October 15 is the Deadline to Recharacterize 2017 IRA Contributions and Conversions
IRA recharacterization is a tax-free transfer of funds from one kind of IRA to another. If you converted a traditional IRA to a Roth IRA and now are reconsidering, recharacterization allows you to undo the transaction and move the funds back to a traditional IRA. You can also recharacterize a tax-year traditional IRA contribution from a traditional IRA to a Roth IRA or vice versa. The Tax Cuts and Jobs Act does away with recharacterization for conversions done in 2018 and later, but the IRS has made it clear that 2017 conversions can still be recharacterized. Don’t miss out on this last chance to take advantage of one of the rare opportunities for a “do-over” in the tax code.
You may consider recharacterizing your 2017 conversion for many reasons. You might be having second thoughts about the tax bill. Tax reform has resulted in lower tax rates in 2018 for many taxpayers. Maybe you converted in 2017 when your rates were higher and now you would like a “do-over” at lower 2018 rates. You have the option of recharacterizing your 2017 conversion.
Not all contributions to IRAs belong there. When a contribution is not permitted in an IRA, it is an excess contribution and needs to be fixed. Some excess contributions are easy to understand. Others may be a bit trickier to grasp. Here are 7 ways an excess IRA contribution can happen to you:
1. Blowing Past the Annual Limit
If you contribute more than the annual limit to an IRA for the year that will be an excess contribution. For 2018, the limit is $5,500 for those under age 50 and $6,500 for those who are age 50 or over. This may seem like an easy rule to follow. You may wonder who is go spouse’s taxable compensation to fund your IRA, you may not use a multitude of different income sources including social security, rental income and investment income. You may have a high income, but not be eligible to fund an IRA. If you go ahead anyway, the result is an excess IRA contribution.
Change can be good. Is your IRA ready for a change? Maybe you are looking for a new type of investment or maybe a new IRA custodian. To change it up with your IRA, you may need to move your IRA funds. Here are 10 things you should know before moving an IRA.
1. The best way to move your money from one IRA to another is to do a trustee-to-trustee transfer. Your funds will not be distributed to you, instead they will move directly from your old IRA to the new IRA of your choice. Usually this can be done by requesting a transfer. Your current custodian will then send your IRA funds to your new IRA custodian.
2. A check made payable to a new IRA custodian for the benefit of your IRA but sent to you counts as transfer. Because the check is not made payable to you, you never have receipt of the funds. That is why it is still considered a direct transfer.
A Health Savings Account is a tax-advantaged medical savings account that helps people pay for qualified out-of-pocket medical expenses. What are the withdrawal rules for HSAs? Are there special considerations that must be taken into account.
1. Withdrawals can be taken at any time. There is no holding period like with Roth IRAs. The entire withdrawal (including any earnings) is tax-free as long as there is a corresponding qualified medical expense. The medical expense must be incurred by either the owner or his or her spouse or dependents. Additionally, the medical expense does not need to occur in the same taxable years as the withdrawal. Instead, the medical expense must simply occur before the withdrawal is made.
What 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.
Don’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.
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.
1. IRS Audit Technique Guides
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.