Avoiding 72(t) Mistakes in 5 Easy Steps

72(t) paymentsWhat are 72(t) payments?

72(t) payments are a series of substantially equal periodic payments made from an IRA that can be used to avoid the 10% penalty for early distributions. Payments must last the greater of 5 years or until the IRA owner reaches age 59½. When using a 72(t) schedule, a number of changes are prohibited. If these changes occur, the 10% penalty (and interest) is applied retroactively to all distributions made prior to age 59½.

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Three IRA Investing Mistakes to Avoid

IRA Investing MistakesDon’t Make These Three IRA  Investing Mistakes

1. Late Investments

If you waited until the last minute in 2018 to make an IRA contribution for 2017, you missed earning up to 15 months of pre-tax investment returns on your contribution.

Avoid the mistake by making your IRA contribution for 2018 now. This will provide an additional year’s worth of pre-tax investment returns that you will receive pre-tax compounding for potentially decades to come, until they are finally distributed. And you’ll get these extra returns for every year that you make your contribution early, rather than late.

Don’t sweat a mistake! If it later turns out that you are ineligible to make the contribution, you can fix the error without penalty up to October 15th of the year after the year for which the contribution was made. Excess contributions can be withdrawn, and eligible IRA or Roth IRA contributions can be recharacterized as being made to a traditional IRA, and vice versa.

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The Roth Conversion Conversation

Roth ConversionAre you a good Roth conversion candidate?

When you do a Roth conversion, your pre-tax funds will be included in your income in the year of the conversion. This will increase your income for the year of the conversion, which may impact deductions, credits, exemptions, phase-outs AMT alternative minimum tax), the taxation of your Social Security benefits and more.

The trade-off is the big tax benefit down the road. But, a Roth conversion isn’t for everyone. Make an appointment to answer these questions together before going through with a conversion.

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3 Investing Mistakes to Avoid with Your IRA

Beware of making these 3 IRA investing mistakes …IRA Investing Mistakes

1.  Late Investments 

If, like so many people, you made your IRA contribution for 2017 only recently in 2018, just before the 2017 tax return filing deadline, you missed earning up to 15 months of pre-tax investment returns on your contribution.

Don’t repeat that mistake. Make your IRA contribution for 2018 now. This will provide an additional year’s worth of pre-tax investment returns compared to making the contribution at the last moment in April 2019. You will also get pre-tax compounding on these extra returns for potentially decades to come, until they are finally distributed. And you’ll get these extra returns for every year that you make your contribution early, rather than late.

Don’t worry about making a mistake. If it later turns out that you are ineligible to make the contribution, you can fix the error without penalty up to October 15th of the year after the year for which the contribution was made. Excess contributions can be withdrawn, and eligible IRA or Roth IRA contributions can be recharacterized as being made to a traditional IRA, and vice versa.

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Spousal IRAs

What are Spousal IRAs & Who Can Contribute to One?

Spousal IRASpousal 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.

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5 Roth IRA Facts

Roth IRA FactsDo 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.

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Bitcoin as an IRA Investment: 6 Things to Know

Here are six things to know about investing IRA funds in Bitcoin.

BitcoinBitcoin 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.”

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Tax Liabilities for Underpayments, Penalties, & Interest: Relief for the “Innocent” Spouse

tax liabilitiesIn 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.

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Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Six 2018 IRA Actions Determined by 2017 Tax Return

IRA actionsAs 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.

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