Tag: Roth IRA


Can I convert Non-Deductible IRA into Roth ?

Sanjiv Gupta CPA - 8 years ago
Dear Sanjiv GuptaI have a question about the Roth IRA. I always exceed the income limits to open a Roth individual retirement account. However, I was told that I should consider opening a nondeductible IRA and then rolling it over to a Roth IRA.My question is, A.) Is this possible? B.) Can I do this again and again, meaning this rollover to be done only once, or would I be able to deposit money into a nondeductible IRA and then roll it over into the Roth IRA each year, provided there are no changes in the tax law? Is there anything else I need to pay attention to?— Devish KumarDear Devish,You should look at two aspects when considering the IRA. A.) Tax Benefits Today and B.) Tax Consequences in the future. In an ideal situation, you would like to save in both cases (as much as possible). And therefore it is important to look at the big picture. You should sit down with your tax professional and share your goals and together come up with a game plan to maximize the tax savings.Now, as to your original question, Converting Non-Deductible IRA into RothTaxpayers are limited by AGI (adjusted gross income) levels as to whether or not they can contribute directly into a Roth IRA, however, there are no income limitations in doing a conversion from a traditional IRA into a Roth IRA. Non-deductible IRA has no tax benefit for your current tax year however Roth allows you to take qualified distribution tax-free in retirement. Therefore, it makes sense to do the conversion.Now, Can you roll over your Non-deductible IRA into Roth? – Yes, you can do this every year. This process is known as Roth IRA conversion. The idea is that once you retire, you will typically have more control over investment choices and account expenses with a Roth IRA than you will with your company-sponsored retirement plan.We recommend that you should first consider contributing to your 401K plan and once you maximize there, you should consider investing in IRA. This way you can plan to save today and for the future.Do you have a question for us?You can ask your question by simply posting it as response to on our blog post and we will try to answer it in our future postings.

What You Must Know About 2012 Tax Challenges

Sanjiv Gupta CPA - 8 years ago
What You Must Know About 2012 Tax Challenges2012 presidential election summons the close of all tax benefits introduced by George Bush. This would usher in an unavoidable clash because of the new tax rules, many deductions, and unchanged tax rates.It is indeed tough to prepare a perfect tax return sheet amidst changing rules and implementation of stringent penalties. Therefore in this article, we are to take a look at how to tackle the most common filing challengesNewly implemented Capital profit rulesWorried about how to calculate taxes on your invested income this year? Heres the key rule: bought stocks after Jan 1, 2011, then you are not eligible to count your cost basis or the tax-exempt investment amount. Your broker will help you calculate the amount as per your preferred method. Most brokers send notice of FIFO; First-in and First-out which reports your selling off older shares. Before filing or tax return analyze 1099 and ask your broker to mend all errors. Talking about 1099, Roman Ciosek, a wealth management assistant at HighTower’s Strata is advising customers to slow down in their tax filing process. According to Ciosek, there will be a number of amendments on the 1099s. However, if you have sold your earlier shares whether willingly or because your broker advised you then you cannot alter your cost-basis.$1billion in unclaimed tax refundsApart from what is discussed above, everything more or less remains in place. You can jolly well counterbalance your gains with losses. While doing so first take into account the long term (considered over a year) profits on assets that incurred tax at or over 15% and balance them with your long term losses; then balance short term gains taxed as minimum income with short term losses. Having calculated the long term accounts and the short term income separately, now you are required to match your long term records to the short term report.  If your loss margin is high considering deducting a little near to $3000 from your income. This way you will be able to manage all taxable amount the next year as well.How to plan: when you proceed with tax filing you can choose to toggle between accounting ways. Your common options are “last-in”, “first-out” & “Specific share identification”.Before using FIFO it is a better idea to select particular stocks/shares that you want to sell. This is more appropriate when you have pitched in at over-time stock selling program and have derived your biggest profit out of the initial batch. On the other hand, if you have a great many capital losses with which you can counterbalance your capital profits then 2012 is a good year to enjoy a good number of tax benefits.This calculation will be the same when accounting for mutual funds, dividend reinvestment plans, exchange-traded funds, and 2013 bonds. If you haven’t received any mails yet from your broker’s company, then wait till you get your options to choose a particular method of calculating your tax amount. Don’t treat the paperwork casually.Retirement plansFiling challenge: If you have plans to finance Roth IRA for 2011, then better have it done before April 17, 2012. IRA is a tax-deductible scheme that will provide you a tax concession on your investment but will calculate taxes on withdrawal of money from this traditional plan. Roth requires you/other liable people to pay upfront taxes. This is one reason why Roth is considered a good investment idea for the long-term by most tax-payers.The changes were introduced in 2010 that everyone could convert their IRA to Roth irrespective of income group. This is indeed facilitating unless you have an exorbitant tax bill. However to calculate tax-return for 2012 you have to abide by the conversions introduced in 2011.IRS warns of ‘dirty dozen’ tax scamsTo tide over your 2010 tax payments if it took you two years then you are required to clear all due amounts this filing season 2012. The time is ticking already and you have only until the filing day to undo 2011 alterations.How to plan: open or reinvest in IRA for 2012 and also transfer an existing IRA into Roth. Such conversion will help you trim down a higher tax rate during your retirement days (than what you have to pay now). For those that were planning to go ahead with conversion plans, this is the right time to take the call. If the conversion is done before the Bush tax laws expire then you won’t be required to pay more than 35% on the upturn, which by the year-end can go up much higher than what is anticipated.Home selling: Not a very good ideaFiling challenge: If you are happy to have earned much after selling off your house then wait, your profit might as well come under taxable charges. For single home sellers, anything above $250,000 will be taxable. For married couples, the same rule applies to a marginal amount of $500,000.Wondering what happens if you sell your house at an under-rated price? You will be considered unlucky, simply because you can’t file for tax-return on the initial amount/cost of your residence. However, if you lent your house out on a mortgage and the contract period was cut short by reconstruction/ restoration purpose then you might as well get a tax break. Such deals are also applicable to conditions such as a short-notice sale or when losing your home to foreclosure. This type of tax-breaks means liberation from paying due debts.Should you buy a home in 2012?How to plan: This tax-break plan closes this year 2012. So in case you want a tax break, then better not waste time.Education tax cutsFiling challenge: the American government though has been lenient with educational grants; however some important scholarships scheme as tax-cut loans. Sorting these educational tax cuts is difficult. Some of the variety of schemes is the lifetime learning credit taxable over $2,000 per return, the American opportunity credit tax-free till $2,500 per undergraduate student, the tuition and fees deduction $4,000 max for a single student per family. However, you can only file one application for the education tax cut per year.Get help to solve your tax doubtsAccording to Justine Ransome, a national tax officer at Grant Thornton the American opportunity credit is the biggest money saver scheme. Taxes are sorted as per income brackets/slabs; but American Opportunity Credit provides the highest tax-cut, $180,000 for married couples and half the amount for singles.How to plan: Bad luck the American opportunity credit expires this year but well you will have various simpler choices the following year.Health care write-offsFiling challenge: health care costs will be deductible at higher rates. This means that you can file for only those that surpass 7.5% of your Adjusted Gross Income. But it seems likely that increasing medical costs can wrap the matter neat and tidy. Allison Shipley, PricewaterhouseCoopers’ principal of personal financial services opines that if a person’s income is drastically reduced and the medical expenses increase on the other hand, then the individual can produce all medical expense bills and enjoy tax-cuts.It’s saving time:Heres what the tax-cut expenses include: general physician and dentist’s bills, doctor's prescription, medications, specs, hearing kits, wheel-chairs, patient’s transportation, consultation fees, caregiver charges, and a few insurance costs.

Strategies for Funding and Managing your 401(k)

Sanjiv Gupta CPA - 7 years ago
he 401(k) fund is undergoing a few changes that are bound to affect almost everyone in its coverage. As such, if you are planning to fund your retirement using the 401(k) accounts, it is about time that you took a keen interest in the changes that are in the offing. Of course,  the largest change is going to be in the amount that you will be required to contribute towards your retirement. The government is in the process of setting up a thrifts savings plan that will increase this value from $500—from $17,000 to $17,500. These changes are expect6ed to be in effect as of the 31st of December this year. This is a good thing for most people as it means the amount of money that will be available to you upon retirement will increase. To take advantage of these changes it is important that you perform an audit to determine that you pay as much as you can legally. In addition, some significant changes that have been added include changes in the disclosure provisions. From the start of the coming year, the first that 401(k) participants will be eligible to receive quarterly and annual statements listing fees, which are to be charged to the account.So what are some of the strategies that you can put in place in order to ensure that you maximize the 401(k) strategy? To start with, you should be keen on the amount that you pay in fees. The percentage that you pay in order to manage your account may at the end of the day be more than you can actually handle if care is not taken. If it is possible for you to minimize the amount that you pay in fees, then the better for you. You can minimize these fees by investing in low-cost index funds or by managing the fund yourself. It is also important that you keep yourself from trying to tap into your retirement funds at an early age. The temptation is often great especially if you are going through some tough economic times. However, keeping yourself aware of the danger you pose through such an action goes a long way in keeping you level headed.

Four Commonly Missed Tax Breaks

Sanjiv Gupta CPA - 7 years ago
Once the tax returns are filed, people generally want to forget income taxes for a while. This is not the right approach. The time just after filing the returns is the apt time to think over and reflect on the process, what could have saved tax and what to do better next year to reduce tax payments in a big way. This is the time when the rules and policies are fresh in the minds so as to proceed with the tax-saving benefits analysis. Here are some of the benefits, which people usually miss to consider while filing returns.Roth IRA – The retirement benefits of IRA can be considered as a good option to invest money in, thereby reducing the taxable income portion for the current year. However one tends to forget that future withdrawals from the 401K plan attract at least minimum tax rates. This is the reason why most of the younger generation today opts for the Roth IRA schemes.The youth, at the start of their careers, are eligible for a lower tax bracket and they contribute to the Roth IRA schemes from after-tax money. The best benefit of this scheme is that in the future, when these people become old and tend to withdraw money, both the contribution and the earnings of this scheme that can be withdrawn is totally tax-free.Flexible Spending accounts – These accounts are the only way out to save taxes on expenses related to medical, child care and other personal reasons.  Most of the companies offer their employees, a part of their salary in the form of these FSAs. The traditional IRS rule does not allow any deductions for medical expenses if these expenses do not exceed 7.5% of the adjusted gross income. Hence this scheme is taken by people who do not have huge medical expenses and yet need deductions that can be offset by other deductions that are not allowed like property tax and state income tax.Proper Asset Location – Classifying assets is more important than holding the assets themselves. It is important to classify the assets correctly into the taxable, tax-deferred and tax-free pockets of one’s portfolio. It is a smart move to place the bonds in the tax-deferred category as even if one gets to sell these instruments, the tax need not be paid immediately. It is also wise to keep stocks in the taxable category because this is sold rarely and tax needs to be paid only upon sales.Performing a Roth conversion in a Low-income year – When income levels drop, there is an option to convert the benefits from the IRA model to the Roth model for a nominal charge. This converts the income from the taxable category to the tax-free category. Partial conversion of benefits into the Roth model is also possible.These are the schemes that are part of the daily lifestyle of the taxpayers. However one needs just to twitch in here and there to maximize these for one’s benefits.

Self Directed IRA – Caution

Sanjiv Gupta CPA - 6 years ago
Self-directed IRA schemes have a great chance of being involved in a prohibited transaction and hence the owner of these retirement benefits face the potential danger of their IRA account being disqualified. This was discussed and decided in the Peek V. Comr. Case. The details of this case are explained below.A fire safety business was considered a potential investment opportunity by two taxpayers. A broker, who was facilitating the sale, connected these taxpayers to a third party agent who managed the process further. This agent explained a technique to the taxpayers which involved them to set up a self-directed IRA, move funds from their existing IRA schemes to the self-directed schemes, set up a company, sell shares of the company and direct the funds into the self-directed IRA scheme and finally use these funds to buy a business interest.The paperwork for this scheme suggested that any prohibited transaction undertaken would prove harmful for the whole objective of this strategy. The paperwork was also accompanied by a letter from the firm’s accountant explaining the prohibited transaction rules clearly, though no personal guaranties were specified.The scheme went as per plan and the transferred funds were used to purchase the assets of the fire safety business. This transaction included a promissory note from the company to the sellers for one-fifth of the total sales price. A couple of years later, the taxpayers moved to Roth IRAs from their original IRAs and hence when the company was finally sold, the payments were finally transferred to Roth IRAs.The taxpayers’ income was fully adjusted to include the capital gains acquired from company stock sales by the IRS and the justification provided by them was that personal guaranties were equivalent to prohibited transactions. The assets from the IRA were deemed to have been distributed to these guaranties. The IRS reasoned that section 4975©(1) (B) disallows taxpayers from creating loans or loan guaranties indirectly to their IRAs. The Roth IRAs discontinue its existence if it is funded by company-owned stock.The taxpayers had to suffer an additional burden of 20% in penalties for not declaring the sales of the company. Their tax advisers could not be trusted upon, because they were the promoter of this sales strategy. The advisers were not given full information either because they were not transparent with the advisors and did not inform them about their decision to personally guarantee their loans.This is a good example for investors to understand the prohibition rules clearly and what transactions to proceed with and what transactions to avoid. It becomes doubly complicated when dealing with investment in retirement funds as the rules pertaining to the IRA accounts are more comprehensive than the other funds. This case also explains the need to be fully transparent with the tax advisers as they are the ones who represent a particular tax strategy and no transaction should be carried out without their knowledge.
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