Are 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.
➤ Contributions for Retirement Planning: If you are working, have an employer plan available, and there is an employer match, make sure you are contributing enough to the plan to reach that maximum match level. Don’t forget to make your own IRA or Roth IRA contributions as well. Your participation in the employer plan has no effect on your ability to make those contributions. It could, however, affect the deductibility of your IRA contributions.
➤ Roth IRA Planning: You really want to contribute to a Roth IRA, but (and it’s a big BUT) you exceed the income limits to qualify. You can utilize a strategy called the Back-Door Roth IRA to move funds into a Roth IRA, where they can grow tax-free into retirement.
Don’t forget about Roth conversions for yourself. You can use a strategy called “filling the brackets.” You convert smaller amounts each year to keep yourself from going into a higher tax bracket. When it comes time to do the tax return, maybe some numbers have changed and you converted too much. No problem! You have until October 15 to recharacterize all or part of your Roth conversion. You “undo” it and do not owe income tax on the amount you recharacterize.
The internet is a great place to do research on most any topic. You have to be cautious that the information you find is current and accurate. Here are five things to consider when researching retirement questions.
Check the Date
The tax code and rules change often. Check the date of the article to see when it was written. What was true three years or five years ago may not still be relevant. Often, brackets or income limits are adjusted for inflation each year. Those numbers need to be checked to see if they are the most recent limits.
Check out the Website
Is the website reputable? Who controls the content on the website? Are they creditable? Are they unbiased or are they selling a product or strategy? Do a search on the company to see if you come up with reviews. Look for unbiased information.
What’s Ok and What’s NOT Ok with an IRA Rollover
The once-per-year IRA rollover rule sounds easy to understand. You may only do one IRA-to-IRA (or Roth IRA-to-Roth IRA rollover) per year (365 days). However, there are many ways it can go wrong. Consider the following two scenarios. One involves multiple distributions and the other involves multiple rollover deposits. One is ok and the other is not.
One Distribution and Multiple Rollover Deposits – That’s Ok!
If you take one distribution from your IRA, you may split the funds and roll them over to multiple IRAs. The rollovers could be done on different days and that would not be a problem. This works for purposes of the once-per-year rollover rule because only one distribution is received even though there is more than one rollover deposit.
Example: Sophie receives a $100,000 distribution from her IRA on June 15. On June 20, Sophie rolls over $75,000 to her IRA. On June 25, she decides to roll over the remaining $25,000 to another IRA. This is not a violation of the once-per year rollover rule because Sophie received only one distribution even though she did two rollovers on two different dates.
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Know all options available for your company retirement plan funds.
Accepting a new job or transitioning into retirement can be both exciting and overwhelming. Figuring out how to handle your current employer’s retirement plan funds may not be at the top of your priority list, but with several options to consider, it’s crucial that you take the time to think through your next financial move.
6 Options for a distribution from a company plan
- Rollover to an IRA
- Convert to a Roth IRA
- Direct Transfer to an Inherited IRA or Inherited Roth IRA (Only for employer plan beneficiaries)
- Lump sum distribution
- Leave it in the current plan
- Convert from plan assets to a plan Roth account (in-plan Roth conversion)
By Sarah Brenner, JD
Are you one of the growing number of savers who has a Roth IRA? If so, there will come a time when you will want to take funds from your account. Here are 5 things that every owner should know before taking a Roth IRA distribution.
1. Your Roth IRAs are treated as one account. Things can get a little tricky if you have more than one Roth IRA. When determining the taxation of a Roth IRA distribution, all of your Roth IRAs are aggregated. What does “aggregated” mean? Well, simply put, this means of your Roth IRAs are considered one account for tax purposes.
Your IRA custodian will report the distribution on Form 1099-R to you and to the IRS. You will be responsible for determining the taxation of your distribution. You will use Form 8606 to report the Roth IRA distribution on your federal tax return.
What is a 60-day rollover?
A 60-day rollover is the distribution of funds from a qualifying retirement account payable to the account owner who then has 60 days to redeposit the funds into another qualifying retirement account.
1. Do trustee-to-trustee transfers instead. The best way to avoid making a 60-day rollover mistake is to avoid 60-day rollovers! Transfer your funds directly to another retirement account. Not only does a direct transfer avoid any 60-day time problems, but if the rollover is coming from a 401(k) or other qualified plan, it will also avoid the mandatory 20% withholding requirement.
Are Americans Ready?
The long second half of the retirement game
- 69% believe there is at least some chance that they will outlive their savings.
- 14% think they definitely will!
How to fix this? Save as much as you can as soon as you can – and if it’s getting late in your career, take advantage of the $1,000 IRA catch-up contribution. In 2016, individuals age 50+ can contribute $6,500 to their IRA. Try to move as much money as possible to tax-free territory like Roth IRAs and leverage life insurance.
Ask these 10 questions to avoid the 50% RMD penalty
• Do I have an accurate inventory of all my retirement accounts? – This may seem rather simple, but it’s absolutely crucial to maintain a record of all your retirement accounts. And that may be easier said than done. According to a 2012 Department of Labor study, Baby Boomers born between 1957 and 1964 held, on average, a staggering 11.3 jobs between the ages of 18 and 46. So it’s entirely possible you have more than one 401(k) or similar plan. Oftentimes, when people leave an old employer, they forget about their plan money, especially if it was only a small amount.
by Scott Smith, CIMA®
It should be no surprise that traditional pension plans are a thing of the past. As I believe it should be, retirement planning is the responsibility of the individual, not the employer. Automatic enrollment, automatic annual escalation of salary deferrals, annual opt out requirements for nonparticipants, default investment options into target date retirement funds, performance history and description of investment options and expenses, as well as, employer matching are all meant to increase participation in company 401(k) plans so employees can take responsibility for their own retirement security.
Employee salary deferral limits for 401(k)s and 403(b)s are $18,000 for 2016. Those who are 50 or older can contribute an additional $6,000 a year. According to the Employee Benefit Research Institute, the average and median 401(k) balances were $76,293 and $18,127, respectively, at the end of 2014. 401(k) retirement balances vary significantly by age and years of service.