You may not realize it, but you still have time to make a contribution to your IRA and still have it count for 2018. Whether it’s a traditional IRA or a Roth IRA, you have until tax day to make a contribution for the previous year. Thus, you can make a contribution anytime before April 15, 2019, and have it count as though it was made in 2018. Many people don’t realize that such an opportunity exists. However, keep in mind that the April 15 deadline is a hard deadline, which means there is no ability to extend it, unlike your taxes. If you are considering making a contribution and want to have it count on your 2018 tax return, you have just over a month at this point to do so. If you have questions about your IRA contributions and what implications they may have on your taxes, you will want to speak with either a tax professional or a certified financial planner.
Health Savings Accounts (commonly known as HSAs) can be a nice addition to your retirement savings plans. They can provide tax-free funds to help pay for your medically-related expenses–such as monthly medicaid premiums and doctor’s visits–and can also serve as an additional retirement account. Now, I want to follow up on that last part. I am not encouraging you to treat your HSA the same way you would an IRA or 401(k). Yes, you can take withdrawals from your HSA once you turn 65 for non-medical uses and only have to pay taxes on those funds. Depending on your situation and where the HSA fits into your retirement plans, that may not be the best use for an HSA. If you intend to use your HSA to cover a good chunk of your medical expenditures in retirement–a retirement that could last decades–you will not want to make withdrawals that may jeopardize that funding and leave you with less than you intended to have. In such an instance, it may be better to view your HSA as your primary medical funds in retirement that can double as an emergency fund, if need be. However, if you intend to use your HSA for non-medical expenditures in retirement and purposely built up the account to do so, then have at it. If you find that you will have a substantial amount of money in your HSA by the time you retire and you want to put some of it to other uses, you may want to speak with a certified financial planner to see whether that is a good idea and discuss how to go about doing so. An HSA can be a great addition to your retirement savings plan and can help take some of the pressure off your other retirement funds by covering medical-related expenses. If you are considering setting up an HSA to help with both your current and retirement medical-related expenses, you should speak with a certified financial planner to make sure it’s right for you.
It’s not talked about nearly as much as Roth IRAs or regular 401(k), but you can have a Roth 401(k). No, not every employer retirement plan offers it. Yes, it does have many of the same advantages as a Roth IRA. If you know what makes a Roth IRA so enticing then you can probably guess the how a Roth 401(k) works. If you guessed that it’s because your contributions are taxed when they go into your account and not when they are distributed, then you are correct. This can be very advantageous, especially if you have an understanding of tax brackets and how you most likely will end up in a higher tax bracket when you retire and begin tapping into you nest egg. Furthermore, having a Roth 401(k) could have a positive impact on any Social Security benefits you receive in the future as a Roth 401(k) distribution is not considered taxable income and thus your Social Security benefits may also not be taxable. Furthermore, a Roth 401(k) doesn’t have the income limitations that a Roth IRA has and thus, you can make contributions regardless of your income. There is one drawback, though, to a Roth 401(k) and it has to do with employer contributions. While you can have employer matching with a Roth 401(k), the money from your employer will go into a pre-tax account as your employer is most likely allowed a tax deduction for the matching contribution. This means that any matching dollars from your employer are not Roth dollars and will be taxable when you take a distribution from that account. Finally, it should be noted that you need to make sure that your employer plan offers a Roth 401(k) option, as not all plans offer it. If you find that your employer plan does allow such an account and you have questions about it, you should either speak with your plan custodian or a certified financial expert.
You may not realize it, but there the money in your Roth IRA will be distributed in a particular order. The order is important as it will determine any potential tax consequences you may have when you take a distribution from your account. In a Roth IRA, there are generally four (4) classifications of assets within an account: (1) regular contributions, (2) taxable conversion and rollover amounts, (3) non-taxable conversion and rollover amounts, and (4) earnings on Roth IRA assets. Remember, that your contributions are tax-free, but that doesn’t mean that other money in the account is not taxable. Thus, for example, if you take a withdrawal that is larger than your contribution total in your account, that amount beyond your contributions amount will be taxable, especially once it dips into any taxable conversion/rollover money or earnings. Knowing that there may be a potential tax consequence should factor into your decision to make a withdrawal and consideration of how you much to withdraw. If you know you may get into taxable money and you are taking an early distribution, you may want to really think long and hard about whether you are making a good decision or if there is another place to get the funds you need. If you are considering doing a withdrawal from a Roth IRA, or just want to have an understanding of the type of money you have in your Roth IRA, you will want to speak with a certified financial planner or tax professional.
This blog post wasn’t written to remind you to do your taxes nor is it intended to ruin your holiday cheer by mentioning taxes. Rather, it’s a reminder that January is a few weeks away, which means that your tax information will become available over the next month and a half. You know, those notices from your employer regarding what they took out for taxes. Other tax information you may receive may be in relation to student debt or retirement accounts. Regardless of the source of the tax information, you should make sure that you save all that information, or–given that most of such information is available online these days–at least know how to access it. Now is a good time to log on to those accounts and make sure that your passwords work and your account information is correct. Over the next few weeks, you may also want to consider accessing your tax return from the previous year and seeing if anything has changed between now and then. You should further consider taking some time in January or early February organizing your tax documents or any related documentation so that it is ready to go when you decide to do your taxes. Finally, the end of the year is a good time to start thinking about how you plan to handle your taxes (i.e. how you will pay them) and what you may need to do regarding accounting. If you have used a tax professional in the past, you may want to consider reaching out to them in January to discuss any tax strategies you may have as well as make sure that they still have your proper information.
If you are considering making a qualified charitable donation (QCD) this year, you have just a over a month to do so as the deadline in December 31, 2018. A QCD presents a valuable tax break opportunity that can be too good to pass up, especially if you find that you will now be taking the standard deduction as a result of last year’s tax reforms. A QCD will allow you a tax break for your 2018 charitable contributions that you may not have had a chance at because you are unable to itemize anymore. a QCD can also be a great way to make a donation to your favorite charity and feel good about where you are putting your money. While QCDs are great, you do need to be aware of any limitations they may have. Remember, such distributions should be done as a direct transfer from your IRA or you can have the IRA custodian send you a check made out to your charity of choice that you then send to the charity. Also, you cannot receive anything in return for your donation from the charity. Finally, and this is important if you have a Roth IRA, QCDs only apply to taxable money in your IRA. Since Roth IRA money is taxed when it goes into the account, so it is post-tax. This means that little of the money in there is taxable, which is why QCDs from Roth IRAs is rare and why people usually do them from traditional IRAs. There are other details and limitations to QCDs that can make them a bit tricky, so your best bet is to talk with a certified financial planner prior to taking one so that you don’t run afoul of any issues.
Just because you are retired and no longer working, doesn’t mean the taxman won’t come looking for you. If you’ve been saving your retirement money in a traditional IRA, then your withdrawals from that account will be taxed when you take them. After all, a traditional IRA allows you to avoid taxes on contributions, but in return distributions get taxed. If you have receive a pension from an employer (aside from the military or disability), then that too will be taxed as it is viewed as income by the IRS. If you have investments made outside of an IRA or 401(k) that you intend to help fund your retirement with, then any gains made by those investments may also be subject to taxes. Now, I’m not here to talk about how to calculate those taxes, but rather to remind you that taxes do not go away once you retire. Also, if are concerned about your future tax bracket (i.e. what it will be when you make the withdrawals) and want to look at ways to avoid such a tax hit, you may want to consider retirement plans that tax the money when it goes into the account instead of when it comes out. That’s exactly what Roth IRAs and Roth 401(k)s do. Thus, if you would rather get taxed sooner rather than later, then you may want to strongly consider Roth accounts. Now, Roth IRAs and 401(k)s aren’t for everyone and there are certain situations where having one actually may not be a good idea. If you have questions about your future taxes or Roth accounts, you should speak with a certified financial planner or tax expert.
The rules surrounding retirement savings accounts can be complicated. As such, it’s not uncommon for people to make mistakes when it comes to saving for retirement. Luckily, the rulemakers realize this also and allow for corrections of many retirement savings account errors and mistakes. It should be noted however, that many mistakes are not penalty free, regardless of whether you correct the error in a timely fashion or not. However, taking the steps to correct an error can keep those penalties to a minimum and potentially save you thousands of dollars in both taxes and penalty fees. Furthermore, the corrective measures themselves can be complex and confusing, especially if you are not good with taxes. Again, though, putting the time and resources into correcting the error is most likely much more cost efficient than taking the penalty. If you have made an error with your retirement savings (i.e. made an excess IRA contribution) you will want to take steps to correct the error as soon as possible and as efficiently as possible. Your best bet to do so is by speaking with a certified financial planner or–if you already know that the correction will involve a tax hit–a tax professional who can help you properly calculate what the tax will be. This is also another good reason why you want to track your retirement account transactions and check to make sure they were processed within a reasonable time because once an error occurs there is only so much time to correct it before it becomes a costly mistake. If you have questions about your retirement account or think you may have made an error and want to correct it, again, you should speak with a certified financial planner and retirement expert.
2019 is less than two months away. With the new year will come new changes regarding Roth IRA contributions. The good news is that Roth IRA contribution limits will go up in 2019, which will provide an opportunity to save more for retirement. While the jump won’t be huge–the new limits will be $6,000 for those under 50 and $7,000 for those over 50–they will provide a chance to put away an extra $500 compared to this year. However, that news is tempered by the fact that there are still income qualifications that need to be met for you to even make a contribution to a Roth IRA. for 2019, if you are single and your Modified Adjusted Gross Income (MAGI) is above $137,000 you cannot make a Roth IRA contribution. If you are married and filing jointly, you cannot make contributions if your MAGI is above $203,000. If you find that your income is above those limits, you may want to consider a traditional IRA, which has no income limitations for contributions. If you have questions about Roth IRAs and contributing to them, you should talk with a certified financial planner.
Do you know the difference between a Roth IRA and a traditional IRA? Chances are, you probably do, but in case you forgot, a with a traditional IRA, your taxes are deferred on the money you contribute until you take a distribution from your account. With a Roth IRA, your contribution money hits the account after taxes have been taken out, which means no taxes on future distributions. This makes Roth IRAs very advantageous, especially if you anticipate being in a higher tax bracket in retirement or in the future. Other highly touted advantages to a Roth IRA include no required minimum distributions (RMDs), no contribution limits based on age, and the fact that money left to heirs in a Roth IRA is tax free. Those advantages make Roth IRAs highly sought after in the retirement planning game. However, that doesn’t mean it’s right for everyone. Traditional IRAs are set up so that contributions can be deducted from your taxes, which is not something that Roth IRAs can offer (Remember, Roth IRA money isn’t taxed yet). Furthermore, Roth IRAs do have income limits when it comes to eligibility, whereas traditional IRAs do not, which is another big advantage for traditional IRAs. You may often hear about the advantages of Roth IRAs, especially if you fall within the income eligibility requirements, but those advantages vary by person and financial situation. If you are considering a opening a Roth IRA or want to learn more about whether you should opt for a Roth IRA or a traditional IRA, you should speak with a certified financial planner who will be able to help you learn more about what is right for you.