In a Qualified 401(k) plan, a participant must begin Required Minimum Distributions (RMD’s) in the year he or she reaches age 70 1/2. This rule also applies to Pre-tax IRA’s. However, there is an exception to this rule when it comes to Roth IRA’s. This provides for a tax planning opportunity for those who have Roth 401(k).
If you have Roth deferrals in your 401(k) plan, and you want to decrease the amount of your taxable RMD, you can do a direct rollover of your Roth funds from your 401(k) to a Roth IRA prior to the year you turn 70 1/2. By doing this, you decrease the balance in your 401(k) plan, which in effect decreases your RMD from the plan. The Roth funds are now in a Roth IRA, which does not require distributions at age 70 1/2.
As an example, Participant A has a balance in her 401(k) plan at December 31, 2017 of $150,000. Of that, $50,000 is Roth, $100,00 is pre-tax. If she turns 70 1/2 during 2018, her 2018 RMD will be calculated based on the balance of $150,000. If, on the other hand, she does a tax free direct rollover of $50,000 to a Roth IRA during 2017, then her 2018 RMD will be calculated based on the December 31, 2017 balance of $100,000. This will reduce her 2018 taxable income. The $50,000 Roth IRA does not have Required Minimum Distributions. This $50,000 will continue to grow tax free until she is ready to take distributions.
If you have questions about this strategy, please contact Anne Christian at email@example.com.
The Tax Cuts and Jobs Act covers a wide variety of tax changes. In the retirement plan world, before the final bill was passed, there was a lot of talk about reducing contribution limits and/or requiring Roth Deferrals as opposed to pre-tax deferrals. Thankfully, neither of these proposals are in the final approved Act. There are however a few changes.
- Re-characterization of Roth IRA contributions:
- Traditional contributions can still be converted to Roth.
- Roth contributions can still be converted to traditional.
- New Rule: Once you convert traditional to Roth, you cannot then re-characterize back to traditional.
- If a plan provides for hardship distributions, there are two changes:
- Old Rule: Participant cannot defer for six months after taking a hardship distribution.
- New Rule: Participant can continue to defer.
- Old Rule: Hardship distributions can only come from amounts contributed by the employee.
- New Rule: Hardship distributions can also come from employer contributions and earnings from all sources of contributions.
- Extended period to rollover plan loan offset amounts for a participant who has a loan balance when the plan terminates or when the participant severs employment:
- Old Rule: The employee has 60 days to contribute the loan balance to an IRA or the loan is treated as a taxable distribution.
- New Rule: The employee has until the due date for filing their Federal Income Tax return for that year to contribute the loan balance to an IRA or the loan is treated as a taxable distribution.
If you have any questions on this topic, please contact Anne Christian, CPA at firstname.lastname@example.org.
Most people are familiar with the tax advantages to the participant of a 401(k) plan. There are also many benefits to an employer for implementing a 401(k) plan. Many of these are financial.
The first, and most obvious benefit to the employer, is the tax advantages which can offset some of the costs. Any Employer contributions, whether in the form of a match or a discretionary contribution, are tax deductible for the employer. In addition, if this is the first 401(k) plan for your company, you are eligible for up to $1,500 in tax credits. For the first three years of your new plan, you can take a tax credit of 50% of your startup and administrative costs, up to $500 per year.
Second, a good benefits package attracts quality employees, while encouraging longevity and loyalty. It is in every employer’s best interest to promote a positive company culture and to maintain superb employee morale. Some types of employer contributions follow a vesting schedule. This means the longer an employee stays with you, the more ownership they have in their balance. A 401(k) plan is an excellent start to an attractive benefits package.
Third, each 401(k) plan can be customized to fit the needs of the individual company. There are endless options available depending on the goals and desires of the owners. Some are looking to provide a competitive benefit package for their employees. Some are hoping to maximize savings and tax benefits for the owners while also offering a retirement package to their employees.
401(k) Plans also offer flexibility of investments and higher annual limits as opposed to saving for retirement through IRA’s.
Want more details specifically catered to your company? Contact Anne Christian, CPA at BWTP for a free analysis and proposal.
Everyone knows saving for your retirement is important. One attractive option is the Roth IRA. Contributions to a Roth IRA are not deductible in the year they are made as traditional IRAs, but they grow tax free and will not be taxed in retirement when distributions are taken.
For 2017, total IRA contributions (traditional and Roth) are limited to $5,500 ($6,500 if you are age 50 or older).
Unfortunately, not all taxpayers are eligible to make contributions to a Roth IRA. For 2017, your modified AGI must be under $133,000 (single) or $196,000 (married filing jointly). The limits, however, do not apply to a Roth IRA conversion.
Using this strategy, you make non-deductible contributions to your IRA and immediately convert this amount to a Roth IRA. While the conversion is a taxable event, your contribution hasn’t had time to earn income, so the entire conversion is treated as a return of principal and thus, will be tax free.
Your contribution and conversion will have no impact on your income and will not change your tax liability for the year, but you will have saved $5,500 into a Roth IRA that will continue to grow and remain tax free!
If you have any questions about making an IRA contribution, please contact Jaclyn Ellis, CPA at 314.576.1350 or email@example.com.
When it comes to retirement plan savings, many people wonder whether it is better to invest pre-tax dollars or after-tax dollars. May 401(k) plans offer the option of traditional pre-tax deferrals and after-tax Roth deferrals. The answer to this question, unfortunately, is not simple. It depends on many factors.
It is important to understand the difference between pre-tax deferrals and Roth deferrals. Traditional, pre-tax deferrals decrease your taxable income now. That deferrals is invested in the 401(k) plan. Then you withdraw the money at retirement, or at the time of another “distributable event”, that original deposit and any earnings on that deposit that have accumulated over the years is all taxable at that time.
On the other hand, when you opt for Roth deferrals, that deferral amount is withheld from your pay now, and is included in your taxable income now. Because you are paying income tax now, you will not need to pay income tax in the future when the money is withdrawn from your 401(k) plan. An additional benefit to the Roth deferrals is that if you satisfy some requirements, the earnings that have accumulated over the years on that Roth investment are also available to withdraw tax free at retirement (or at the time of another “distribute event”).
In order to decide between Roth or traditional deferrals (or both), you need to look at:
- Your current taxable income. It may be beneficial to decrease taxable income if you are close to phasing out of some income tax deductions or tax credits. It may be beneficial to decrease current tax liability due to current cash flow.
- You also need to consider what you expect your tax situation will be at retirement. Will you be in a higher or lower tax bracket?
- If you are starting young and expect your deferrals to accumulate many years of earnings, you may consider Roth, since those earnings could be significant and will be tax free at retirement.
For IRA’s, remember you still have time to make your tax deductible IRA contribution for 2016 of up to $5,500 ($6,500 if you are over age 50). The deadline is April 17, 2017. There are other requirements. Ask your tax preparer or give us a call to see if you qualify.
Every situation is different and needs consideration. For more information on this topic, please contact Anne Christian, CPA at firstname.lastname@example.org or by phone at (314) 576-1350.