As we near the tax filing deadline, there are a few things you need to be aware of as you consider your retirement plan contributions for tax year 2012 (or whatever the prior tax year is, if you’re reading this sometime later). Regular IRA contributions are due by the filing deadline, with no extensions. That means April 15, 2013 for the 2012 tax year. Your contribution for 2012 is considered made “on time” if your payment is postmarked by midnight on April 15, 2013. Perhaps you wish to make a more substantial contribution to a retirement plan – in 2012, you can contribute up to $50,000 to a Keogh plan. That amount is limited to 20% of the net self-employment income, or 25% of wage income if the individual is an employee of the business. Keogh plan contributions can be made by the extended due date of your return – […]
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Don’t Forget to Pay Tax on Your 2010 Roth Conversion
Remember back in those heady days in 2010, when you finally had carte blanche eligibility to convert your IRA funds to a Roth IRA regardless of your income? And then there was a special provision that the IRS made available: you could convert money to your Roth IRA in 2010, and delay recognizing the income and paying the tax over the next two years… remember that? That was so cool. However. (Ever notice how there’s always a “however” in life?) Here we are, two years later, and NOW you have to pay tax on the Roth conversion that happened way back then. You might have forgotten it altogether, but you can bet the IRS hasn’t forgotten. Hopefully you didn’t forget this on your 2011 tax return that you filed in 2012 as well. At that time, you should have recognized half of the deferred Roth IRA conversion from 2010 on […]
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Rolling Over a 401(k) into a New Employer’s Plan
When you change jobs you have a choice to make regarding your retirement plan at former employer. If the plan is a 401(k), 403(b), or other qualified plan of that nature, you may have the option to roll the old plan into a plan at your new employer. The new employer’s plan must allow rollovers into the plan – this isn’t always automatic. Most plans will allow rollover of former employer’s plans, but not all. Once you’ve determined that the plan will accept a rollover, you should review the new plan to understand whether or not it makes sense to roll your old plan into it, or choose another option. Other options may be: rollover the old plan into an IRA, convert the old plan to a Roth IRA, leave the old plan where it is, or take a distribution from the old plan in cash. In this article we’ll […]
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IRAs and Medicaid
When it comes to IRAs and Medicaid eligibility the question that gets asked is, “How does my IRA affect my eligibility for Medicaid?” Many states share similar guidelines when it comes to exempt and non-exempt assets in IRAs. Essentially, it boils down to this: if the IRA is not in payout status (the IRA owner is not taking required minimum distributions) then the assets in the IRA are included (non-exempt) in the determination of eligibility. However, if the IRA is in payout status and the owner is now taking required minimum distributions (RMDs) the total amount of the IRA is not included, but the annual income from the RMDs is.The same would be true regarding 401(k)s, 403(b), and other qualified plans that may require RMDs after age 70 ½. There are some states (Illinois for example) that treat IRAs, a 401(k), and pensions as exempt. Check your state’s laws to […]
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Defined Contribution vs. Defined Benefit Plans
Many employers have made retirement plans available for their employees, and sometimes there are multiple types of plans that the employee can participate in. These retirement plans fall into two categories: Defined Contribution and Defined Benefit plans. In this article we’ll cover the differences between the two types of plans. Defined Benefit (DB) Plans The older type of retirement plan is the Defined Benefit Plan. (We’ll refer to this as DB for the rest of the article.) DB plans are generally the old standard pension-type of plan, and this category of plan is named as it is because the benefit is a defined amount in a pension plan. By a defined amount, we mean that a formula is used to calculate the amount of pension that you’ll receive. The formula typically uses factors such as your years of employment, your average salary (either over your entire career, or perhaps over […]
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What is a 401(k)?
Many of us have access to a 401(k) plan at our workplace – have you ever wondered exactly what a 401(k) is? The 401(k) plan is named for a specific section in the Internal Revenue Code – Section 401, subsection k, to be exact. This code section lays out the rules for these retirement plans, which are employer-sponsored plans providing a method for the worker or employee to defer a certain amount of income into a savings plan on a pre-tax basis. Often the employer also includes a matching contribution to the employee’s account. These matches are typically based upon the amount of contribution that the employee makes to the plan – such as a dollar-for-dollar match for contributions made by the employee up to certain percentage of the employee’s income. The deferred income is not subject to ordinary income tax, but it is still subject to FICA (Social Security) […]
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History of the 401(k)
Back in 1978, the year of 3 popes, Congress passed the Revenue Act of 1978 which included a provision that became Internal Revenue Code section 401(k). The 401(k) has roots going back several decades earlier, with many different rulings (Hicks v. US, Revenue Ruling 56-497, and Revenue Ruling 63-180, among others), providing the groundwork for the specialized tax treatment of salary deferrals that Section 401(k) enabled. More groundwork for the 401(k) as we know it was laid with the passage of the Employee Retirement Income Security Act (ERISA) of 1974, in that the Treasury Department was restricted from putting forth a particular set of regulations that would have reduced or eliminated the tax-deferral benefits of deferred compensation plans. After the Treasury Department withdrew the proposed regulations in 1978, the way was cleared to introduce the 401(k) plan with the Revenue Act. This particular section of the Code enabled profit-sharing plans […]
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Receive a Tax Credit For Saving
Starting (or staying with) a savings plan can be difficult to do. After all, it’s often difficult enough to just get by on your earnings day-to-day, week-to-week, before reducing the take-home pay that you’ve worked so hard for by putting it into a savings plan. The thing is though, once you start a savings plan, you’ll be surprised at how little it “hurts” to start putting small amounts aside. After a while, you won’t even miss it. In addition, the IRS has a way to help you get started – it’s called the Saver’s Credit. This is a credit that you receive on your tax return, simply for putting money aside in a savings plan. Pretty sweet deal, if you asked me! The IRS recently released their Newswire IR-2012-101, which details how the plan works and how you can take advantage of it. The full text of IR-2012-101 is below: […]
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Increase Your Retirement Savings by At Least 1% in the Coming Year
Several financial bloggers (20 at last count!) have been diligently writing articles of encouragement for people to consider increasing their savings rates by at least 1% in the coming year. Since many employees are going through annual benefit elections right about now, it’s also a very good time to put in an increase to your annual contributions to your retirement savings plans. Small steps are the easiest to take, and the least painful – so why not set aside an additional 1% in your retirement plan in the coming year? The list below includes a boatload of ideas that you can use to help you with this increase to savings. I’ve heard from several more bloggers who are going to put their posts up soon. If you’re a blogger, see the original post for details on how to join the action: Calling All Bloggers! Listed below are the articles in […]
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Take Your RMDs From Your Smallest IRA
Here’s a strategy that you could use to simplify your life: when you’re subject to Required Minimum Distributions (RMDs) after age 70½, you have the option of taking separate RMDs from each IRA that you own OR you could take all of your RMDs from one account if you like. As long as you calculate your RMD based upon all of the IRAs that you own, you are free to take the full amount of all of your RMDs from one single account (or several accounts) if you wish. And keep in mind that the “I” in IRA stands for Individual – so you can’t aggregate your IRAs with your husband’s, for example. By doing so, you could eliminate the smaller account(s) if you wish, thereby reducing paperwork (fewer accounts and statements). As well, you don’t have to keep track of as many accounts for estate planning. But then again, […]
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The Difference Between IRA Contributions and Rollovers
Often there is confusion about what constitutes a “contribution” and a “rollover” into an IRA. This post is intended to clear up the difference. While both activities are technically contributions, there’s a major difference between the two. The most significant of the differences is that with a regular annual contribution there are several limits imposed that can be quite restrictive. Annual Contribution Limits For an annual contribution to a traditional IRA or a Roth IRA, you are limited to the lesser of $5,000 or your actual earned income for the year. If you have no earned income, you’re not allowed to make an annual contribution to an IRA. Above that amount, if you happen to be 50 years old or better, you can add $1,000 more to your annual contribution (2012 figures). Astute readers will point out that there is the option for a spouse to make a spousal IRA […]
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RMDs Don’t Have to Be Taken in Cash
But… It’s a little-known fact that distributions from an IRA or a Qualified Retirement Plan can be taken in kind, rather than in cash. You can in any circumstance take distribution from the account of stocks, bonds, or any investment that you own, just the same as if it were cash. The downside to this is determining valuation for the distribution. You could value the distribution on the day of the distribution by opening price, closing price, average price, or mean between the day’s high and low prices. Where you really get into trouble is when the security that you own is very thinly-traded, such as a small company or very infrequently-traded bonds. These can be very hard to value on the date of distribution, and as you might recall, the value of a distribution for Required Minimum Distributions (RMDs) must be valued appropriately in order to ensure that the […]
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What Is Net Unrealized Appreciation?
We’ve discussed how to utilize the Net Unrealized Appreciation (NUA) treatment of distributions from your qualified retirement plan (also known as QRP, meaning 401(k), 403(b), and other plans) – one of the earlier articles on Net Unrealized Appreciation can be found at this link. Even though the process is explained in the earlier article, we didn’t discuss just what exactly can be treated with the NUA option. How do you determine what part of the distribution can be treated with capital gains treatment? In order to determine what is to be treated as unrealized appreciation, we need to define what has to be treated as ordinary income from such a distribution. Briefly, the way that the NUA option works is that you take a complete distribution of your QRP account within one tax year – and you have the option to treat a portion of your account distribution with capital […]
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What If My Employer Doesn’t Match My 401(k) Contributions?
Should I continue to make contributions to my 401(k)? Is there something else that I should make contributions to instead? As you may recall, the recommended order for retirement savings contributions is normally as follows: 401(k) contributions up to the amount that the company matches max out your Roth or traditional IRA contributions for the year (as applicable) max out the remainder of the available 401(k) contributions make taxable investment contributions In the situation where your employer doesn’t match your contributions to a 401(k) plan, the order of contributions is more appropriate if you bump up the Roth or traditional IRA contributions. In other words, just eliminate the first bulletpoint. Now, the choice of Roth IRA versus the traditional IRA for your contributions is dependent upon your income and the tax impacts. For example, you would not be eligible to make a deductible traditional IRA contribution if your Modified Adjusted […]
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What is Meant by Half Years of Age?
If you’ve paid much attention to the rules around retirement plans (IRAs, 401(k)s, and others), you’ve probably noticed that there are a couple of rules that refer to ages that include “½”. So what does this mean?? Well, quite literally, this means 6 months after you reach a certain age. The two primary ages with “½” included are 59½ and 70½. So, to be age 59½, means that you reached your 59th birthday six months prior to that date. Likewise, to be age 70½ means that you reached age 70 six months prior to that date. These two ages are for different purposes and are (naturally) treated differently. Age 59½ The rule using age 59½ is for one of the exceptions to the penalty for early withdrawals from your IRA or 401(k) plan: once you’ve reached that age (and not before that age) you can take withdrawals from your IRA […]
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When Is a Roth IRA Subject to Income Tax?
Elaine Roth (Photo credit: Wikipedia) Ah, the Roth IRA. That single bastion of non-taxable money in our arsenal of accounts. When you have investments in a Roth IRA, you can take the money out tax-free, right? Not always. There are several situations where a Roth IRA’s monies can be subjected to tax, penalty, or both. Listed below are some of those circumstances. When a Roth IRA is Taxable It should be noted that contributions to a Roth IRA may always be withdrawn from the account tax-free, for any purpose whatsoever. There are no restrictions on these withdrawals. 1. Taking the money out of the account within the first five years of the account’s existence can result in taxation of a portion of the funds. The portion that is taxable is any withdrawal that exceeds the total of all contributions and conversions into the account. This rule applies without exceptions. 2. […]
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A Tax-Free Roth Conversion Question of Timing
Fern Overgrowth (Photo credit: MightyBoyBrian) We’ve discussed here in the past about how it is (at least under present law) a perfectly legal maneuver to make a non-deductible contribution to a traditional IRA and then at some point later convert the same contribution to your Roth IRA (see Is it Really Allowed? for more). If you have no other IRA accounts, this conversion to Roth can be a tax-free event, especially if there has been no growth or gains in the investments in the account. However (and there’s always a however in life) I recently came across a situation that was sent to me by a reader, where he wanted to do such a conversion, but he also wanted to rollover some money from his 401(k) plan into an IRA. The question is in the timing – understandably, if he does the conversion from the traditional IRA to the Roth […]
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About to Graduate? Learn How to Save!
Hey, soon-to-be-graduates: as you begin to make your way out into the world of full-time employment, you’ll soon be faced with many, many “grown up” ways to spend the money you’ll be earning. You’ll of course have rent, insurance, food and clothing, maybe a car payment, and you’ll want to use some of that new-found money to blow off steam, however you choose to do that – maybe fulfilling a lifetime dream of getting “beaked” by Fredbird, for example. If you’re on top of your game, you’ll may also be thinking about saving some of your earnings. Here, you’ll have a bundle of options to choose from – regular “bank” savings accounts, 401(k) plan (or something similar) from your employer, and IRA accounts, both the traditional deductible kind and the Roth kind (hint: the Roth kind is what I want you to pay particular attention to). Side note: even if […]
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What types of accounts can I rollover into?
OMG IRA (Photo credit: girlonaglide) When you have money in several accounts and you’d like to have that money consolidated in one place, the question comes up – Which type of account can be tax-free rolled over into which other type of accounts? Thankfully, the IRS has provided a simple matrix to help with this question. At this link you’ll find the matrix, sourced from IRS Publication 590. In terms of explanation, here are a few rules to remember: You can generally rollover one account of any variety (IRA, Roth IRA, 401(k), and so on) into another account of the exact same type. You can rollover a Traditional IRA into just about any other tax-deferral plan, including 401(k), 403(b), 457(b), as well as a SEP IRA. The same goes for each of the accounts in reverse as well as between all of these types of accounts. In general, employer plans […]
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The Rollover
Image via Wikipedia You’ve heard it millions of times – on the radio or tv – “when you leave your job, you should roll over your retirement account”. You may know that it makes sense (or at least you assume it makes sense, otherwise why would these folks admonish you to do so?), but do you know why it’s important? And do you have the first clue as to how to accomplish a rollover? Why rollover? Among the reasons that it is important to rollover your retirement account when you leave employment is that you want to have control over your money. If you leave the account with the former employer, you are effectively handing over a portion of the control of your money to the administrator. This administrator’s primary job is to ensure that the plan remains as effective and efficient as possible, for your former employer. Your interests […]
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
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