- Rapidly approaching is April 15th, which is not only "tax-day" but also the last day to make IRA contributions for the tax year of 2014. Even though we're already a month and a half into the new year, you still have time to set-up & contribute to an IRA and lock in a substantial write-off! As anyone who has forgotten to do this can tell you, it is a huge chunk of tax-savings that you definitely want to keep in your pocket, rather than in Uncle Sams!
- In this column, I address some of the most common IRAs that my clients at Lagunitas Asset Management use, as well as some of the options that are available to small business owners who are looking to set up a retirement plan for themselves and their employees. It is extremely important to remember that you get to fund not only your retirement plan at work, but also an individual plan for yourself! No matter if you're maxing out your 401k, 403b, or whatever plan that company offers, you still can fund your own IRA. That's what the I in IRA stands for: your Individual Retirement Account! Please reach out to me via email at Mike@LagunitasIQ.com if you need any help in getting these accounts set-up and funded for yourself or your business.
What Is a Traditional IRA?
Traditional individual retirement accounts (IRAs) can be a good way to save for retirement. If you do not participate in an employer-sponsored retirement plan or would like to supplement that plan, a traditional IRA could work for you.
A traditional IRA is simply a tax-deferred savings account that has several investing options and is set up through an investment institution. For instance, an IRA can include stocks, bonds, mutual funds, cash equivalents, real estate, and other investment vehicles.
One of the benefits of a traditional IRA is the potential for tax-deductible contributions. In 2015, you may be eligible to make a tax-deductible contribution of up to $5,500 ($6,500 if you are 50 or older). Contribution limits are indexed annually for inflation.
You can contribute directly to a traditional IRA or you can transfer assets directly from another type of qualified plan, such as a SEP or a SIMPLE IRA. Rollovers may also be made from a qualified employer-sponsored plan, such as a 401(k) or 403(b), after you change jobs or retire.
Not everyone contributing to a traditional IRA is eligible for a tax deduction. If you are an active participant in a qualified workplace retirement plan — such as a 401(k) or a simplified employee pension plan — your IRA deduction may be reduced or eliminated, based on your income.
In 2015, for example, if your modified adjusted gross income (AGI) is $61,000 or less as a single filer ($98,000 or less for married couples filing jointly), you can receive the full tax deduction. On the other hand, if your AGI is more than $71,000 as a single filer ($118,000 for married couples filing jointly), you are not eligible for a tax deduction. Partial deductions are allowed for single filers whose incomes are between $61,000 and $71,000 (or between $98,000 and $118,000 for married couples filing jointly). If you are not an active participant in an employer-sponsored retirement plan, you are eligible for a full tax deduction.
Nondeductible contributions may necessitate some very complicated paperwork when you begin withdrawals from your account. If your contributions are not tax deductible, you may be better served by another retirement plan, such as a Roth IRA. (The maximum combined annual contribution an individual can make to traditional and Roth IRAs is $5,500 in 2015.)
The funds in a traditional IRA accumulate tax deferred, which means you do not have to pay taxes until you start receiving distributions in retirement, a time when you might be in a lower tax bracket. Withdrawals are taxed as ordinary income. Withdrawals taken prior to age 59½ may also be subject to a 10% federal income tax penalty. Exceptions to this early-withdrawal penalty include distributions resulting from disability, unemployment, and qualified first home expenses ($10,000 lifetime limit), as well as distributions used to pay higher-education expenses.
You must begin taking annual required minimum distributions (RMDs) from a traditional IRA after you turn 70½ (starting no later than April 1 of the year after the year you reach 70½), or you will be subject to a 50% income tax penalty on the amount that should have been withdrawn. Of course, you can always withdraw more than the required minimum amount or even withdraw the entire balance as a lump sum.
An IRA can be a valuable addition to your retirement and tax management efforts. By working with us at Lagunitas Asset Management, we can help you can determine whether a traditional IRA would be appropriate for you.
What Is a Self-Employed Retirement Plan?
A self-employed retirement plan is a tax-deferred retirement savings program for self-employed individuals. In the past, the term "Keogh plan" was used to distinguish a retirement plan established by a self-employed individual. However, self-employed retirement plans are now generally referred to by the name that is used for the particular type of plan, such as SEP IRA, SIMPLE 401(k), or self-employed 401(k).
Self-employed plans can be established by any individual who is self-employed on a part-time or full-time basis, as well as by sole proprietorships and partnerships (who are considered “employees” for the purpose of participating in these plans).
Unlike IRAs, which limit tax-deductible contributions to $5,500 per year (in 2015), self-employed plans allow you to save as much as $53,000 of your net self-employment income in 2015, depending on the type of self-employed plan you adopt.
Contributions to a self-employed plan may be tax deductible up to certain limits. These contributions, along with any gains made on the plan investments, will accumulate tax deferred until you withdraw them.
Withdrawal rules mirror those of other qualified retirement plans. Distributions are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to age 59½. Self-employed plans can typically be rolled over to another qualified retirement plan or to an IRA. Annual minimum distributions are required after the age of 70½. Unlike the case with other qualified retirement plans, hardship distributions are not permitted with a self-employed plan.
You can open a self-employed plan account through banks, brokerage houses, insurance companies, mutual fund companies, and credit unions. Although the federal government sets no minimum opening balance, most institutions set their own, usually between $250 and $1,000.
The deadline for setting up a self-employed plan is earlier than it is for an IRA. You must open a self-employed plan by December 31 of the year for which you wish to claim a deduction. However, you don’t have to come up with your entire contribution by then. As with an IRA, you have until the day you file your tax return to make your contribution. That gives most taxpayers until April 15 to deposit their annual retirement savings into a self-employed plan account.
Each tax year, plan holders are required to fill out Form 5500, for which they may need the assistance of an accountant or tax advisor, incurring extra costs.
If you earn self-employment income, a self-employed plan could be a valuable addition to your retirement strategy. And the potential payoff — a comfortable retirement — may far outweigh any extra costs or paperwork.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2015 Emerald Connect, LLC
