One of the many issues facing self-employed individuals is how to save for retirement. One option is to open a traditional or Roth IRA. However, the annual maximum contribution is low in terms of retirement planning. In 2018, it’s $5,500 if you are under age 50 or $6,500 if you are age 50 and over. The self-employed often look to adopt employer-sponsored retirement plans. While there are a number of options, the Solo 401(k) is one of the most popular arrangements. Not only does the Solo 401(k) produce higher contribution levels than other arrangements, but employer contributions are tax deductible! There are pros and cons for retirement savings for the self-employed.
What are Spousal IRAs & Who Can Contribute to One?
Spousal IRAs are designed to allow a working spouse to make IRA contributions for a spouse who does not have enough earned income to make their own IRA contributions.
There are some key requirements that must be met:
- The spouses must be legally married and file a joint federal tax return. This includes same-sex couples.
- The spouse receiving the contribution must have less compensation, or no compensation, than the spouse making the contribution.
- The IRA account must be held in the name of the spouse for whom the contribution is made. If Gina is the working spouse and the contribution is made for George, then the IRA account must be in George’s name. George has complete control over the IRA account. He can name his own beneficiaries, invest the funds as he wishes, and take withdrawals whenever he wants.
Did you know there are free IRS Tax Tools that can help minimize your tax bill and manage your taxes all year round? Most taxpayers are unaware of them. The are located on their website.
Here are a 12 of the best IRS tax tools including links.
These are the same guides that IRS tax examiners use when conducting an audit. The Freedom of Information Act require the IRS to provide these audit guides
These guides can be very helpful in aligning your 2017 tax return with audit guidelines. It can also help you eliminate audit risk by having better knowledge of the law and IRS rules and procedures.
More than 50 audit guides are available on the IRS web site for free download. They cover topics including: Executive Compensation, Lawsuit Awards and Settlements, Business Consultants, Architects, Attorneys, Cash Intensive Businesses, Golden Parachutes, Split Dollar Life Insurance, Veterinary Medicine, the Wine Industry, and dozens more.
Do you think you understand all the rules that govern your Roth IRA? Not so fast! There are many misconceptions as to how these complicated accounts work. Here are 5 Roth IRA facts that might surprise you:
1. You are never too old to contribute. If you have earned income and your modified adjusted gross income is below a certain level, you can contribute to a Roth IRA. Your age does not matter. This often comes as a surprise to taxpayers because you cannot contribute to a traditional IRA once you reach the year you turn 70 ½. Roth IRAs are different. Age is never a barrier to making tax year contributions.
Here are six things to know about investing IRA funds in Bitcoin.
Bitcoin is receiving a surge of publicity as a possible IRA investment, and a number of new firms have recently started targeting the “Bitcoin IRA” market.
1. There is no such thing as a “Bitcoin IRA.” Although the term is often seen in the media and advertising, there is no such thing any more than there are “stock market IRAs.” Legally, a “Bitcoin IRA” is simply an IRA like any other, except that its custodian permits investments in Bitcoin.
2. Bitcoin is not an “IRS Approved” investment. This claim is frequently made in advertising, but the IRS does not approve investments. In fact, the IRS has issued a notice specifically to IRA owners headlined “The IRS Does Not Approve IRA Investments” and warning against what it calls the “Fraudulent ‘IRA Approved’ Sales Pitch.”
IRAs can invest in Bitcoin simply because they are allowed to invest in almost anything except collectibles and life insurance. When the term “IRS Approved” misleadingly implies some sort of endorsement, it may cast doubt on the bona fides of the party making the claim. The IRS warns: “Avoid any investment touted as ‘IRA Approved’ or otherwise endorsed by the IRS.”
In many households, married couples divvy up the responsibilities; one will handle the bills and banking while the other cooks and does the grocery shopping, or one will do the laundry while the other manages the yard work and house. This split often extends to annual income tax responsibilities, even in couples who use a professional preparer. However, when couples submit joint returns, both are jointly and severally liable for the information included in the return. That means if there’s an underpayment, both spouses are going to be liable for the debt.
The tax code does provide means by which a spouse can be relieved of this joint and several obligation. As you can imagine, these exceptions are technical and very fact specific. Recently, the U.S. Tax Court issued two rulings on one of those exceptions; the relief for the innocent spouse. In one case, relief was granted; in the other, relief was denied. What separated these cases?
Essentially, what separated these cases was the IRS’s ability to prove that the spouse requesting relief had actual knowledge, or should have known, that a misrepresentation was being made. In the first case, the couple separated in 2014 and divorced in 2016. The return at issue was filed in 2014 and did not include an IRA distribution that was deposited into their joint checking account. Although they were living separately at the time, the couple continued to use a joint checking account for all purposes until their eventual divorce. Both had access to this account and regularly made transactions from the account. For tax purposes, they sent their information separately to a third-party preparer. However, the ex-wife was generally responsible for any information related to her inherited IRA.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
As you prepare your 2017 tax return, use the information you collect both to make the best IRA contribution choices for 2017 and plan IRA actions for 2018. Six ways to consider:
1. Maximize IRA Contributions for 2017
2017 IRA contributions can be made until April 17, 2018, the due date for 2017 tax returns. The maximum IRA contribution for both 2017 and 2018 is $5,500 ($6,500 for persons age 50 or older) or the amount of earned income, whichever is less. However, the amount of modified adjusted gross income (MAGI) reported on your tax return may limit:
- The maximum contribution to a Roth IRA
- The allowable tax deduction for a contribution to a traditional IRA, for persons covered by an employer’s retirement plan
These IRA limits for 2017 can be seen at https://www.irahelp.com/2017.
What is an Health Savings Account (HSA)?
A Health Savings Account is a tax-advantaged medical savings account that can be used tax-free for qualified health expenses. HSAs are designed to be used in conjunction with a High Deductible Health Plan (HDHP). HSAs offer triple tax advantages: contributions are deductible, earnings are tax-deferred while in the HSA, and distributions are tax-free when used for qualified medical expenses.
1. Determine if you are eligible to make an HSA contribution. To be eligible to contribute to an HSA, you must be enrolled in an HDHP. To be an HDHP, a plan must meet certain limits on deductibles and out-of-pocket expenses. These limits are adjusted annually for inflation. You may not contribute to an HSA if you are enrolled in Medicare because Medicare is not an HDHP.
529 Educational Plans Should Be Gaining in Popularity
Now that the dust has settled and the tax code has been “reformed,” it’s time to unpack those changes and analyze how best they can help you. One of the changes was the expansion of 529 educational plans. Under the Tax Cuts and Jobs Act, eligible expenses include up to $10,000 per person per year for K-12 educational expenses. Given the popularity and rising costs of private education, and the state income tax breaks associated with many of these accounts, 529 educational plans should see a spike in popularity.
529 Plans – A Quick Overview
529 plans were created by Congress in the mid 1990s as way for families to save money for college education expenses, which at that time had just begun to skyrocket. There are two types of 529 plans: a prepaid plan and a savings plan. We will focus on the savings plans because they are most prevalent. If you understand how a Roth IRA works, you should have a pretty good idea of how a 529 savings plan works. A 529 plan is an investment account funded with after-tax money. The earnings grow tax-free and the withdrawals are tax and penalty free as long as they are qualified. Even better, some states provide state income tax deductions for contributions! Currently, 34 states offer some type of deduction or credit for 529 plan contributions.
What Tax Reform Means to You
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This far-reaching piece of legislation will overhaul the tax code. But what does the tax reform mean for you and your retirement plan? Here are some highlights.
Tax reform keeps seven tax brackets and lowers the top rate to 37% for individuals. The Alternative Minimum Tax (AMT) has been scaled way back. The standard deduction is doubled to $12,000 for singles and $24,000 for those who are married, filing jointly, and the child credit has been expanded. Personal exemptions are suspended.
Many popular deductions have been eliminated or scaled back. The state and local tax deduction is limited to $10,000, and the mortgage interest deduction will be limited to the first $750,000 in mortgage interest debt for new home purchases.
These changes, like most of the changes tax reform brings for individuals, are scheduled to sunset after 2025. Tax reform also brought sweeping reform to corporate taxation. Changes on the corporate side, unlike the individual side, are permanent.