Posts Tagged ‘retirement accounts’

Year-End Business You Should Take Care of Now

Posted on: October 4th, 2010 by

Financial & Tax Planning - Rockville, MDYou might think that the beginning of October is a bit early to start worrying about taking care of year-end business.  But with these three must-dos, getting an early start doesn’t just let you cross a chore off your list, it can actually put some extra money in your pocket.

1. Make the most of your retirement accounts.
Retirement savers have a lot to keep in mind at year-end.  Although you don’t have to make current-year contributions to IRAs until next April 15, there’s a laundry list of other tasks you have to take care of before December ends:

  • Contributions to 401(k)s and other employer-sponsored retirement plans are due by Dec. 31.
  • If you’re required to take mandatory distributions from your retirement accounts, either because you’re age 70 1/2 or older or because you have an inherited IRA, then you must do so by the end of the year.
  • The opportunity to convert your traditional IRA to a Roth and take advantage of special 2010 rules that allow you to put off the tax impact until 2011 and 2012 goes away on Jan. 1.

These things are easy to forget about in the year-end rush.  There are big penalties for not taking required minimum distributions, but even more costly is the opportunity cost of not getting as much money as you can into your retirement accounts.

2. Taking tax losses.
If you’ve lost money on a stock, you can get a tax break by taking a capital loss on your tax return.  To do so, though, you must sell the stock by Dec. 31.  The reason you might want to do so early, though, is to get a jump on everyone else doing the same thing.  Another advantage is that if you want to take losses but still own the stock in the future, you have to wait 30 days after selling to buy it back.  If you sell now, you can buy back in November or December, just as latecomers are selling, hopefully pushing the price down to let you get in more cheaply.

3. Re-balance your portfolio.
If you haven’t done re-balancing in a while, you shouldn’t put it off any longer.  Whether it’s getting your stock/bond mix back to normal or adjusting your sector exposure, re-balancing makes sure you’re taking the right amount of risk.

For instance, say you have allocations to both financial stocks and real-estate investment trusts.  If you haven’t rebalanced, the value of your REITs is much higher than your financials, leaving you overly exposed if REITs reverse course and fall.  By re-balancing, you lock in some profits on your REITs while taking advantage of low prices to boost your financial exposure.  It’s not guaranteed to make you money, but over time, rebalancing has helped many people take advantage of the natural cycles within markets.

SO……. Do it today
Sure, you could wait on some of these things.  But why wait?  There is no time like the present.  By acting sooner than later, you can get a jump on your peers; and being first out of the gate may well mean more money in your pocket.

Divorce and Your Retirement Accounts

Posted on: July 8th, 2010 by

CPA Rockville - Financial PlanningDivorce is a major financial transaction; that being said, it can have major tax implications and some pitfalls you will want to try and avoid.  This is especially true when splitting up tax-favored retirement accounts between you and your soon-to-be ex-spouse.  You are going to have to plan ahead to make sure that the tax results work out favorably for you.  For example, if you have a qualified retirement plan at work or a self-employed business retirement program, you’ll probably have to divide up your retirement account(s) between you and your ex as part of the divorce property settlement.  However, if you do so carelessly, if can create a real tax fiasco for you.

To divide up qualified retirement plan accounts the tax savvy way, you need to establish domestic relations order, or QDRO.  The QDRO establishes your ex’s legal right to receive designated percentages of your retirement balance or designated benefit payments from your plan.  The good news is that the QDRO also ensures that your ex, and not you, will be responsible for the related income taxes when he or she receives payouts from the plan.  The QDRO arrangement also permits your ex-spouse to withdraw his or her share of the retirement plan money and roll it over tax-free into an IRA.  That way, your ex can take over the management of the money while postponing income taxes until withdrawals are taken from the rollover IRA.  If the money in your qualified retirement plan gets into your ex-spouse’s hands with out a QDRO being in place, however, you will be facing a potentially disastrous tax mess.  You will be treated as if you received a taxable payout from the plan and then voluntarily turned the money over to your ex.

You don’t need a QDRO, however, to divide up an IRA between you and your soon-to-be ex without dire tax consequences.  All you have to do is arrange for a tax-free rollover of money from your IRA into an IRA that you can set up in your ex’s name.  Then your ex can manage the rollover IRA and defer taxes until he or she begins taking money out of the account.  You still need to be careful though.  The tax-free rollover deal only applies when your divorce agreement requires the rollover.  If the money important that you never transfer IRA money to your ex in advance of a legal requirement in your divorce papers to do so or you could, again, get hit with all the taxes.

So the question remains, are you going to divide up your tax favored retirement account money in the smart way or the dumb way?  Unfortunately, many competent divorce attorneys know little or nothing about taxes, so you will need to find a legitimate tax professional who has handle lots of divorce-related tax issues.

Things to Remember About Estate Planning

Posted on: April 19th, 2010 by

Estate Planning - Rockville, MD“In this world nothing can be said to be certain, except death and taxes.”  – Benjamin Franklin

Benjamin Franklin makes a very astute point that the problem is death and taxes.  While facing your own mortality is not the most pleasant thing, it is something you must do and estate planning is very important, especially to those you leave behind.  The first thing you must do is prepare a will.  Dying without one is probably one of the messiest mistakes you can make – people argue, mud gets thrown, and all of it could have been easily avoided.  There are many things to consider in your will, including who will care for your children, what to do if you get put on life support, and ultimately, who will get what.  Resolving these issues now will prevent a lot of problems later.

Details, details, details… they are of the utmost importance in estate planning.  There are many obvious details, like funeral planning or finding a guardian for living dependents, but there are easily overlooked ones as well.  Make sure that you have appropriately (and are up to date on) assigned beneficiaries for your retirement accounts.  Also, you need to choose a reliable executor and set up a durable power of attorney to direct assets and investments.

Make sure that you have an adequate amount of life insurance.  If your estate doesn’t amount to enough to replace your income  in terms of supporting your family, then the death benefit from an insurance policy may be the answer.  You need to calculate how much yearly income you will need to replace to determine how much insurance you will need to carry.  Remember to reassess your calculations though as your financial situation changes.  As your situation changes, so should your policy.

Although many of these things can be done on your own, if your estate is complicated, you may want to consider consulting with an accountant, estate planner, or estate lawyer to resolve any possible tax issues now.

Be Wary of Who You Hire

Posted on: April 13th, 2010 by

Trust Your CPA - Rockville, MDThere are certain tax schemes that the IRS is really cracking down on now that you must be wary of.  Many people are filing extensions this year, meaning that their returns don’t have to actually be in until October 15, so taxes don’t just go away after the dreaded April 15 passes.  If you are one of those people filing extensions, then make sure you know these tidbits from the IRS.  Sketchy tax preparers are on the rise and will often advise you to take illegal deductions; make sure you hire a reputable and trusted CPA if you hire someone.  The IRS is also making a point of scrutinizing retirement accounts in search of taxpayers who enter transactions that allow them to exceed the contribution limit of the IRA.  Many of these transactions are put together by dubious financial advisers, so like accountants, you need make sure you only use reputable, certified financial planners.  Make sure you carefully look into who it is you are hiring and check on their certifications before entering into any business engagement with them.

The Importance of Tax Shelters

Posted on: April 2nd, 2010 by

Rockville CPA - IRSWith the economy in the state that it is in and Americans seeing a sea of red figures on their investment portfolios, we tend to put our tax management issues on the back burner and focus on the here and now.  That may seem like the best option, but any good CPA will tell you that tax shelters aren’t as important as they were before, they are more important.  The reasons are quite simple:

1) They are sheltered from creditors as well as taxes. Avoiding bankruptcy is always favorable, and having money in shelters will help strengthen your hand if you have to negotiate with lenders at any point.

2) Taxes are likely to rise. Rising taxes will make these shelters much more valuable.

3) Money in tax shelters like IRAs or 401(k)s doesn’t count against you in the federal formula when your children are applying for financial aid for college.  Parents are expected to contribute a certain percentage of their assets to their child’s education, but money in retirement accounts is ultimately invisible to the formula.

With these three things in mind, you should consider speaking to a financial planner about how to invest your income and protect what little you may have left even if you don’t have a lot of extra cash lying around.  Tax shelters will protect your money in the long run.

Cutting Retirement Expenses

Posted on: March 30th, 2010 by

Financial Planner - RetirementThe most current statistics have pointed that having saved $1 million is still not going to be enough for retirement in the years to come.  With that in mind, there are still more ways that we can save our hard earned dollars:

1)  Take required minimum distributions – Those ages 70 1/2 or older must take required minimum distributions from retirement accounts each year.  The withdrawal amount is calculated by dividing you individual retirement account and 401 (k) balances by your life expectancy, as determined by the IRS.  The penalty for failing to take out the correct amount is a 50% tax penalty, plus income tax on the amount that should have been withdrawn.

2) Spend your taxable accounts first – You don’t have to pay income tax on the money in your 401(k)s & IRAs until the money is withdrawn; Many other types of accounts with gains are taxed annually regardless.  You should talk to your financial planner about spending money outside your retirement accounts first and setting up a withdrawal plan to minimize your tax burden.

3) Delay signing up for social security – You can begin signing up for social security benefits at age 62, but that does not mean that you should.  Benefit checks are actually cut 20-30% for those who claim their checks before what the Social Security Administration deems the full retirement age.  Soon-to-be retirees (born between 1943-1954) must wait until age 66 to claim their full entitlement.  For those born after 1954, the age gradually increases, culminating at 67 for those born after 1960.

4) Travel smart –  While you are working, you are generally forced to make your travel plans over weekends and over holidays, but when you retire, you will have the luxury to travel during the week and during off peak times.  You should take advantage of this.

5) Find age related tax breaks – Some states exempt pension income from state income tax.  Other locales offer age-related property tax exemptions or deductions.  You should contact your local CPA to see if you qualify for any of these credits.