Guest post by The Heroes Group:
1. Am I eligible for a Roth IRA conversion?
Is it recommended? A key benefit of a Roth IRA is that you don’t pay income tax when you withdraw funds in retirement (your earnings, or profit, are tax free). Before you consider converting, ask your CPA for your estimated tax liability. When you decide to convert to a Roth IRA, you may be required to pay taxes on the assets for the year of conversion. We recommend converting your Traditional IRA to a Roth IRA at year-end. This makes the calculation of your estimated tax liability more accurate. One strategy to consider is a partial or multi-year conversion so that you aren’t pushed into a higher tax bracket.
2. Should I increase my retirement plan contribution?
If you are currently making contributions to your IRA and are not covered by a retirement plan at work, you may consider increasing your contribution, therefore increasing your associated tax deduction. It is important to know that your Traditional IRA contribution is typically due by April 15th for the prior tax year. This creates a great tax planning strategy – ask your CPA to give you options when they prepare your tax return. This could include your tax liability if there was no contribution, a full contribution or a partial contribution. Contribution limits vary depending on what type of retirement plan you have.
3. What are my options if I am self-employed?
If you are an employer, there are several retirement plan accounts that you can offer your employees. For single person employers (i.e. you are the only worker/employee), there are several tax savings strategies available to you, including a solo or self-directed 401(k) plan.
4. How do custodian transfers affect my IRA?
The governing rules for IRAs have changed. You may make only one IRA-to-IRA rollover per year (this does not include direct rollovers from trustee to trustee for business owners). If you make more than one transfer in a year, certain penalties, contribution limits and excise taxes could be imposed. Talk to your CPA before making one of these transfers. A strategy to consider is having all of your IRA and Self Directed IRA accounts held by the same custodian. This makes record keeping simple.
5. Will I get penalized for withdrawing money from an IRA to pay my child’s tuition?
In most cases, the 10% early withdrawal penalty will not apply. However, if the IRA was a traditional IRA, you will have to pay ordinary income tax on the withdrawal, which might put you in a higher tax bracket. Make sure to check with your CPA first before doing this. One strategy to consider is using your Roth IRA instead of your Traditional IRA. The contributions you make are withdrawn tax-free and then the earnings are withdrawn, which might be subject to income tax (minimizing your tax liability compared to using a Traditional IRA).
6. Should my investments be in a personal account or self-directed IRA?
Investments made through your personal account have different tax rates, with the maximum rate for qualified dividends and long term gains at 20% for publicly and privately traded stocks. If you had the same stocks in your self directed Traditional IRA, the tax would be deferred until the funds were withdrawn from your account, or if you invested through your self directed Roth IRA there would be no tax altogether. Other investments, such as partnership or S-Corporation interests could be subject to income tax, even if held by your self directed IRA. Your CPA will have more insight on advising you which type of account is best to hold your investments that will yield the best after tax results for you. Each individual situation is different, so speak with your CPA before making any final decisions. One strategy to consider is to make loans from your self-directed IRA (interest is not taxable in an IRA) and make investments into companies through your personal account.
7. Can I deduct my self-directed IRA contribution on my tax return?
It depends. The amount you can deduct for contributions to a traditional IRA may be limited if your income exceeds a certain threshold or you or your spouse are covered by a retirement plan at work. In addition, Roth IRA contributions are not deductible (when you make withdrawals in retirement, they are tax free). When you with make withdrawals from a traditional IRA in retirement, the entire withdrawal is taxable.
We made assumptions and used brevity, simplicity and professional judgment in preparing this information. Your specific situation may vary. We recommend contacting a CPA and/or attorney to answer your IRA questions prior to making any important business decisions.
Learn more about The Heroes Group by calling 407-906-4376 or emailing info@theheroesgroup.com.
