The Roth IRA is possibly one of the best savings vehicles Congress has given to the American taxpayer. You get to save after-tax dollars, allow them to grow tax-free and take distribution in retirement tax-free.
In 2010 Congress allowed owners of traditional IRA's to make a full or partial conversion to a Roth IRA. Yes, the tax is still due on the money held in your Traditional IRA but once the tax has been paid and the money transferred into the Roth, you are done.
Roth IRA's have many benefits. Today we will address the reasons for converting a Traditional IRA to a Roth. Next week we will cover the reasons when and why you might not/should not convert to a Roth. Note that most reasons are not hard and fast rules. As conditions change, e.g. tax bracket, employment, etc. your decision needs to be reviewed, maybe annually.
Benefits of converting are numerous:
- retirement assets taxable on distribution now move into an account that will grow free of taxes and be distributed free of taxes as well.
- Roth IRA's have no required minimum distribution at age 70 1/2. You may hold a Roth as long as you like and take distributions whenever you like (once you are over 59 1/2 and the account has been opened for 5 years.)
- Distributions, also know as income, pass through as non-events in the federal tax system so payouts do not count as increased income to raise your income tax bracket, Medicare premiums or impose the 3.8% tax on investment income.
- Roth IRA's prove beneficial during the in-between years of retirement before Social Security kicks in.
- Distributions provide necessary income boost without increasing taxes as in filing FAFSA for college aid.
- A Roth conversion helps you better control your tax strategy as once you have paid the tax you no longer worry about tax increases or changing tax policy. Your income/distributions will be tax free.
Be $ Smart - consider the benefits of converting all or part of your Traditional IRA to a Roth IRA. Be sure to consult your tax preparer before making the move.
Showing posts with label tax-free. Show all posts
Showing posts with label tax-free. Show all posts
Sunday, August 19, 2018
Saturday, July 9, 2016
Take Advantage of Your HSA
Health Savings Accounts are becoming more popular. They are usually part of a high deductible plan and are different from flex-spending.
They are triple-tax-advantaged where you pay no state or federal income tax on the money as it is deducted from your pay before taxes are calculated or
1. Contributions you make to a HSA are tax-deductible,
2. Contributions made by your employer are tax-free,
3. Interest accrued in the HSA is also tax-free,
and the accounts are “portable” meaning they stay with you even if you change jobs or leave the workforce.
Unlike flex-spending which must be used up annually (up to $500) or you lose it, HSA money can be carried forward indefinitely. This makes an HSA account another form of savings to use in retirement where healthcare can be a major expense.
Tax-free distributions from your HSA are made upon presenting receipts for qualifying health expenses like deductibles and co-pays. If you are able to cover these expenses out of pocket, you may hold on to the receipts and get a tax benefit in future years. Meantime, your money in the HSA grows tax-free.
Over time, If you are healthy and hardly draw from your HSA you could amass a sizable amount of money in your HSA to be used for future health expenses. There is no time limit on your receipts!
Be $ Smart - Save as much as you can in your HSA to take advantage of the triple tax exemptions. Use every tax break Uncle Sam offers. It leaves more money in your pocket!
They are triple-tax-advantaged where you pay no state or federal income tax on the money as it is deducted from your pay before taxes are calculated or
1. Contributions you make to a HSA are tax-deductible,
2. Contributions made by your employer are tax-free,
3. Interest accrued in the HSA is also tax-free,
and the accounts are “portable” meaning they stay with you even if you change jobs or leave the workforce.
Unlike flex-spending which must be used up annually (up to $500) or you lose it, HSA money can be carried forward indefinitely. This makes an HSA account another form of savings to use in retirement where healthcare can be a major expense.
Tax-free distributions from your HSA are made upon presenting receipts for qualifying health expenses like deductibles and co-pays. If you are able to cover these expenses out of pocket, you may hold on to the receipts and get a tax benefit in future years. Meantime, your money in the HSA grows tax-free.
Over time, If you are healthy and hardly draw from your HSA you could amass a sizable amount of money in your HSA to be used for future health expenses. There is no time limit on your receipts!
Be $ Smart - Save as much as you can in your HSA to take advantage of the triple tax exemptions. Use every tax break Uncle Sam offers. It leaves more money in your pocket!
Wednesday, June 4, 2014
Taxable - Tax-exempt - Tax-deferred - Tax-free
Clients often ask me to explain the differences among their various accounts. Taxes play an important role in how you invest and how much money you will be able to keep after paying taxes.
The following are simple explanations. For expert tax guidance please speak with your accountant or tax attorney.
Taxable: an account that holds money on which you have already paid taxes - e.g. bank checking or savings accounts or brokerage accounts. These accounts may have stocks, bonds, CD's, etc. Every year you receive a 1099 of all reportable earnings, dividends and interest. You enter these numbers on your tax return and pay taxes accordingly.
Tax-exempt: refers to bonds (loans) issued by municipalities (states, cities, towns, counties). These bonds are exempt from federal taxes. As an incentive to its residents to buy these bonds, which finance local projects, you pay no state taxes on the interest. As a NY resident, if you purchase a NY State bond, it will be double tax exempt as you will pay no state or federal taxes on the interest. However, NY reserves the right to tax the interest earned on other states' bonds.
Tax-deferred: means you pay no taxes now but when you withdraw the money both state and federal taxes are due. IRA, SEP, 401k, 403b all grow tax-deferred. Your 401k or 403b plan from work will take money from your paycheck before deducting taxes, deposit the money into your plan where it will grow tax-deferred (you will not receive a 1099 each year). Taxes will be paid when you start withdrawing money from these accounts later in retirement. The money will be taxed, as your income is taxed, both by the state and the federal government. Hopefully, in retirement you will be in a lower tax bracket and, consequently, pay less in taxes.
Tax-free: refers to a Roth IRA where money grows without paying taxes each year and is distributed without being taxed. Actually, the money contributed to most Roth IRA's is money on which you have already paid taxes; it is the earnings (growth) that are tax-free.
Be $ smart. Know your tax rate. Learn about the impact of taxes on your investments.
The following are simple explanations. For expert tax guidance please speak with your accountant or tax attorney.
Taxable: an account that holds money on which you have already paid taxes - e.g. bank checking or savings accounts or brokerage accounts. These accounts may have stocks, bonds, CD's, etc. Every year you receive a 1099 of all reportable earnings, dividends and interest. You enter these numbers on your tax return and pay taxes accordingly.
Tax-exempt: refers to bonds (loans) issued by municipalities (states, cities, towns, counties). These bonds are exempt from federal taxes. As an incentive to its residents to buy these bonds, which finance local projects, you pay no state taxes on the interest. As a NY resident, if you purchase a NY State bond, it will be double tax exempt as you will pay no state or federal taxes on the interest. However, NY reserves the right to tax the interest earned on other states' bonds.
Tax-deferred: means you pay no taxes now but when you withdraw the money both state and federal taxes are due. IRA, SEP, 401k, 403b all grow tax-deferred. Your 401k or 403b plan from work will take money from your paycheck before deducting taxes, deposit the money into your plan where it will grow tax-deferred (you will not receive a 1099 each year). Taxes will be paid when you start withdrawing money from these accounts later in retirement. The money will be taxed, as your income is taxed, both by the state and the federal government. Hopefully, in retirement you will be in a lower tax bracket and, consequently, pay less in taxes.
Tax-free: refers to a Roth IRA where money grows without paying taxes each year and is distributed without being taxed. Actually, the money contributed to most Roth IRA's is money on which you have already paid taxes; it is the earnings (growth) that are tax-free.
Be $ smart. Know your tax rate. Learn about the impact of taxes on your investments.
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