Some individuals get the nice surprise of a big tax refund every tax year (if this is you, don’t be too happy – you’ve been lending Uncle Sam money interest free). Other folks get the unpleasant surprise of having to write a big check to Uncle Sam. For the latter individuals, there may be a way to lower their tax bill and save more for retirement. Let’s look at an example. Assume an individual has a tax bill of $4,000 and they want to reduce this. Naturally, there are other deductions they may qualify for, but in this case, they’ve exhausted all other options except this one: saving to their 401k. Let’s also assume this individual’s marginal tax rate is 25%. The individual can take their tax rate and divide it into their tax liability for the year – in this case $4,000 divided by 25%. This comes to $16,000. […]
Diversification and asset allocation are important components to any investment plan. Additionally, where assets such as stocks and bonds are held, also called asset location, should also be considered. Asset location refers to the type of account that asset classes are held. Such accounts are generally traditional and Roth IRAs, employer-sponsored plans such as 401ks, etc., and after-tax, non-qualified investment accounts. The reason asset location becomes important is to help make use of tax efficiency in an investment portfolio. For example, stocks held in after-tax, non-qualified accounts for longer than one year as well as qualified dividends are taxed at much more favorable rates. These favorable rates can range from as little as zero to 20%. Bond interest, however, is taxed as ordinary income, leaving an investor being taxed at potentially higher amount. As many readers know, amounts contributed to qualified, pre-tax accounts such as deductible IRAs, 401ks, etc., are […]
With 2014 over and 2015 well on its way you may be finding yourself gathering all of your 2014 tax information and getting ready to file your income taxes. Some folks will be expecting refunds while others will woefully dread writing out a check to the IRS. If you find yourself in the group of folks that will be writing a check to Uncle Sam, here are some tips to reduce your tax burden for 2015.
As the end of the year approaches many employers will pay and many employees will receive year-end bonuses. While often the icing on the cake for a productive year employee should be aware of the tax consequences of their bonus. Percent vs. Aggregate Method When it comes to taxing the bonus an employer may choose the percentage method versus the aggregate method. Under the aggregate or wage holding bracket method the employer will use the withholding tables generally used for the employee normal paycheck. Then, the supplemental wages are aggregated with the employee’s normal pay and taxes are withheld accordingly.
At some point in almost everyone’s lifetime they have gone through the process of changing jobs. Many times those jobs offered retirement plans such as 401(k)s 403(b)s, etc. Conventional wisdom would say that for most employees it may make sense to roll their employer sponsored plan into an IRA. Based on a request from a reader (thanks David!), I thought I would go over some of the issues to consider before rolling your employer sponsored plan to an IRA.
On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation. Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income. If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the […]
When you don’t file your tax return or if you don’t pay the tax owed on time, the IRS has specific penalties that are applied to your account. Recently the IRS issued their Tax Tip 2012-74, which lists eight facts about these penalties. The actual text of the Tax Tip is listed below: Failure to File of Pay Penalties: Eight Facts The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay, or both. Here are eight important points about the two different penalties you may face if you file or pay late. If you do not file by the deadline, you might face a failure-to-file penalty. If […]
Some very clever folks have looked at the 2010 Roth IRA conversion facts, including the ability to spread the tax over tax years 2011 and 2012, and have discovered a unique situation… What would happen if I did the Roth conversion in 2010, elected to be taxed half in 2011 and half in 2012, but during 2011 I withdrew all of the funds from the account? This way, you’d effectively have access to 100% of the funds while only paying tax on half of them. (This assumes that your Roth IRA is otherwise qualified – e.g., you’re over age 59½ and the account has been in place for five years.) Hold on there, cowboy! There’s a problem with your kooky little scheme – the IRS has planned for just such an eventuality. Effectively, any amount that you withdraw from your Roth IRA that is not previous contributions or conversions, will […]