FROM THE EMAIL BOX

A married couple who is a few months from retirement, long-time friends and 1040 clients, recently met with a new Financial Advisor and emailed me for my advice on issues that had been discussed.  Here are the issues they identified and my responses.

 

1) Donor Advised Funds – Earmark an amount for immediate income tax deduction and donate to our usual 501C3 organizations with payments out of this fund.

 

Answer:  This is a good tax planning option when you are unable to itemize but relatively “close to the edge”.  It will allow you to perhaps itemize every other year.  Remember that the tax benefit of any charitable contribution is based on the extent your total itemized deductions exceeds the Standard Deduction amount for your filing status.  See here for an explanation of Donor Advised Funds -.  FYI, you can also contribute stock to a Donor Advised Fund (see answer to Question #2).

 

2) Donating Stock – Take current stock holdings and donate to charitable organizations for a tax write off.

 

Answer: This is also a good option, providing a tax benefit if you can itemize.  However, even if you cannot itemize this option does save capital gains taxes.  See here for an explanation of the rules for donating stock to a charity

 

3) IRA Beneficiary – We were told that money passed to beneficiary from an IRA is now made taxed over 10 years.

 

Answer:  Thanks to the SECURE Act, starting in 2020, for IRAs passing to a “non-spouse” beneficiary, the entire amount of the account balance must be distributed to the beneficiary (or beneficiaries) by the end of the 10^th year following the year after the account owner’s passing.  There are 3 exceptions –

 

* the beneficiary is a minor child of the account owner,

* the beneficiary is not more than 10 years younger than the account owner, or

* the beneficiary is disabled or chronically ill as defined by the Internal Revenue Code

 

See the topic “Definition of Disabled or Chronically Ill” here.

 

4) ROTH IRA – Our Financial Advisor suggested we begin converting IRA money from our current Standard IRA accounts into Roth IRAs. 

 

Answer:  The amount you convert will be taxed in the year of the conversion, except for any recapture of “basis” (non-deductible contributions).  Converting a portion of traditional IRAs to a ROTH annually over a period of years is a good idea, with the goal of keeping the annual cost of the conversion within a low marginal tax bracket.

 

5) 401(k) Beneficiary – The Advisor also suggested listing beneficiaries on our 401(k) accounts because this has nothing to do with the will and takes the process outside of probate.

 

Answer:  The named beneficiary or beneficiaries on a 401(k), IRA, or other retirement savings account automatically gets the money in the account directly from the account trustee on your passing.  It has nothing to do with your will or probate.  It is a good idea to name beneficiaries on your retirement savings accounts, and review the beneficiary designations every few years. 

 

6) Savings Bonds – We recently reviewed our inventory of US Savings Bonds and the interest was quite high.  We would appreciate your thoughts on liquidating bonds based on most recent purchases vs older bond purchases to reduce taxes.

 

Answer:  The first consideration in choosing which bonds to cash-in first is whether or not the bonds are still accruing interest.  As with the ROTH conversions, the liquidation of bonds still earning interest can be done over a period of years, cashing in older bonds first and keeping the interest reported each year within a low marginal tax bracket.  FYI, savings bond interest is never taxed on the state return. 

 

TTFN

EVERYBODY OUGHT TO HAVE AN IRA

In his classic Broadway musical comedy A FUNNY THING HAPPENED ON THE WAY TO THE FORUM. Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I agree.

I also believe that everybody ought to have an IRA.

Everybody with earned income, regardless of age, level of income or wealth or coverage under an employer plan, should have an IRA as a form of secured savings.  This is because of the multiple benefits of an IRA account – the tax deferred, or tax free, accumulation of income, the possible tax deduction it can provide, and the fact that IRAs are, in most cases, protected from general creditors to whom you may owe outstanding debts and during bankruptcy procedures. 

You should, of course, first take as much advantage as possible within your budget of your employer’s 401(k), 403(b), 457, or whatever retirement plan, hopefully to the maximum annual allowable contribution. 

There are two types of IRAs – the “traditional” IRA and the ROTH IRA.  If you can have a ROTH IRA you should have a ROTH IRA and use it as your current savings account.

The maximum amount you can contribute to a ROTH IRA, a traditional IRA or a combination of ROTH and traditional accounts for 2018 is $5,500.   If you are age 50 or older you can contribute an additional $1,000.  A non-working spouse can open and contribute to an IRA, up to the maximum, as long as the other spouse has earned income. The combined contributions of working and non-working spouses are limited to the working spouse’s earned income.

Contributions to a ROTH IRA are never deductible on your federal or state income tax returns.  But earnings on money held in a ROTH IRA account can eventually be totally tax free to both you and your beneficiaries.

Here is what you need to know about a ROTH IRA -

* You can contribute to a Roth IRA at any age as long as you have earned income from a job or self-employment.   You do not have to stop making contributions at age 70½ if you still have earned income.

* The amount of your allowable contribution to a ROTH IRA is phased out and eventually eliminated based on your Adjusted Gross Income (AGI).  The AGI phase-out range for taxpayers making contributions to a ROTH IRA for 2018 is -

$120,000 - $135,000 = Single and Head of Household

$189,000 - $199,000 = Married Filing Joint and Qualifying Widow(er)

$0 - $10,000 = Married Filing Separate

* You can withdraw your contributions at any time without taxes or penalty.  All withdrawals are considered to come from contributions first.

* You must hold the Roth account for at least five years and be at least 59½ before you can withdraw earnings tax-free and penalty-free.  The 5-year period begins on the first day you make your first ROTH contribution.

* You never have to take any withdrawals from a ROTH IRA in your lifetime.  There are no annual required minimum distributions beginning at age 70½.

As long as you never touch the accumulated earnings on your ROTH IRA investment, and withdraw only your contributions, you can take money from this account at any time over the years without any tax cost.  And your accumulated earnings will grow to a nice retirement nest egg, or legacy for your beneficiaries, if invested wisely.

You have contributed $10,000 to a ROTH IRA, which has accumulated earnings of $2,000.  You need $5,000, or as much as $10,000, to pay for an extraordinary medical bill, or for needed home repairs, or to pay for your child’s college education.  You can take the $5,000 - $10,000 from your ROTH IRA account without any tax consequences.

Contributions to a “traditional” IRA may provide a current tax deduction.  If all of your traditional IRA contributions have been fully deductible then all subsequent withdrawals are fully taxable[R1] .  The amount you can deduct may be phased-out based on your “Modified” Adjusted Gross Income (MAGI) if you are an active participant in an employer-sponsored retirement plan such as a 401(k), a 403(b) or an SEP.    

Your “Modified” AGI for purposes of the deduction phase-out begins with “regular” AGI and adds back the-

• foreign income and housing exclusions and deduction,

• savings bond interest exclusion for higher education costs,

• adoption assistance benefits exclusion, and

• deduction for student loan interest.

For 2018, the amount of a contribution to a traditional IRA that can be claimed as a deduction on the tax return of a taxpayer who is an active participant in an employer retirement plan is phased out if Adjusted Gross Income (AGI) is -

• $ 63,000 - $73,000 for Single and Head of Household

• $101,000 - $121,000 for Married Filing Joint and Qualifying Widow(er)

• $0 - $10,000 for Married Filing Separate

The deduction on a joint return for a spouse that is not an active participant in an employer plan, but who is married to one who is, phases out at AGI of $189,000 to $199,000.  

If your deduction is limited or totally phased out you can still contribute the maximum amount to an IRA account.  Part of the contribution will be “non-deductible”.  Non-deductible contributions create a “basis” in your IRA investments and part of your future withdrawals will be partially tax free as a “return of basis”.

You can also use IRAs to save for education, as well as excessive medical expenses and buying a home.  Exclusions to the premature withdrawal penalty exist for these types of expenses.

As far as reporting the activity within an IRA account – as I explained in a 2009 post – "What Happens In An IRA Stays In The IRA".   

Younger employees just starting out should definitely opt for the ROTH IRA.  Here are two suggestions for funding IRA contributions if you are starting your first full-time job –

(1) If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your contribution. 

(2) Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Beginning with the first week of January put $10, $20, or $50 in this “bank” each week.  On January 2nd of the following year take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for that tax year.  Continue this practice for subsequent years.

Here is another good idea – If your son or daughter has a summer or after-school job you should consider opening up a ROTH IRA account for him or her.  Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to the $5,500 maximum. If your son earns $2,400 for the summer you can contribute $2,400 to a ROTH IRA for him. If he earns $6,000 you can contribute $5,500.

There is nothing in the Tax Code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.  You can use your own money to fund the IRA contribution and let your child keep his earnings.

You can use a ROTH IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a ROTH IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a ROTH, match it and put in another $2,500 (assuming her total earnings for the year is at least $5,000).

If you put the maximum into a ROTH each year for your 16-year-old from 2018 through 2023, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.  One caveat - there exists a potential problem with opening an IRA account for a child. Once the child reaches the “age of majority,” usually 18, he or she will have full access to all the funds and can “take the money and run.”

One last thing - the earlier in the year you contribute to your, or your children's, ROTH IRA, the more money you will accumulate tax-free at retirement.  So, if not already done, make your 2018 ROTH IRA contribution today, and make your 2019 contribution on January 2^nd of 2019.

If you have questions about the Act will affect your specific situation I suggest you consult your, or a, tax professional.  You can begin your search for a tax professional at "Find A Tax Professional".

TTFN

A LITTLE THIS-A, A LITTLE THAT-A

+ I owe an apology to McDonald’s, Burger King, Wendy’s, Taco Bell, etc. for using them in a description of Henry and Richard and other commercial tax return mills of that ilk.

I have always said that H+R et al “charge gourmet restaurant prices for fast food service”.  Basically, I am observing that Henry and Richard, and the others, ain’t cheap, or even reasonable, and the fees are certainly not commensurate with the service.  But comparing the service at tax preparation chains to that received at fast food chains is not fair – nor true.

Prior to being diagnosed with diabetes I was a frequent patron of McDonald’s, Burger King and Wendy’s.  For the most part, I found the service provided by these chains to be most definitely “appropriate”.  And, again for the most part, I most certainly received value for my money. 

Those who use tax preparation chains will NOT be able to say the same thing when describing their experience.

And I must point out that nobody at McDonalds, Burger King or Wendy’s tried to force me to buy fries or onion rings that I neither wanted nor needed.

So, more appropriately, H&R et al “charge gourmet restaurant prices for service that is inferior to the service you get at a fast food chain.”

Of course, to be fair, I must always include in my assessment of tax preparation chains the following statement –

It may actually be possible that the best tax preparer, at the best price, for your particular situation is an H+R Block, or other chain, employee.  But this is only because of the individual education, experience, ability, temperament, and other factors that are specific to that individual preparer or perhaps that unique and specific franchisee.

Hey, it is better to be safe than sorry.  Bottom line - don’t use Henry and Richard or another chain to have your 2017 income tax returns prepared.  If you are looking to find a tax pro you can start here.

+ Hey fellow tax pros – did you see Monday’s post at THE TAX PROFESSIONAL?

+ This past Sunday was the first payroll I processed for a business client using the new tax withholding tables that were revised to reflect the changes of the GOP Tax Act.  I was curious to see if employees were actually getting any more money in their paychecks.

The gross payroll – total wages paid - for 20 employees for the 2-week pay period was up about $3,600 from the January 8^th payroll, but the federal income tax withholding was $1,050 less.  So, there actually was more money in the paychecks.

However, the pay checks of the two highest paid employees, including the millionaire owner of the business, with the same gross income for the two payroll periods being compared, were increased by over $750 due to reduced federal income tax withholding.  Obviously, the increases in the paychecks of the lower paid employees were small.

I do worry, being cynical, that the withholding tables are a bit too “generous” to try to prove that serial liar Donald T Rump was telling the truth for once when he said workers would see increased paychecks thanks to the Act.  I expect that, while individual paychecks will be slightly higher, 2018 tax return refunds may be lower, or balances due higher, especially for employees who live in New Jersey, as the employees of the above client do.

I am not alone in my concerns.  In “Democrats raise concerns about IRS withholding tables” at TAXPRO TODAY Michael Cohn tells us (highlights are mine) -

“The ranking Democrats on the tax-writing House Ways and Means Committee and Senate Finance Committee are worried the Internal Revenue Service might succumb to political pressure by releasing withholding tables this year that cause employers to withhold too little in federal taxes from their employees’ paychecks to make it appear the tax cuts are larger than they really are, with the result that taxpayers will end up owing more money on their taxes next year.”

+ Speaking of business clients and the GOP Tax Act, also this past week-end a business client, a family owned “regular” (non-S) corporation with 2 shareholders that usually has net taxable income of under $50,000, asked if its tax will be reduced under the new tax law.

When the lower corporate tax rate was originally discussed I had thought the entire rate scale would be reduced. I think I had read somewhere that those currently paying 15%, based on net taxable income, would pay 8% under “tax reform”. However, everything I have read says the income tax rate in the Act is a flat 21% tax rate on net taxable income for all “regular” (non-S) corporations.

So smaller closely held corporations, with net taxable income of $50,000 or less, who previously paid 15% in federal income tax will actually see a 6% tax increase, and, because the sliding scale of tax rates is gone, those with $75,000 or less in taxable income will see a 2+% increase.

Once again true small business gets screwed!

+ FYI - some guidance from the IRS on one of the changes in the GOP Tax Act.

The weekday daily “Checkpoint Newsstand” email newsletter tells us what it learned from the “Frequently Asked Questions” (FAQs) posted to the IRS website -

“The FAQs clarify that a Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by Oct. 15, 2018. A Roth IRA conversion made on or after Jan. 1, 2018, cannot be recharacterized.”

+ The last word - As with any post, your appropriate comments, and not “praise” that is really only trying to promote your site or product, are always welcomed.  I also want to know if you find any tax law inaccuracies, or typos or other clerical FUs, in the post.

TTFN

IF YOU CAN HAVE A ROTH IRA YOU SHOULD HAVE A ROTH IRA

If you are able to make contributions to a ROTH IRA you should use a ROTH IRA account as your current savings account.

Contributions to a ROTH IRA are never deductible on your federal or state income tax returns.  But earnings on money held in a ROTH IRA account can eventually be totally tax free to both you and your beneficiaries.

Here is what you need to know about a ROTH IRA -

* The maximum amount you can contribute to a ROTH IRA, a traditional IRA or a combination of ROTH and IRA accounts for 2018 is $5,500.   If you are age 50 or older you can contribute an additional $1,000.

* You can contribute to a Roth IRA at any age as long as you have earned income from a job or from self-employment.   You do not have to stop making contributions at age 70½ if you still have earned income.

* The amount of your allowable contribution to a ROTH IRA is phased out and eventually eliminated based on your Adjusted Gross Income (AGI).  The AGI phase-out range for taxpayers making contributions to a ROTH IRA for 2018 is -

$120,000 - $135,000 = Single and Head of Household

$189,000 - $199,000 = Married Filing Joint and Qualifying Widow(er)

$0 - $10,000 = Married Filing Separate

* You can withdraw your contributions at any time without taxes or penalty.  All withdrawals are considered to come from contributions first. 

* You must hold the Roth account for at least five years and be at least 59½ before you can withdraw earnings tax-free and penalty-free.  The 5-year period begins on the first day you make your first ROTH contribution.

* You never have to take any withdrawals from a ROTH IRA in your lifetime.  There are no annual required minimum distributions beginning at age 70½.

As long as you never touch the accumulated earnings on your ROTH IRA investment, and withdraw only your contributions, you can take money from this account at any time over the years without any tax cost.  And your accumulated earnings will grow to a nice retirement nest egg, or legacy for your beneficiaries, if invested wisely.

You have contributed $10,000 to a ROTH IRA over the past couple of years, which has accumulated earnings of $2,000.  You need $5,000, or as much as $10,000, to pay for an extraordinary medical bill, or for needed home repairs, or to pay for your child’s college education.  You can take the $5,000 - $10,000 from your ROTH IRA account without any tax consequences.

Here is another good idea – If your son or daughter has a summer job you should consider opening up a Roth IRA account for him or her.

To qualify for an IRA your child must have earned income — wages or net earnings from self-employment.  Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to the $5,500 maximum. If your son earns $2,400 for the summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,500 you can contribute $5,500.

There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.  You can use your own money to fund the IRA contribution and let your child keep his earnings.

You can use a Roth IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a Roth IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a Roth, match it and put in another $2,500.

If you put the maximum into a Roth each year for your 16-year-old from 2018 through 2023, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.

One caveat - there exists a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”

One last thing - the earlier in the year you contribute to your, or your children's, ROTH IRA, the more money you will accumulate tax-free at retirement.  So make your 2017 (if not already done) and 2018 ROTH IRA contribution today.

TTFN

SAD TO SAY GOOD-BYE

Participants in the infant myRA program, created under President Obama, just received the following email:

 

“The myRA Program will be phased out and your account will be affected.

 

Dear XYZ:

 

We're writing to inform you that the U.S. Department of the Treasury has decided to phase out the myRA retirement savings program and the program is no longer accepting new enrollments. Please read the important information below to learn what this means for your account.

 

Your Account Status

 

Your account remains open and you can continue to manage your account until further notice. The funds in your account remain in an investment issued by the U.S. Department of the Treasury. We'll be in touch over the coming weeks with next steps and relevant deadlines regarding the transfer or closure of your account. In the meantime, we want you to know that any myRA with a zero ($0) balance as of September 15, 2017 or later, will be subject to possible automatic closure beginning on September 18, 2017.

 

Actions you should take now:

 

Update your contact information

 

We recommend you log in to your account to make sure your contact information is complete and up to date. You can also update your information by contacting customer service.

 

Transfer your myRA to another Roth IRA

 

Your myRA is a Roth IRA. You have the option to transfer your myRA into another Roth IRA that you select. To do so, you will first want to identify or open an account at the new Roth IRA provider where you will continue to save and invest. Then, by working with a new Roth IRA provider you select, you can transfer your myRA balance to your new Roth IRA. This will allow you to continue saving without paying current income taxes on earnings, maintain the preferential tax treatment of a Roth IRA, avoid tax withholding that may apply to a distribution, and avoid penalties.

 

If you choose not to transfer your balance to another Roth IRA, you can make a withdrawal for the amount of your myRA balance by calling customer service. You can also withdraw funds online by signing into your account. To maintain all of the benefits of a Roth IRA, you must deposit funds paid to you (as well as any tax withholding) into another Roth IRA within 60 days of the distribution. Failure to do so may result in tax liability and penalties related to withdrawn earnings that would have been avoided by working with your new Roth IRA provider to transfer your account balance.

 

Visit irs.gov/rollovers for more information regarding Roth IRA transfers or rollovers, or visit myRA.gov to learn more about withdrawing funds from myRA.

 

Upon transfer of your myRA balance to another Roth IRA or distribution to you of your myRA balance, Comerica1 will no longer be custodian to your myRA.

 

For more information about this announcement or if you have additional questions, visit myRA.gov.

 

Sincerely,

 

myRA Customer Support”

 

I verified this on the myRA website.

 

It is sad that this program is being killed.  At this point I do not know if it is because of lack of sufficient participation or idiot Donald T Rump’s continual policy of undoing any good done by his predecessor out of spite.

 

I will report on future developments with this issue here as they arise.

 

TTFN

 

 

 

 

 

IS THE MYRA RETIREMENT ACCOUNT FOR YOU?

In the January 2014 State of the Union address BO called a “myRA” payroll withholding starter retirement account for employees without access to a 401(k) plan.  These accounts are now a reality.

CNBC, announcing the initiation of the program by the Department of the Treasury “very cautiously and with little fanfare” this past April in “Does anyone recall the myRA retirement savings plan?”, describes the new retirement savings account -

“The biggest advantage of the myRA proposal is its simplicity.

People can open the accounts with just $25 and can contribute as little as $5 per paycheck through direct deposit. After-tax dollars are contributed to the account, which is set up as a Roth IRA, and the principal and interest earned can be withdrawn at any time without tax or penalty.

Participants can accumulate a maximum of $15,000 in the account, at which point it would be rolled over into a private-sector Roth IRA. If they haven't reached that threshold after 30 years, the account would also be rolled into a private account.”

The official website tells us that the myRA is –

“a new type of Roth IRA investment that makes saving for retirement simple, safe, and affordable. Individuals can open a myRA account with no start-up cost and there are no fees for the maintenance of the account. myRA has no minimum contribution requirement, so savers can contribute the amount that best fits their budget. The investment in a myRA is backed by the United States Treasury and the account carries no risk of losing money.”  

 

As mentioned above, the myRA is a "ROTH" account.  Contributions to this account are not currently tax deductible, but qualified withdrawals, including all earnings, are totally federal and state tax free.  The same $5,500 and $6,500 maximum applies to an Myra account.

 

Contributions are invested in the Thrift Savings Plan Government Securities Investment Fund (aka the “G” fund).  According to the myRA website, “This fund has had an average annual return of 3.19% over the ten-year period ending December 2014”.

Contributions can now be made directly from your bank account or through direct deposit from employee payroll checks.

The myRA webside explains how create an account (go to this site to set up an account) -

“1. Sign up for myRA

First, you will open your myRA account by providing your information online or by phone — it will take about 10 minutes.

2. Set up regular contributions from your paycheck

Give a direct deposit authorization form to your employer. You'll have the option to print one when you open your account, or use the one you receive in the mail with your welcome package. If you want to contribute from multiple jobs, give each employer a form. Some employers may ask you to use their own direct deposit authorization forms.

If your employer has questions about setting up direct deposit to your myRA, you can share a letter we have prepared that explains the process.”

This sounds like a good idea to me.  While the investment choice, and investment return, is limited, the principal is quaranteed.  It is an easy way for a lower income employee, without access to an employer-sponsored retirement plan, to begin to save for retirement. 

 

And it appears that myRA contributions would qualify for the Retirement Savings Contributions Credit (aka “Savers Credit”).  Click here for a TWTP post that explains this credit.

TTFN

EVERYBODY OUGHT TO HAVE AN IRA

In his classic Broadway musical A FUNNY THING etc Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I certainly don’t disagree.

 

 

I also feel that everybody ought to have an IRA.

Everybody with earned income, and regardless of age, level of income or wealth, or coverage under an employer plan, should have an IRA as a form of secured savings.  This is because of the multiple benefits of an IRA account – the tax deferred, or tax free, accumulation of income, the possible tax deduction it can provide, and the fact that they are, in most cases, protected from general creditors to whom you may owe outstanding debts and during bankruptcy procedures.

You should, of course, first take as much advantage as possible within your budget of your employer’s 401(k), 403(b), 457, or whatever retirement plan, hopefully eventually to the maximum annual allowable contribution.

Some employers offer a ROTH option for contributions.  Employee contributions to a traditional 401(k), etc are “pre-tax” and reduce the amount of taxable federal and often state wages reported on Form W-2.  If you are in the 25% federal bracket this provides an immediate 25% “return on investment”.  With a ROTH 401(k) employee contributions are “after tax”, but distributions at retirement are totally tax free.  As with traditional 401(k) plans, ROTH 401(k)s require annual minimum distributions at age 70½, but you can avoid this by rolling your ROTH 401(k) into a ROTH IRA when you retire.

Younger employees just starting out should opt for the ROTH 401(k) if it is available.  Older employees, who are used to the “pre-tax” treatment of employee contributions, may want to consider contributing any annual inflation-based increases to the maximum amount allowed to a ROTH account.

But you should not stop there.  Once you have maxed out contributions to your employer plan you should contribute to an IRA – again hopefully eventually to the maximum allowable contribution.

Before I discuss IRAs further I refer you to POSITIVELY TAXES - JUST ABOUT EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT AN IRA from my DOLLAR STORE.   

For both 2014 and 2015 the maximum amount you can contribute to an IRA, either traditional or ROTH, is $5,500.  The additional “catch-up contribution” if age 50 or older is $1,000, also for both years.

Here is the other information you need to know for 2014 and 2015:

2014 -

The deduction for contributions to a traditional IRA by taxpayers who are active participants in an employer retirement plan is phased out for Single and Head of Household filers with AGI between $60,000 and $70,000 and for those who are Married Filing Joint and Qualifying Widow(er) with AGI of $96,000 to $116,000. 

The deduction on a joint return for a spouse that is not an active participant in an employer plan but who is married to one who is phases out at AGI of $181,000 to $191.000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $114,000 to $129,000 for Single and Head of Household filers and $181,000 to $191,000 for Married Filing Joint and Qualifying Widow(er). 

2015 –

The deduction for contributions to a traditional IRA by taxpayers who are active participants in an employer retirement plan is phased out for Single and Head of Household filers with Adjusted Gross Income (AGI) between $61,000 and $71,000 and for those who are Married Filing Joint and Qualifying Widow(er) with AGI of $98,000 to $118,000.  The phase-out range for a married taxpayer filing a separate return who is covered by an employer plan is $0 - $10,000.

The deduction on a joint return for a spouse that is not an active participant in an employer plan but who is married to one who is phases out at AGI of $183,000 to $193.000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $116,000 to $131,000 for Single and Head of Household filers and $183,000 to $193,000 for Married Filing Joint and Qualifying Widow(er).  The phase-out range for a married taxpayer filing a separate return who is covered by an employer plan is $0 - $10,000.

Ideally you should contribute to a ROTH IRA – so your contributions will grow tax-free (and not just tax deferred) and will not be subject to RMD rules at age 70½.  FYI - accumulations in a ROTH IRA can be passed on totally tax-free to beneficiaries when you go to your final audit.

However, depending on your financial situation, the tax-deductibility of all or part of traditional IRA contributions may be more beneficial.

My post “ADVICE FOR A NEW GRADUATE STARTING OUT IN HIS/HER FIRST FULL-TIME JOB” from this summer provides two suggestions for funding IRA contributions if you are just starting out –

ü If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  

ü Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Beginning with the first week of January 2015, put $10, $20, or $50 in this “bank” each week.  On January 2nd of 2016 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2016.  Continue this practice for 2016 and subsequent years. 

If you cannot contribute to either a ROTH or a deductible IRA, based on income and other limitations, you should still contribute to a non-deductible IRA.  Doing so will create a “basis” in your IRA investments and part of eventual withdrawals will be partially tax free as a “return of basis”.

If your income is too high to be able to contribute directly to a ROTH IRA you can use a special tax trick to make a “back door” contribution.  Make the contribution to a non-deductible traditional IRA account and then turn around and convert the account to a ROTH IRA.  This is also discussed in the POSITIVELY TAXES report referenced above.

While you should certainly consider contributing to Section 529 plans and Coverdell Education Savings Accounts, you can also use IRAs to save for education, as well as excessive medical expenses and buying a home, as exclusions to the premature withdrawal penalty exist for these types of expenses, and withdrawals from a ROTH IRA are always tax and penalty free to the extent of your contributions.

TTFN

ADVICE FOR A NEW GRADUATE STARTING OUT IN HIS/HER FIRST FULL-TIME JOB

Dear Graduate:

1.  Claim Single-1, or Single-0, on your Form W-4 for federal and state withholding.  Do NOT claim more than 1 exemption.

2.  Participate in your employer’s 401(k) or 403(b) plan.  If cash-flow permits, contribute the maximum, which for 2014 is $17,500.  If you cannot contribute the maximum try to contribute at least enough to qualify for the maximum amount of any employer matching contribution.  If your employer offers a ROTH 401(k) or 403(b) option choose this option.  As an alternative, if you are contributing the maximum put 50% in a “traditional” account and 50% in a ROTH account.

3.  If you contribute toward the cost of employer-paid group health insurance premiums via payroll deduction, and you are offered an option, elect to have your contributions be treated as “pre-tax”.

4.  Participate in your employer’s medical expense Flexible Spending Account (FSA).  Be conservative and start with $1,000.  You can increase your contribution in subsequent years once you get a handle on your annual out-of-pocket medical expenses.

5.   If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  The maximum you can contribute to an IRA, “traditional” and ROTH combined, for 2014 is $5,500.

6.  Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Each week put $10, $20, or $50 in this “bank” (if you choose $20, but $20 in each week).  On January 2nd of 2015 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2015.  Continue this practice for 2015 and subsequent years.  

TTFN