Categories for Blog
February 19, 2014 1:45 pm
Published by dylan
There's been a lot of talk about raising minimum wage levels in this country. In fact, there are efforts to raise the minimum wage going on in 34 states. Supporters of a higher minimum wage say the issue is that no one can live on minimum wages anywhere. Boosting it, they say, will give the economy some extra juice.
We’re all for giving the economy more juice. The recovery that started in 2009 has been among the weakest on record. Housing activity is still depressed compared with pre-crash levels. More than half of all residential construction jobs disappeared during the crash and only five percent of them have been recovered. News reports say there's a recovery in manufacturing, but it's hard to see. Employment in auto manufacturing is still 38% below the June 2000 level.
The unemployment rate fell to 6.7% in December and held at that level in January. But no one is cheering. One reason the rate is falling is that workers are leaving the work force.
So, yes, there's a problem. Yet, when I listen to all the talk about raising the minimum wage or instituting what some call a living wage -- enough for a family of four to get by on, I find myself thinking about what I hear from many clients who are small business owners. If the minimum wage goes up, they say, they'll be forced to cut jobs or reduce hours.
Small business owners are always thinking about labor costs. I often talk to owners of fast-food restaurants; some 88% of McDonald's restaurants are owned by franchisees. Fast-food operators are ahead of the talk about rising minimum wage rates. They're already looking for ways they can automate their processes. What does it mean? Fewer jobs, fewer hours, reduced or no benefits.
I can't blame them. Business people are in business to make money. If you squeeze profits, something will give. This is especially true for publicly held companies, where a stock can be crushed if results miss Wall Street estimates.
Check out this Bloomberg graphic to see how minimum wage levels vary from state to state:
So, if minimum wages are raised, there will be short-term benefits: more spending, more fuel for the economy. That's good. But proprietors find ways to cut costs. In the long run, then, nothing will change. I admit it's a vicious circle.
The fact is our economy has undergone profound changes in the last, say, 20 or 30 years. Manufacturing is a shadow of its old self. Whole industries are shrinking fast, like newspapers, even banking. Uncertainty rules, especially for those without a job or facing a job loss and, ultimately, seeing their incomes cut substantially. Income inequality is rising.
I don't think simply raising the minimum wage will solve these issues. The government can't create long-lasting income gains, and it shouldn't be in the job-creation business. I understand the need for safety nets. In times of major economic stress, they're very important. A stronger recovery will help mitigate some of the issues. Most importantly, I believe new opportunities will emerge when people are willing to take the time to get more education and improve their job skills. This can help an employer grow his business faster, boosting profits, and subsequently boosting benefits and wages for all.
January 15, 2014 11:00 am
Published by dylan
Uniquely successful people succeed because of the structures that govern how they think, how they work, how they play, how they interact with family, friends and colleagues. Here are five traits we see regularly. I hope you can use some of these concepts to get more out of your lives and achieve a more successful 2014.
Uniquely successful people never start the day after 9 a.m. They start much earlier. They get to work early because they want alone time -- time without interruptions of meetings, phone calls, email or staff wanting answers. They use their alone time to think about the challenges of the day or to contemplate plans for the future. Alone time is good for you.
Uniquely successful people never see problems; they see opportunities. Problems are challenges, to be sure. However, successful people see them as great tools to expand their success. A problem within a group at a company could be resolved with better communication. Or a business problem properly debated could lead to higher order thinking. Often times it can mean the idea doesn't work, but a tweak can turn it into a far better result.
Uniquely successful people never go it alone. They assemble experts and trusted advisors to share ideas, pare problems to the essentials and delegate instructions that will equally save time and solve challenges. Uniquely successful people -- and this is important -- are never defensive. They thrive on constructive criticism; it leads to better decisions. Richard Branson, the great English entrepreneur, has said he's succeeded because of the spirited give-and-take between himself and his team.
Uniquely successful people never do anything without a written plan. A plan can be as all-encompassing as the steps it will take to become CEO of a large company or as basic as tackling a home improvement project. Plans should be written with as many specifics as possible, including potential obstacles, solutions to consider and necessary action steps. The writing forces you to first articulate a goal and then the steps needed to achieve the goal. The most successful people take the plan a step further. They use their written plans to review and measure their progress and stay focused on the most important task. Furthermore, they understand the consequences of failing and the rewards of achievement.
Uniquely successful people never forget their loved ones. Balancing the passion in business with the loved ones in our lives is no easy task. Time with family opens yourself to new ideas. Last week I had a phone call with a client who took a small skiing trip over the holidays. He was excited to share his stories with me of getting the little ones into skiing gear, watching them have fun on the slopes, cooking meals together, the laughter and the stories. But what he appreciated most was the opportunity to see how his life fits in with the bigger picture. Not a bad thing.
December 19, 2013 5:45 pm
Published by dylan
Decisions you make between now and Dec. 31 will directly affect what you pay on your income taxes on April 15. Here are six ideas to trim your taxes.
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Make those charitable deductions by Dec. 31. To the United Way, to your college, your child's college or school, the local Humane Society, your church or synagogue, the local non-profit theatre company. Basically, any group that qualifies as a 501 (c)(3) organization. You can contribute cash. You can also contribute stock, mutual funds or other securities that you've held for more than a year.
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Fund your retirement plan and, if you're a business owner, overfund your company's pension plans. If you have a 401(k) plan, try to max out your contributions. That reduces adjusted gross income. The 2013 limit is $17,500. If you're 50 or older, you can add an additional $5,000. A business owner should look at making contributions to Keogh, SEP-IRAs, IRAs and the like. (For more, check this Internal Revenue Service release. Yes, sometimes the government IS here to help.)
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Defer income. Got a big bonus coming? Tell your company to defer the payment until next year so it's not 2013 income. If you're self-employed, send out invoices on Jan. 1. Have a big stock gain? Don't sell and defer the gain until next year.
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Pay next month's mortgage and 2014 property taxes now. Mortgage interest is deductible. Make your January payment on Dec. 31, and that month's interest is deductible. Pay your property taxes for 2014 on Dec. 31.
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Buy that new equipment. Are you expecting to add a new machine to your factory, put a new printer or buy a new dental or medical equipment? Buy it before Dec. 31, and you may be able to take advantage of the bonus depreciation and section 179 deductions available in 2013.
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Don't forget the AMT. This alternative -- and dreaded -- method of computing an income-tax bill is supposed to ensure everyone pays some tax. In New York, Connecticut and other high-tax states, too many deductions can trigger the AMT. Go through your income and expenses to see if these could trigger the AMT. You may want to push some deductions into 2014.
One last tip. Start thinking about your 2014 tax bill. Your income tax return for 2013 offers a guide to what your 2014 taxes may look like. Planning now can keep your taxes under control. Here's what we mean. If you need surgery and expect big-out-pocket expenses, maybe wait until next year. You can only deduct the expenses that exceed 10 percent of adjusted gross income.
On behalf of our team we wish you health and happiness this holiday season!
October 3, 2013 1:00 pm
Published by dylan
The United States Government last shutdown was for 26 days between 1995 and 1996. According to The CBO (Congressional Budget Office) this shutdown shaved about .50 percent of quarterly growth from the U.S. Economy. With a partial shutdown now in place, below are some of the concerns investors need to be aware of when it comes to their portfolio:
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If the shutdown persists for upwards of one month, we could see economic growth decline by as much as 1.5%, some $55-$60 billion. Investors need to be aware of the potential talk of recession fears if the shutdown continues. Markets are skittish so volatility may pick up.
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Federal Reserve Tapering is becoming political: the threat of the Government shutdown made Fed officials reconsider the reduction of tapering; the economy is still considered “luke-warm” especially as it relates to jobs.
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Nearly 1 million government employees on furlough directly effects spending in the private sector as well – jobs are the mother’s milk of the economy. Government based contracts could be put on hold ultimately affecting some corporate earnings.
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Beware of False Accusations: The Shutdown and Debt Ceiling issues are converging together: The government’s $16.7 trillion spending cap is set to reach its limit October 17th. No doubt, raising the debt ceiling so the Congress may continue to spend more with a “broken credit card” is not a long-term solution and could have negative implications. To force a compromise, government officials will threaten to stop Social Security checks being sent to retirees. The President has and will likely utilize executive branch power to raise the debt ceiling so that the US will not default on its obligations if necessary.
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Interest rates are likely to remain low for longer than we think. The talk of tapering only affects the “degree” of how much the Congress is spending on their credit card. If interest rates rise the cost to borrow as well as maintain credit balances rises. For every 1% interest rate increase it may cost $160 billion or more in additional interest charges to the federal budget. The Fed and Treasury are keenly aware of this.
There are many concerns we see in the current political landscape and the dysfunction in D.C, if the shutdown takes on a new level of wrangling. However, we also see many opportunities as we sit back observe and watch “elephants collide.”
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We could be in a corrective phase which we would add to equities – energy , biotech sectors.
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We are adding to municipal bonds (where appropriate), as rates have crossed the 5% tax free(9% equivalent at the top tax bracket).
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Auto Recovery: at General Motors, 9 of 17 plants operate at full capacity, more than any at any other time in history.
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Companies that can, will deploy capital and generate risk adjusted returns, ie: VISA/MC
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Consumer companies which benefit from demographics and events look attractive, ie NIKE – summer Olympics and World Cup Soccer.
April 8, 2013 10:18 am
Published by dylan
For more than a decade, estate planning has harkened back to the “wild, wild west,” a time when even the best hired guns didn’t know what would happen next. Now, finally, there’s more certainty, thanks to the estate tax provisions in the American Taxpayer Relief Act (ATRA). The new law, signed as the country teetered on the brink of the “fiscal cliff,” extends several favorable tax breaks, with a few modifications.
Before we explore ATRA’s main provisions, let’s recap the events dating back to 2001, the year the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was enacted. Among the changes, EGTRRA gradually increased the federal estate tax exemption from $1 million to $3.5 million in 2009 while decreasing the top estate tax rate from 55% to 45%. It also severed the unified estate and gift tax systems, creating a lifetime gift exemption of $1 million unrelated to the estate tax exemption. Then the law repealed the estate tax completely, but just for 2010. After that year, the estate tax provisions were scheduled to “sunset,” restoring more onerous rules that had been in effect before EGTRRA, unless new legislation dictated otherwise.
The Tax Relief Act of 2010 generally postponed the sunset for two years. It hiked the estate tax exemption to $5 million (indexed for inflation), lowered the top estate tax rate to 35%, and reunified the estate and gift tax systems. That law also allowed “portability” of exemptions between spouses.
Now, at long last, ATRA brings permanent clarity. Here are the key estate changes:
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The estate tax exemption remains at $5 million with inflation indexing. For 2013, the exemption is $5.25 million. Also, portability of exemptions between spouses is made permanent, so a married couple can effectively pass up to $10.5 million tax-free to their children or other non-spouse beneficiaries, even if the exemption of the first spouse to die isn’t exhausted.
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The top estate tax rate is bumped up to 40%. Not as low as the 35% rate in 2011 and 2012, but still better than the 55% rate slated for 2013 prior to ATRA.
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The estate and gift tax systems remain reunified. This means that the lifetime gift tax exemption is equal to the estate tax exemption of $5.25 million in 2013. (That’s now the maximum exemption for combined taxable lifetime gifts and estate bequests.) Other provisions, including the generation-skipping tax that applies to most bequests and gifts to grandchildren, are coordinated within the system.
As a result of these changes, now is a good time to examine wills, trusts, and other aspects of your estate plan. Depending on your situation, revisions may be required or you might create a new trust to take advantage of the current estate tax law.
April 1, 2013 9:44 am
Published by dylan
The odds that you’ll suffer a disabling injury or illness are far greater than the likelihood of you dying prematurely. A disability income (DI) insurance policy, used to supplement life insurance coverage, could help protect you from loss of income if you’re unable to work. Indeed, a DI insurance policy might provide even more benefits than you expect.
Typically, a private DI insurance policy can pick up some of the slack if you’re disabled for an extended time. Should you no longer be able to work, you will begin receiving a monthly disability benefit. Normally, the benefit is a predetermined amount, unlike employer-provided coverage, in which the benefit equals a percentage of compensation.
As with life insurance, DI terms can vary widely from policy to policy. Some key variables include the amount of the benefits you’ll receive; the length of the coverage; the requirements for receiving full benefits; the definition of “disability”; the length of the waiting period before benefits begin; any cost-of-living adjustments; availability of partial benefits; and possible non-cancellation features. Naturally, the cost of the premiums also will vary, depending mainly on those variables.
But don’t assume that you must be bedridden to collect any benefits. Frequently, a DI insurance policy will provide “residual benefits” in the event you can work some of the time or if you’re slowly getting back on your feet. Some policies even offer benefits after you’ve returned to work if you are earning less than you did before your disability.
The residual benefits generally kick in when the loss of income is greater than 20% of previous earnings and the decline is due to the medical condition underlying the disability. This feature could be especially valuable to small business owners, including self-employed entrepreneurs, and professionals in fee-based practices, such as physicians, attorneys, and accountants.
For example, suppose a surgeon recovering from a severe illness returned to practice but was able to see fewer patients. If the surgeon’s income was reduced from $50,000 a month to $30,000, the residual benefit could restore income to 80% of the pre-disability level—in this case, $40,000 a month. Similarly, if the side effects of chemotherapy make it too hard for a litigator to appear in court or for a CPA to handle a company’s books, the residual benefits can soften the economic blow.
To see what your coverage may or may not include, take a close look at existing DI policies or any new policy you’re considering and have your insurance agent explain the residual benefits section. The policy might be more valuable than you imagined or the residual benefits may be too restrictive. Those provisions could be a key component of your DI insurance coverage.
March 29, 2013 11:14 am
Published by dylan
There’s good news in the mail: Johnnie or Susie just got accepted into a top college. Naturally, you’re proud of your child. But now comes the hard part—figuring out how to pay for four years of education at an elite school.
Tuition costs at private institutions, in particular, can seem staggering. Still, there are ways to send your son or daughter to a great college without bankrupting your financial future. Start with these five steps:
1. Compare and contrast financial aid offers.
There’s no standard format for the wording of award offers, so carefully review the information in each one your child receives. Typically, the offers will list financial aid from several sources, including school scholarships, work-study programs, and federal loans, and also will note your “expected family contribution,” calculated from the information you provide on the Free Application for Federal Student Aid (FAFSA). But some schools provide more information than others, so try to compare apples to apples.
2. Do the math.
Once you determine how much aid each school will provide, figure out your how much you will have to provide. Incorporate the amounts you expect your child will be able to cover—perhaps for such things as books, meals, and entertainment—into your calculations. That will give you a better handle on what you’re really facing.
3. Expand the hunt for financial aid.
Don’t give up just because your child isn’t a star athlete or a computer genius. You can find scholarships to fit a wide range of niches and groups on websites such as Fastweb.com, SchoolSoup.com, and SallieMae.com. In addition, students may qualify for state aid. Also, many corporations offer scholarships to children of employees. And remember to reach out to civic, religious, and ethnic groups within your community.
4. Consider a payment plan.
Frequently, colleges provide tuition payment plans that charge little or no interest. You may have to pay just a small up-front fee. Contact the school for the necessary arrangements.
5. Explore loan options.
If your family must borrow money, start with federal loans, which typically have the lowest interest rates. Currently, a subsidized federal Stafford Loan offers a fixed interest rate of 3.4%, while the federal PLUS loan features a 7.9% rate and Perkins loans have a fixed interest rate of 5%. Apply for these when you fill out the FAFSA. As a last resort, you might turn to private loans, but be aware that the interest rates on those tend to be higher.
This is just a quick lesson on navigating the financial aid waters. The schools your son or daughter is considering also may be able to provide ideas for reducing the financial burden on your family.
March 13, 2013 10:17 am
Published by dylan
Estate planning is especially complex in 2012. Due to a series of tax law changes—most recently under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Relief Act”)—wealthy families can benefit from generous estate tax exemptions, a lower estate tax rate, reunification of the estate and gift tax systems, portability of estate tax exemptions, a return to “step-up in basis” rules, and other changes. But it may be all for naught.
Why is that? The latest set of estate and gift tax provisions are scheduled to “sunset” after 2012. Barring any new legislation, the estate and gift tax law generally will revert to the way it was prior to the passage of a 2001 law that phased in today’s favorable rules.
Of course, Congress still could act late this year, or even impose retroactive provisions next year, but there are no guarantees, and without further action, the family of someone who dies in 2013 will face much stiffer estate planning challenges than if the death had occurred the previous year.
How well do you understand the current state of affairs? Here’s a brief quiz to test your knowledge.
1. The maximum estate tax exemption for someone who dies in 2012 is:
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$1 million.
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$3.5 million.
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$5 million.
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$5.12 million.
2. The maximum estate tax rate in 2012 is:
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25%.
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35%.
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45%.
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55%.
3. The portability provision for estates allows for the:
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Transfer of an unused exemption between spouses.
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Transfer of an unused exemption to a child.
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Carryover of the exemption to the following year.
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Extension of the exemption to gift tax.
4. The generation-skipping tax generally applies to any:
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Transfer from a grandparent to a grandchild.
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Transfer from an estate to a trust.
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Transfer from a parent to a child.
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Transfer to a younger individual.
5. The lifetime gift exemption in 2012 is:
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The same as the estate tax exemption.
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Half of the estate tax exemption.
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Equal to the gift tax exclusion.
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Repealed.
6. Barring new legislation, which of the following will occur in 2013?
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The estate tax will be repealed.
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The top estate tax rate will be 55%.
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The estate tax exemption will be $500,000.
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The generation-skipping tax will expire.
7. Barring new legislation, which of the following will NOT occur in 2013?
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The portability provision will be repealed.
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The generation-skipping tax exemption will be reduced.
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The lifetime gift tax exemption will be reduced.
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The carryover basis rules will be reinstated.
Answers: 1-d; 2-b; 3-a; 4-a; 5-a; 6-b; 7-d
March 12, 2013 12:21 pm
Published by dylan
Now that another year is under way, you might make a “New Year’s Resolution” to put your financial house in order—and a great place to start is to resolve to pay down the debt on your personal balance sheet. If you owe money to multiple lenders, you may find it advantageous to consolidate those obligations with a single creditor.
What are the benefits of debt consolidation? Here are several to consider.
1. No muss, no fuss.
You can make just one monthly payment instead of having to sort through an avalanche of statements and write checks or make electronic payments to many credit card companies or other lenders. Simplicity and convenience are often cited as the main reasons for consolidating.
2. Better recordkeeping.
It’s easier to track payments to one creditor than to collect information from several sources. You’ll get a better handle on how your debt is affecting your cash flow.
3. Less stress.
Trying to figure out what you have to pay, and how to fit it into the family budget, can turn into a nightmare. And consolidation will save you from being harassed by collection agencies.
4. Lower interest rate.
Debt consolidation makes the most sense when it saves you money. Try to arrange terms so that your new interest rate is lower than the average rate for all of your old loans.
5. Longer repayment schedule.
If the new loan lets you stretch out payments longer than the terms of lots of small debts, it may be easier to balance your family’s budget.
6. Improved credit history.
Having bad credit can hinder your ability to borrow or to qualify for preferred terms on new loans. Consolidating debts and attacking the outstanding balance will generally help your credit score.
7. Get a plan.
If you work through a debt consolidation company, it will help you address your situation in an organized fashion, paying off old debts while getting a reasonable interest rate and repayment schedule for the consolidated loan. Or you could develop such a plan on your own.
8. Avoid late fees.
Typically, fees for late payments will be reduced or waived if you can show that you have a reasonable plan for consolidating and paying down your debt.
9. Set yourself free.
Finally, debt consolidation provides an opportunity to get out from down under the obligations of multiple loans. Then, if your financial situation improves, you can pick up the pace of repayment to lift your debt burden as soon as you can.
Debt consolidation isn’t a cure-all; it won’t solve all your financial problems. But it can start you on a better path.
March 12, 2013 9:58 am
Published by dylan
Are you planning to donate real estate to charity? The tax law allows you to claim deductions, within generous limits, for giving property to qualified charitable organizations. But you have to meet strict requirements, including the necessity to obtain an independent appraisal for property valued at more than $5,000.
In fact, in a new case, a taxpayer who donated real estate worth approximately $18 million failed to provide the required appraisal, and after an audit, the IRS challenged his charitable deductions. The Tax Court’s verdict? His deduction was zero!
The basic rules for deducting gifts of property say you can’t use those donations to write off more than 30% of your adjusted gross income (AGI). Overall, your charitable deductions can’t exceed 50% of your AGI for the year. But if you exceed those levels, you can deduct the rest in future tax years.
If you donate property that has gained value, the deductible amount is equal to the fair market value (FMV) of the property at the time of the donation, as long as you’ve owned it for more than one year. For shorter-term gifts of property, the deduction is limited to your “basis” (usually, what you paid for it).
However, the IRS requires you to jump through a few hoops before you can pocket any tax deductions. When you file your tax return, you must include a detailed description and other information for property valued at more than $500. Also, if you claim the FMV is more than $5,000, you must obtain a written appraisal of its worth.
In the case of the above disallowed deduction, Mr. Mohamed was a prominent entrepreneur, real estate broker, and certified real estate appraiser. He donated several parcels of property to a charitable remainder trust during a two-year period. When he completed his tax returns for those two years, he attached Form 8283 (Noncash Charitable Contributions). Based on his own appraisals, the total FMV of the properties exceeded $14 million (although his initial deduction was “only” $3.8 million due to the AGI limits).
But Mohamed didn’t read the form’s instructions explaining that self-appraisals aren’t permitted. He also omitted important information such as the basis of the properties. The IRS challenged the deductions. When Mohamed appealed to the Tax Court, the IRS disallowed the entire deduction, despite subsequent independent appraisals establishing the total FMV at more than $18 million. In the end, the Tax Court agreed with the IRS, although it acknowledged the result was harsh.
The moral of this story is that if you donate appreciated property, you need to make sure you observe the strict letter of the law.
March 11, 2013 8:18 am
Published by dylan
Planning your retirement involves far more than determining how much income you’ll need. One of the most basic and important decisions is where you want to live during your retirement years.
Choosing a location is something you can start working on early, as much as five to 10 years before you leave work. Don’t wait until retirement is just around the corner, because the process of comparing and contrasting different regions can be time-consuming and eye-opening.
The first step is to decide whether you want to remain where you are or move to a new place. It’s a very personal starting point, and often it will take into account proximity to family members and attachment to your community.
For those who decide to move on, here are some steps to make sure you end up in a happy place:
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Discuss your desires. Do you dream about lying on a beach with the latest bestseller, or reeling in giant marlin from deep water? Do you envision attending symphonies and plays, or riding horses and hiking up mountains? Will you play golf or visit museums and the library? Do you want lots of sunshine or four seasons? Small town or big city? Lots of restaurants or lots of bait shops? Start by writing down a clear picture of your life in retirement.
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Do your homework. Start matching real places with your dream retirement activities and environment. Look into weather, demographics, health care costs and health care availability for hospitals and medical specialties, crime statistics, and other factors using popular “Best Places To Retire” guides. Generate a list of three or four places that look like good matches.
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Dip your toe in. Schedule a trip to each area, and make it a long vacation if possible, up to several weeks. Try to visit each area at different times (e.g., when weather isn’t ideal) and experience as many things as you can while there. Are the people friendly? Do any unexpected difficulties pop up? Does it match your vision?
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Consider longer visits. If your short-term visits leave you uncertain, consider renting your current home out while you spend even more time in your potential locations. Take several months to get a real feel for the area and make your decision. After all, you hope to live there for a long time to come!
Once you decide on a location, it’s time to look at some financial factors, starting with the sale of your current home. Ask several realtors for an estimate, and compare what you’re likely to clear from the sale with what you’ll need in your new area. We can help you do these calculations, and we’ll add any expected surplus into your income calculations, and take into account tax and other implications.
Relocating can be one of the most stressful aspects of retirement. Work with a financial advisor who understands all the state and estate tax implications and how moving affects your financial outlook and quality of life.
March 10, 2013 9:26 am
Published by dylan
There are two basic types of IRAs for retirement savers: the traditional IRA that has been around for decades and the Roth IRA, a more recent innovation. Each has pros and cons, so the choice often depends on your circumstances. To help you decide, here’s a brief comparison.
First, be aware that both IRAs share some common traits. The contribution limit for 2013 for all IRAs (of either type) is $5,500 (up from $5,000 in 2012). If you’re age 50 or older, you can kick in an extra $1,000. There’s no current tax on earnings from contributions within either IRA. And the deadline for contributions is the tax return due date for the year of the contribution, with no extensions permitted.
Now let’s examine the key differences.
1. Traditional IRAs.
If your modified adjusted gross income (MAGI) exceeds a specified annual level and you actively participate in an employer retirement plan, the deductibility of your contributions will be phased out. The phaseout for 2013 occurs for a MAGI between $59,000 and $69,000 for single filers, and between $95,000 and $115,000 for joint filers. If your spouse participates in an employer plan but you don’t, the phase-out range is between $178,000 and $188,000 of MAGI. Thus, many high-income individuals can’t deduct any part of their contributions.
When you take distributions during retirement, you’re taxed at ordinary income rates on the portion representing deductible contributions and earnings. Furthermore, if you’re under age 59½ when you take a distribution, you must pay a 10% tax penalty (unless one of several exceptions applies).
2. Roth IRAs.
Unlike with a traditional IRA, contributions to a Roth are never deductible, regardless of your MAGI. In addition, the ability to make full contributions to a Roth is phased out for 2013 for a MAGI between $122,000 and $127,000 for single filers, and between $178,000 and $188,000 for joint filers.
However, qualified distributions from a Roth in existence for at least five years are 100% tax-free. This includes distributions made (1) after age 59½, (2) due to death or disability, or (3) used to pay qualified first-time homebuyer expenses (lifetime limit of $10,000). Other distributions are taxed at ordinary income rates under “ordering rules,” which treat contributions as coming out first, then conversion and rollover amounts, and finally earnings. So a portion or all of a payout still may be tax-free.
Due to the back-end benefits, you might convert funds in a traditional IRA to a Roth, paying tax in the year of conversion. If it suits your purposes, you can “undo” the conversion by the tax return due date (including any extension).
Which type of IRA is best for you? Figure it out by factoring in all the variables. We can help you crunch the numbers.
