Taxes and Retirement

IRAs
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As tax deadlines near, it is time to look at IRAs and funding those before tax season. Just to recap:

  •  For 2015 in both traditional and Roth IRAs, you can put away $5,500 ($6,500, if you are 50 or older) or your taxable compensation if it is lower than the contribution amount. Contribution limits are based on income, and are phased as one’s income increases.
  • Contributions cannot be made in or after the year you reach 70.5 years old.
  • Filing jointly, may allow the spouse to fund an IRA, even if the spouse did not have taxable income.
  • While you can still contribute to an IRA if you or your spouse has a 401(k), it may not be tax deductible.
  • If you are self-employed you may be able to fund a SEP IRA with up to $53,000 or 25% of one’s taxable income, whichever is less.
  • SEP IRAs can be funded up until the date one files his or her taxes, including the extension date in October. It is important to consult with your CPA in conjunction with an attorney and adviser to make sure all of the rules are met to fund a SEP and that all SEP IRAs are funded for employers if need be.

As advisers, when we look at funding accounts for clients, it is important to do a comprehensive review of a client’s retirement plan. All too often we find that account owners still list exspouses as beneficiaries, or they do not reflect an additional child that was recently born or a new spouse. This is also a great time to discuss using trusts as a beneficiary. Trusts, if setup properly, can allow the distributions to be spread out over the life of the oldest beneficiary. Another great advantage of a trust is to guide what would happen to funds if the children are “not ready” for that type of money or are minors. Within the past few years, an acquaintance setup a trust to be the beneficiary, but did not change the beneficiary form, then subsequently passed away. The beneficiaries proceeded to spend six figures each in under one year. Reviewing beneficiaries, at a minimum, should be an annual procedure!

A recent change in 2010 allows people of any income level to convert his or her traditional IRA to a Roth IRA. While the conversion date for tax purposes needs to be by year end, most people will be able to project their income and make a decision on how much to convert. The added benefit is that you can re-characterize those funds later in the year if the accounts drop and you can move them back to a traditional IRA and reclaim any taxes paid with the conversion. There are many strategies around conversions, but it takes time to analyze and implement, so do not delay setting up a meeting with your advisers.

If you are fortunate enough to have too many employees for a SEP, or to get a tax deduction for an IRA contribution, you may want to look at a SIMPLE IRA. These plans are similar to 401(k)s and are ideal for smaller businesses because of lower administrative costs.

Recently, with the uptick in job creations, many folks have changed jobs. This is a great time to combine previous 401(k)s into an IRA or your current 401(k). While an IRA is yours and usually has a much larger selection of investment choices, using the company 401(k) plan may provide access to lowcost options along with unique options like stable value funds.

As we go through 2016, it is expected that legislation will pass requiring a fiduciary standard to IRAs much like they do for 401(k)s. So as you look at rolling over an old 401(k) or changing your provider, it may be in your best interest to work with someone that is setup to meet these fiduciary standards.

In closing, the real benefit of retirement plans is the ability to set aside funds that will compound over time. It is amazing what compounding and time can do to grow your assets. But, you have to make the sacrifice to set assets aside or there is nothing to compound!

This article is for informational purposes only and does not constitutes tax, legal, insurance or investment advice. This article should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Readers should discuss the personal applicability of the specific products, services, strategies or issues posted herein with a professional adviser of his or her choosing. Travis S. Anderson 

KADO

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