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 […]
qualified retirement plan
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 Options Are Available for a Surviving Spouse Who Inherits an IRA?
First Spouse Program bronze medal (Photo credit: Wikipedia) When the owner of an IRA dies and leaves the IRA to his or her spouse as the sole beneficiary, there are some unique options available for handling this inherited IRA. Keep in mind that these options are only available to a spouse a beneficiary – a non-spouse beneficiary has much more limited options available. Options for a Spousal Beneficiary of an IRA The first and easiest option is for the spouse to leave the IRA exactly where it is and do nothing. In this manner, the IRA will continue to exist as belonging to the deceased spouse – for a time. If the deceased spouse was over age 70½ years of age and subject to Required Minimum Distributions (RMDs), the surviving spouse could elect to continue receiving those RMDs using his or her late spouse’s lifetime as the distribution factor. On […]
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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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Tax Credits That Can Increase Your Refund
The IRS recently issued their Tax Tip 2012-41, which lists out some of the tax credits that are refundable. Most tax credits are not refundable, meaning that if the amount of the credit is more than your tax for the year, the credit is limited only to the amount of your tax. For example, if you had tax payable of $1,500 and then had Education Credits, Energy Credits, and/or Foreign Tax Credits amounting to more than $1,500. Your credits will be limited to $1,500 since that’s your tax payable and the credits are not refundable. On the other hand, there are a few credits that are refundable, as listed below in the actual text from Tax Tip 2012-41. Four Tax Credits that Can Boost Your Refund A tax credit is a dollar-for-dollar reduction of taxes owed. Some tax credits are refundable meaning if you are eligible and claim one, you […]
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5 Facts You Need to Know About Your Retirement Plan
Image via Wikipedia Many of us are covered by one or more types of defined contribution retirement plans, such as a 401(k), 403(b), 457, or any of a number of other plans. What many of these plans have in common is that they are referred to as Cash Or Deferred Arrangements (CODA), as designated by the IRS. These plans are also often referred to as Qualified Retirement Plans (QRPs). Each type of plan has certain characteristics that are a little different from other plans, but most of them have the common characteristic of deductibility from current income and deferred taxation on growth. (Note that this list of plans does not include IRAs. IRAs have certain characteristics that are completely different from QRPs, and vice-versa.) 1. Each dollar you defer is worth more than a dollar. It’s true. As you defer money into your retirement account, each dollar that you defer […]
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8 Things to Consider Before Rolling Over Your 401(k)
K’nex (Photo credit: -Snugg-) Employers have been giving us lots of opportunities to make this decision of late: when leaving an employer, whether voluntarily or otherwise, we have the opportunity to rollover the qualified retirement plan (QRP) such as a 401(k) from the former employer to either an IRA or a new employer’s QRP. This decision shouldn’t be taken lightly – although often it is the best option for you. Moving to an IRA gives you much more control over your destiny, so to speak, by allowing you to choose from the entire universe of allowable investment choices. Using your new employer’s QRP can give you a better sense of control over the account as well, although the flexibility of an IRA is generally preferable to another QRP. But sometimes it makes the most sense to leave your money in the old plan. Listed below are eight possible reasons that […]
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Pre-Death Planning: Roth Conversion
Image via Wikipedia Financial planning often requires us to face our own certain demise – something that we often don’t want to do, but still a certainty that we all must face. Among the things that we want to do when planning for the inevitable would be to make certain that our surviving loved ones have access to adequate monetary resources to support themselves, in the most cost-effective manner. Another thing that we hope to accomplish is to make the transition as easy as possible for our loved ones. One way to do this is to convert a good portion of your IRA or other tax-deferred funds to a Roth IRA account. Here’s why: By converting to a Roth account, you will make the funds in that account available to your heirs totally tax free. Granted, your estate will also be smaller by the amount of tax that you paid […]
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2012 Retirement Plan Limits
Image via Wikipedia The new limits for retirement plans in 2012 have just recently been published. The details of these new limits are below: IRA The contribution limit (and therefore the deductible contribution limit) for a traditional IRA remains the same in 2012 as in 2011 – at $5,000. The catch up provision, available to taxpayers age 50 or better, also remains the same at $1,000. If you’re a Single filer and covered by a retirement plan via an employer, the deductibility phases out when your Adjusted Gross Income (AGI) is over $58,000 and phases out completely at an AGI of $68,000. This is an increase of $2,000 over the 2011 phase-out range. If you’re Married and filing jointly and the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is between $92,000 and $112,000, also up from 2011 by $2,000. If you’re not […]
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New Opportunities to “Roth”
Recently one of the tenets of the Small Business Jobs Act of 2010 came into effect, providing you with additional opportunities to set aside funds in a Roth account – not a Roth IRA, but rather a “designated Roth account”, often referred to as a Roth 401(k) or Roth 403(b). Designated Roth accounts are also often referred to as DRACs – just to keep the acronym train rolling. The way the new law works is that, if you have a 401(k) or 403(b) (the traditional kind), you can roll over or convert some of your funds to a DRAC while the account is still active – as long as your plan is set up to allow in-plan distributions of this variety. The eligible rollover distribution (ERD) must be made: after September 27, 2010; from a non-designated Roth account in the same plan, meaning your traditional 401(k) or 403(b); because of […]
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