater needs or who would be subject to lower RMDs, allowing more time for the funds to grow. A qualified disclaimer statement must be completed within nine months of the IRA owner’s date of death.

It can cost you a penalty equal to 50% if you fail to withdraw the appropriate RMD amount. Distributions from a traditional IRA are taxable as ordinary income. Distributions of Roth IRA contributions are not taxable, but the account must meet the appropriate five-year Roth holding period for tax-free distributions of earnings.

Avoid Costly Mistakes!

When there are multiple beneficiaries or the IRA goes to an estate or a trust, distribution rules become more complex. Let me show you how to get the most from your retirement planning. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

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February 13th, 2017 by

U.S. workers change jobs every 5½ years, on average.1 These changes often include a significant decision regarding the assets in their former employer’s 401(k) or other defined contribution plan. Unfortunately, about 45% of people cash out their balances in workplace plans when changing jobs, and the percentage rises to 55% for those with balances of $5,000 or less.2

When you take a distribution from your 401(k), you will owe ordinary income tax on the withdrawal and possibly a 10% early-withdrawal penalty if you are under age 59½. The biggest penalty, however, might be the loss of future retirement dollars. Consider that even a $5,000 401(k) balance could grow to more than $30,000 over 30 years, assuming a hypothetical 6% annual growth rate.3 Cashing out a larger balance would have greater consequences.

Careful with Your 401(k)

Preserving Tax-Deferred Money

Depending on your situation, you may have several other options for your 401(k) assets when changing jobs. All of them keep the tax-deferred status of your retirement funds and offer the potential for continued tax-deferred growth.

Keep money in former employer’s 401(k).

This could be a conveniently short period option (if allowed by your old employer), but you will not be able to make future contributions. Keep in mind that many employer plans may automatically transfer balances under $5,000 to an IRA and automatically cash out balances under $1,000.

Transfer monies to a new plan.

If your new employer offers a 401(k) or other workplace retirement plan that accepts rollovers, this strategy might make sense if you are comfortable with the fees and options in the plan and expect to stay with your new employer for some time.

Roll monies to an IRA.

IRAs typically provide a wider variety of options than employer plans and enable you to consolidate your retirement assets in a single account. Moreover, the IRA is yours to control, regardless of your employment situation.

For either type of rollover, it’s more efficient to execute a trustee-to-trustee transfer from your old plan to the new plan (or IRA), either directly or in the form of a check made out to the new trustee. If you receive a check payable to you from your former employer’s plan, 20% will be withheld for federal income taxes. You have 60 days from the date of the check to roll over the entire distribution — including the tax withheld — to an IRA or another employer-sponsored plan; otherwise, the amount not rolled over will be considered a taxable distribution.

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxable as ordinary income. Withdrawals before age 59½ may be subject to a 10% federal income tax penalty, with some exceptions.

Sources:
1) Employee Benefit Research Institute, 2015
2) InvestmentNews, February 17, 2015
3) This hypothetical example of mathematical principles is used for illustrative purposes only and does not represent the activity of any particular financial instrument. Fees and expenses are not part of the calculation, and they may reduce the activity or increases described. Actual results will vary.

Freeman Owen, Jr -Retirement Specialist

Allow me to guide you through your retirement planning and strategy. I want to help you keep your money secure!  Let’s talk.

Meet me for a FREE retirement strategy consultation at my office at 1-833-313-7233. 

 

October 27, 2015
October 27th, 2015 by

Spousal IRA
An IRA study found that women lag behind men when it comes to accumulating money for retirement (see chart). Though there may be multiple reasons for this disparity, the most fundamental is the continuing wage gap between men and women.1 This gap tends to widen around the age when many women have children, which suggests that time away from the workforce may have a negative impact on a woman’s career.2 It also stands to reason that if a mother — or stay-at-home dad — is taking care of the children rather than working, she or he may not be contributing to a retirement account. The same situation could arise later in life if one spouse works while the other takes time off.

Additional Saving Opportunity

A spousal IRA — funded for a spouse who earns little or no income — offers an opportunity to help keep the retirement savings of both spouses on track. It also offers a larger potential tax deduction than a single IRA.

For the 2014 and 2015 tax years, an individual with earned income (from wages or self-employment) can contribute up to $5,500 to his or her own IRA and up to $5,500 more to a spouse’s IRA — regardless of whether the spouse works or not — as long as the couple’s combined earned income exceeds both contributions and they file a joint tax return. An additional $1,000 catch-up contribution can be made for each spouse who is age 50 or older. Contributions for 2014 can be made up to the April 15, 2015, tax filing deadline.

All other IRA eligibility rules must be met. So if a spousal contribution to a traditional IRA is made for a nonworking spouse, she or he must be under age 70½ in the year for which the contribution is made. The age of the working spouse does not matter for purposes of the spousal IRA.

Traditional IRA Deductibility

If neither spouse actively participates in an employer-sponsored retirement plan such as a 401(k), contributions to a traditional IRA are fully tax deductible. However, if one or both are active participants, federal income limits may affect the deductibility of contributions.

In 2015, contributions to the IRA of an active participant will phase out with a modified adjusted gross income (AGI) between $98,000 and $118,000, but contributions to the IRA of a nonparticipating spouse will phase out with an AGI between $183,000 and $193,000. (The income ranges were slightly lower in 2014.) Thus, some participants in workplace plans who earn too much to deduct an IRA contribution for themselves may be able to deduct an IRA contribution for a nonparticipating spouse.

Annual required minimum distributions (RMDs) from traditional IRAs and most employer-sponsored retirement plans must begin for the year in which the account owner reaches age 70½. Withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty, with certain exceptions as outlined by the IRS.

Sources:
1) The Washington Post, May 21, 2014
2) Pew Research Center, 2013

Freeman Owen, Jr - Host of "Safe Money Talk" on CBS Radio The Big Talker 1580AM Plan for your retirement early so you can reach the goals you want.
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