Posted on July 12, 2015May 31, 2016 by Jan Roberg

How To Allocate Your Savings

I recently wrote a post about saving money and why you need to have an emergency fund saved up before you start saving for retirement. (See: How Much of My Income Should I be Saving? (http://robergtaxsolutions.com/2015/06/how-much-of-my-income-should-i-be-saving/) Well, a friend of mine recently asked me what I thought should be the next step in saving and this is what I told him.

I’m not a financial planner or money guru of any kind. If you have access to a professional in that field I recommend you hire one because I think everybody could use a plan tailored to their needs. But if you don’t have access to a personal planner, this is my opinion of how I think you should prioritize your savings.

First: Have at least three months worth of expenses saved up in a regular bank account. I like to see 6 months to a year’s worth in the bank, but the three months is crucial before you start putting money anywhere else.

Second: If your employer matches your 401(k) contribution- then put your money there up to the match. An employer match is a 100% return on your investment. You can’t get that anywhere in the marketplace. If you find a bank account that pays one half of one percent interest that’s considered good these days. A 100% match? That’s totally awesome! Do not miss out on that opportunity.

Third: If you have money left to save after contributing up to the match, then I would put money into a Roth IRA if you qualify. Generally you need to earn less than $129,000 a year if you’re single and $191,000 a year if you’re married. The reason I like the Roth IRA over the 401(k) or traditional IRA is that you get to take the money out tax free in retirement. It’s also a good source of funds for college, housing, or other emergencies if you should need it. There is no tax benefit now for putting money into the Roth, all the benefit comes when you take the money out. I cannot overstate how valuable that “tax-free” part of the retirement equation is.

Fourth: My next choice for savings would be back to your employer sponsored 401(k). This gives you a tax reduction benefit now.

Fifth: College savings. People with new babies always ask me about college savings programs. They will have no money in their own savings or retirement but they want to open a 529 plan. So why is college savings so far down on the list? Here’s the main reason: you can get a loan to go to college. You cannot get a loan to retire. We’re talking about priorites: savings, Roth IRA, 401(k), then college. (Remember, a Roth IRA can be used for college if needed.)

Have you gotten this far and you still have money left to save? That’s great! That also implies that you’ve got enough money to hire a professional financial planner. There are cool things you can do with annuities, life insurance, and other investments that are way beyond the scope of anything I can tell you about. Find someone that you can really talk to.

What are your plans for the future? Where do you want to be when you retire? When will you retire? How will you get there? These are all things that need to be tailored just to you and can’t be answered in some blog post.

Posted on February 7, 2014May 31, 2016 by Jan Roberg

Roth IRA Facts

Roth IRA distributions are tax free (as long as you’ve met the requirements.) Earnings on your Roth are tax free. If you die, your heirs inherit the money tax free. I just love things that are tax free!

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I write about ROTH IRAs quite a bit, but someone recently asked me to explain ROTH IRAs so here we go:

A ROTH IRA is best defined by how it’s different from a regular (Traditional) IRA. Here are the differences:

You cannot deduct contributions to a ROTH IRA, so whatever money you invest into a Roth—you’re going to pay income tax on the year you invest it.
If you satisfy the requirements, your ROTH distributions are tax-free.
You can still make contributions to a Roth IRA even after you reach age 70 and ½.
You can leave your money in your Roth IRA as long as you live. (This is important for people who want to leave behind money for their heirs. It also means you don’t have any required minimum distributions (RMDs) like you have with Traditional IRAs. )
You must designate the IRA as a Roth when you set it up (the default IRA setting is for a Traditional IRA.)

So why am I so gung ho about Roth IRAs? I like things that are tax free. The distributions are tax-free, the earnings are tax-free, and if you die, they go to your heirs tax-free. That’s a lot of tax-free going on there.

Here’s another thing I really like about the Roth IRA—not only are the distributions tax-free, but the distributions don’t count towards your Adjusted Gross Income. I realize I’m going into Tax Geek Speak here, but hear me out, because this is important.

Let’s say you’ve got a kid in college. You haven’t saved enough money for tuition and you need $10,000 for the tuition payment. Now you can take that money out of your Traditional IRA and not pay a penalty (because you won’t pay the penalty for early withdrawals when you use it for tuition), but you’ll still have to pay the regular income tax on it. So if you’re in the 25% tax bracket, you’ll pay an additional $2500 in taxes to take that $10,000 out of your Traditional IRA.

Now, if you need the whole $10,000 then you’ll need to actually take $13,333 out and withhold $3,333 in order to have the $10,000 and still pay your taxes on it. Plus, the IRA money that you take out goes on your tax return as income. So if you’re applying for financial aid, your aid will be reduced because you’re showing $13,333 more in income than if you didn’t take any money out of your IRA. (And you could use the financial aid—you couldn’t afford the tuition, right?)

Now, if you had a Roth IRA, you’d take out that $10,000 tax-free. The $10,000 wouldn’t have an impact on your tax return and therefore, wouldn’t have the same negative impact on your FAFSA application. See why I like the Roth IRA?

Here’s another example of where it’s useful. Let’s say you’re retired and receiving Social Security income. If your money is all in a traditional IRA or pension, your extra income can make your social security taxable—up to 85% of your Social Security income can be taxed. But if you take money out of your Roth IRA, that will have no effect on whether your Social Security gets taxed or not. The more you have in your Roth IRA, the more opportunity you’ve got to maneuver.

If you’re looking for a place to put some retirement money, my first choice is a Roth IRA. Start saving today, you’ll be glad you did.

For more information about Roth IRAs, here’s a link to the IRS website: http://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs

Posted on February 4, 2014May 31, 2016 by Jan Roberg

ROTH IRA Strategy for High Income Earners

High income earners are often excluded from the tax-free retirement benefits of a Roth IRA, but you may be able to work around it.

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Perhaps you’ve heard about how great a ROTH IRA is: You put your money in an account and it grows tax free and when you take the money out at retirement time you get it all tax free. Awesome, right? Zero percent is a good tax rate. But if you’re in a high income bracket (see the chart below), you’re not eligible to contribute to a ROTH. But there may be a way around that for you. It’s called a ROTH IRA conversion. Here’s how it works:

Even though your income may prevent you from making a ROTH IRA contribution, there is no income limit for a Traditional IRA contribution. This is important—there is no income limit to making a Traditional IRA contribution. There are income limits as to whether it is deductible or not—but no limits as to your ability to make an IRA contribution.

For example: let’s say you earn $200,000 a year and you have a 401(k) plan at work. You can’t make a ROTH IRA contribution and you can’t have a deductible Traditional IRA contribution either. What you can do is make “non-deductible” contribution to a traditional IRA.

A non-deductible contribution to an IRA pretty much does the same thing as a ROTH—it grows tax free and at retirement it you can take it out tax free. The problem with the non-deductible IRA is that when you take it out, you take it out proportionately with your taxable IRA money.

For example: let’s say you have $20,000 on non-deductible IRA invested and another $80,000 in a traditional IRA that you rolled over from your 401(k) account for a total of $100,000 in IRA funds. You want to take the $20,000 of non-taxable money out. You can’t do it. If you take $20,000 out, the IRS is going to tax $16,000 of it because the non-taxable money comes out proportionately to the taxable money.

(Geek time: 20K + 80K = 100K

20K divided by 100K = .2 or 20 percent

$20,000 times 20% = $4,000 that is tax free

$20,000 – $4,000 = $16,000 taxable IRA)

So this is where the ROTH IRA conversion comes in. If you don’t have any money in a traditional IRA yet, then you can take that non-deductible IRA and convert it to a ROTH IRA with no tax consequences. There are currently no income limitations on doing a ROTH IRA conversion.

If you convert your money into a ROTH IRA, then when you want to take that money out—you’re taking it out of the ROTH. There is no equation determining how much is taxable or non-taxable—it’s all in the ROTH and it’s all non-taxable.

Now if you’ve already got money in a Traditional IRA, this strategy might not work for you because you’d be taxed on those funds during the conversion. If the total amount is fairly low, you might want to consider rolling it all over and taking the tax bite. You’d want to discuss that with your financial advisor and tax person before attempting that.

But if you don’t have any Traditional IRA funds, the non-deductible Traditional IRA contribution and ROTH IRA conversion might be a good strategy for setting aside some tax free retirement income for you.

Incomes where the ROTH IRA is completely phased out (2013):

Married filing jointly: $188,000
Single or head of household: $127,000
Married filing separately: $ 10,000

Posted on December 4, 2013May 31, 2016 by Jan Roberg

Tax Planning Isn’t Rocket Science, But it Can Save You Money!

You don’t have to be a rocket scientist to do a little planning ahead to save big dollars on your tax return.

Today I want to talk about tax planning, and why it’s so important.

I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special. She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first. So she called me.

Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined. Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole. Then we started talking.

You see, she didn’t need to make the purchase right away, she was just thinking about it. So I decided to see what would happen if we split the $30,000 between 2013 and 2014, $15,000 each year. What a difference! Instead of paying over $9000, she’ pay $688 per year total for her state and federal income taxes combined. That wasn’t a typo–six hundred and eighty-eight dollars a year. $1376 total tax for a savings of over $8000!

So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000. How cool is that?

In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well. For many people, splitting up the IRA withdrawal would not save them any taxes at all. But my point is–how do you know? By taking the time to ask–she saved $8000.

What’s going on in your life that could benefit from a little tax planning? Selling some stocks or mutual funds? Donating to charity? Do you own a small
business? Are you getting married? Getting divorced? Having a baby? Getting a new job? Buying a home? Any of these events, and many more, could use
a little tax planning.

My business card says, “If you don’t have a tax strategy, you’re probably paying too much.” It’s true. So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes. Why would you want to give the IRS more money then you need to? It’s not rocket science, it’s just common sense. The best way to keep more of your money is to make a plan for keeping it. Call me. I can help.

Posted on October 4, 2011May 31, 2016 by Jan Roberg

Cancelling Your Roth IRA Conversion

Photo by voxtheory on Flickr.com

Whoa, that Roth IRA conversion you did last year seemed like such a great idea at the time didn’t it? I know I thought it was pretty wonderful. But things change and with the stock market tanking, your portfolio is probably not worth what it was back when you did the conversion. For some people, now might be a good time to – here’s the important IRS word: Recharacterize your IRA.

Basically, to recharacterize your IRA, you’re taking all the money that you “converted” and put it back into your Traditional IRA. You will need to talk with your financial adviser and fill out the proper forms to do this. You also have a deadline: you must complete the transaction by October 17th, so you don’t have a lot of time to work with here.

Once you recharacterize your Roth IRA, it will be like it never happened, so you’ll have to amend your tax return to eliminate the Roth conversion that you reported last April and claim a refund. But that might be the smartest tax move you ever made. Let’s take a look at an example:

Porky Pig is in the 25% tax bracket and he made a $10,000 Roth IRA conversion for tax year 2010. The cost of the conversion to Porky was $2500. But now, because of the stock market, Porky’s Roth IRA is only worth $8500. It’s like he paid $325 too much in tax. Is that enough for Porky to make a change? For me it is, but for some people it might not be.

Let’s take a look at Porky’s friend Bugs Bunny. Bugs did a larger conversion; he rolled over $50,000 into a ROTH IRA. Bugs has a tax rate of 33% so he paid $16,500 for his Roth IRA conversion. Bugs also had a bigger portfolio drop than Porky, his Roth IRA went down by 20% to $40,000. Bugs paid $3,300 too much in taxes for his Roth conversion. I would think that $3,300 has got to be too much tax by anyone’s standards.

So what should you do if you made a conversion and your portfolio tanked? First, you’ll want to make an analysis similar to Bugs and Porky’s. What’s the true cost to you in terms of taxes? Don’t forget how much it will cost to amend returns and pay your broker fees. If it makes sense to recharacterize, then by all means, do so.

Don’t get me wrong, I’m still a big fan of Roth IRAs and I still think that the Roth IRA conversion is a great tool, especially for people whose incomes are too high to make regular Roth contributions. It’s just that if recharacterizing your Roth can save you a large amount of tax money, you really should consider doing it.

Can you do a Roth conversion again later? Yes, but you’ll have to wait for at least 30 days before you do it. You’d be reporting the conversion on your 2011 return (unless you wait until 2012.) You would not get the advantage of being able to split the tax payment between two years.

I hope this sheds a little light on the situation. Remember, the deadline to recharacterize your Roth IRA to a Traditional IRA is October 17. Don’t wait until the last minute, remember that your financial adviser will need time to process the paperwork.

Posted on April 1, 2011May 31, 2016 by Jan Roberg

Reporting the ROTH IRA Conversion on your Tax Return

Retirement by Scott Wills

It might have seemed like a simply marvelous idea at the time, but lots of people who did the ROTH IRA conversion are having a bear of a time getting it all sorted out on their income tax returns. If you’re one of those people, hopefully this will help.

I’m going to tell you where the numbers should show up on the form. If you know where things are supposed to go, then you’ll know if it’s right or not. Quite frankly, the most difficult part for me has been using the computer software to get the numbers to go in the right place.

Let’s run a few different scenarios, all using a rollover of $15,000. In all of the scenarios, you’re going to use form 8606 to let the IRS know that you did a ROTH conversion instead of just taking the money out and spending it. This will keep you from being charged the 10% penalty for early withdrawal.

In our first example, you’re rolling over $15,000 from a traditional IRA and you have no basis (meaning you didn’t pay taxes on any of the $15,000.) Down near the bottom of the first page of the 8606 is Part II, the section about ROTH IRA conversions. Question 16 wants to know the amount that you converted: that’s $15,000. Line 17 will be blank, line 18 will be the taxable amount of $15,000. Lines 19 and 20 are based upon if you’re paying the tax in 2010 or if you’re splitting it between 2011 and 2012. If you’re paying the tax this year, then you’ll have the number 15,000 on line 15b of your 1040 form. If you’re putting off paying until next year, then that line will be blank.

One of the questions I’ve been asked is, “If I don’t pay the tax this year, how does the IRS know that I’m supposed to pay it next year?” Line 20. Rest assured, anyone with numbers in lines 20a and 20b will have their returns looked at during the next two years to see if they remembered to pay the tax. I guarantee it.

Our second example still has you rolling over $15,000 and that’s all the money you have in your IRA. What’s different is that you paid taxes on $5000 of that money. Just like before you put 15,000 on line 16, but now you put $5000 basis on line 17. That makes the taxable amount only $10,000. You decide about whether to pay now or later.

Our third scenario is a little trickier. You’re still rolling over $15,000 and your basis is $5,000—the difference this time is that you have a total of $60,000 total in your IRA. Unlike the above example, you can’t just deduct the $5,000 of basis from what you rollover, it has to be proportional to your total IRA amount. 5000/60,000 equals 8.33%. That percentage of 5000 is $417. You’ll put $15,000 on line 16 for the rollover, $417 on line 17 for the basis. That means that the taxable amount on line 18 will be $14,583. (I know, it doesn’t sound as good as the other scenarios does it?) Don’t forget that you still have $4,583 in basis to use if you do any conversions in the future.

And our last scenario, you have $5,000 in basis from before and you made a $5000 non-deductible IRA contribution this year. The $15,000 is your entire IRA. This time, you also have to fill out Part 1 of form 8606. On line 1 you will put $5,000—the contribution you made this year. On line 2 you will put $5,000 the basis you had before. One line 3 your add them together for $10,000. Then you’re going to skip down to Part 2 (unless you had SEP and SIMPLE IRAs) and put $15,000 on line 16. Your total basis will be $10,000 on line 17, and your taxable conversion will be $5,000.

Knowing what form you need and where the numbers go is only half the battle. Getting the numbers to go where they’re supposed to go using computer software can be more challenging than doing it by hand. If you’re using brand name software like Turbo Tax, you can call their expert hotline for help.

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Note: We try to answer all the questions that come to us but please be patient. It’s our busy season right now. We may not get to your post until the weekend. When you make a post and use the capcha code, it won’t immediately show up. You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of. (We try to keep this a G rated website.) We have to edit those out. If you need an answer right away, here are some links that might help:

EIC questions of any kind: http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers: http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office: http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

If you want to hire us, please call (314) 275-9160 or email us. We do prepare returns for people all over the country (and a few foreign countries as well.) We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.

Posted on February 9, 2011November 15, 2018 by Jan Roberg

Tax Tips for Single People

Singles need tax breaks too.

Updated November 15, 2018

If you’ve skimmed through my other blog posts, you might notice that I have lots of tips for people with children, people who are old, or people with various family situations. What you don’t see is much about people who are single and working. This post is for you.

If you’re a young adult out on your own, earning wages, and living in an apartment, you’ve probably noticed that you don’t have many tax deductions to work with. The three most likely things you might qualify for are the student loan interest deduction, the IRA deduction, and the retirement savings contribution credit. Other than that, unless you’re ready to buy a home, you usually don’t have much to work with. But let’s take a look at these three items.

Student loan interest deduction: if you’ve finished college, or are at least temporarily out, you’re probably paying student loans. The most you can claim per year for this deduction is $2,500—now that’s for the interest you pay, not the principal. I often find people trying to claim everything they paid and that won’t fly. You can only use the amount on your form 1098E that you get in the mail.

Now if you’re single and you make less than $65,000 per year, then you can claim the full amount of your deduction. If you make over $80,000 you lose the deduction completely. For those of you in between, you’re in what’s called the phaseout range. It’s a funky equation, bottom line, the closer you are to $80,000, the less you’ll be able to claim.

IRA deduction: My Dad always used to lecture me about saving for retirement. Now that I’m older, I just recycle his lecture. (I’m sure he doesn’t mind.) If you don’t have a retirement plan at work, you can put up to $5,500 into a traditional IRA and that money will not be subject to income tax.

So, if you put $5,500 into an IRA, then your taxable income would go down by $5,500. By saving money for your retirement, you’d also save on your tax bill. If you’re in the 22% tax bracket, you’d save $1,210! That’s a pretty good bang for your buck.

If you do have a retirement plan at work, you can just reduce your taxable income by putting money into your 401(k) plan there. It works a lot like the traditional IRA. One thing to remember, if you do have a retirement plan at work and you make over $80,000 then you won’t be able to claim a deduction for an IRA contribution. You can still claim a full deduction if you make less than $65,000, and anything in between puts you into that “phase out category”.

Saver’s Credit (formerly known as the Retirement Savings Contribution Credit): Putting money away for retirement can be especially helpful tax-wise if you qualify for the Retirement Savings Contribution Credit. You can only claim this credit if you income is $31,500 or less though and you cannot be a full time student. So, if you graduated in May and started working in June you wouldn’t be able to claim the Saver’s credit this year. (But then we’re looking at the Education credit so that’s usually a better deduction anyway.)

The credit is worth between 10% and 50% of your retirement savings contribution. The maximum contribution you can claim is $2,000—so even if you put $5,000 into your IRA, you could only claim $2,000 towards the credit. The percentages work like this; if you made less than $16,750 you can claim 50% of your contribution. Up to $18,000 you claim 20%, and over that you get a 10% tax credit.

So let’s say you made $25,000 and put $1,000 into an IRA. You’d qualify for a $100 tax credit (1,000 times 10% is $100.) Another cool thing about this credit is that you can mess around with it. Let’s say that you make $28,000—oops, you can’t get a Saver’s Credit. But wait, if you put $1,000 into an IRA now your income is only $27,000 and you do qualify.

You don’t get a lot of tax savings options when you’re working and single, but it’s important to know what is available to you and how to make to most out of what you’ve got.

Posted on January 24, 2011November 15, 2018 by Jan Roberg

IRAs for Dummies

Okay first and foremost, you’re not a dummy! But I wanted to make a simple post with simple explanations about IRAs. This isn’t the be all end all of IRA stuff. But hopefully it will give you a little clue about them.

A traditional IRA lets you put money away for retirement and you can get a tax deduction for the money that you put into the IRA. For example: if you’re in the 25% tax bracket and you put $1,000 into an IRA then you will save $250 in taxes for the year you put the money in. (The tricky part is that there are limits as to how much is deductible if you or your spouse have a retirement plan at work. There are also complications if you’re using the married filing separately status. I’m not covering that here. If this sounds like you, give me a call and I can help you figure it out.)

A Roth IRA lets you put money away for retirement but you don’t get a tax deduction for the money you put in. $1,000 into a Roth IRA gives you no tax savings. (There are income limits for contributing to a Roth, the phase out starts at $167,000. If you’re under that income level, you’re fine.)

Generally, the most you can contribute to an IRA in a year is $5,500. If you’re married, you can contribute $5,500 for you and $5,500 for your spouse, even if your spouse doesn’t work. You can’t put more money into an IRA than you earned (so if you only made $3,000 that’s going to be your maximum contribution.) If you’re over 50 years old, you can contribute up to $6,500 to your IRA.

Remember, the $5,500 is a maximum. It’s fine to contribute less. Most accounts are going to want at least a $1,000 to open, but you don’t have to have $5,500 to put into an IRA. Its not an all or nothing kind of investment.

When you take money out of your traditional IRA, the money you take out is taxable. So, once again if you’re in the 25% tax bracket and you take $1,000 out of your IRA then you’ll pay $250 in taxes. The concept is kind of like: take a tax deduction now/pay taxes later. Here’s where it’s tricky…if you take the $1,000 out before you are 59 1/2, not only will you pay the $250 in taxes, but you’ll also pay a 10% penalty making the total tax you pay $350. There are exceptions to the penalty if you use the money to buy a house or pay tuition. You will pay the tax no matter what, but sometimes you can escape the penalty.

With the traditional IRA you are playing a gambling game. You’re betting that your taxes are higher now and will be lower when you retire. That’s a good bet for many people. So the traditional IRA is a good thing.

When you take money out of your Roth IRA, the money you take out is not taxable. So, if you take out $1,000 from your Roth and you’re in the 25% tax bracket, you will pay zero tax on that $1,000. If you take the $1,000 out before you turn 59 1/2, you may pay a 10% penalty on the earnings but not on the whole $1000. Roth IRA means tax-free income later.

I really like the Roth IRA for a couple of reasons:

It’s especially good for young people. The Roth is a great savings tool that can be used for buying a home and paying college tuition. If you invest in a Roth when you’re in the 15% tax bracket but wind up taking the money out when you’re in the 25% tax bracket: zowie! You win! It’s like a little tax bonus.
Even if you’re more mature and already in the 25% tax bracket or higher, I still like the Roth. When you’re retired and receiving social security payments, your social security isn’t taxable until you cross a certain income threshhold. Once you cross that line, your social security becomes taxable and it’s like you’re paying double taxes. For example: let’s say your pension and social security put you right at the line where if you make any more money your social security would be taxable. Once you cross that line you’ll pay tax on your social security income. If you take money out of your traditional IRA, let’s use the $1,000 example again, and you’re in the 15% tax bracket, you won’t pay 15%–you’ll pay even more because now your social security will be taxed too. It’s not exactly double, it’s more like one and a half times more. (Kind of a funky equation.) Bottom line: once you start receiving social security payments, extra income is actually taxed at an even higher rate than your real tax rate because they start taxing your social security. Ouch! Ask any senior citizen who’s been hit with this. It hurts.
Now if your retirement income is so far over the threshold that you don’t need to worry about additional tax (because you’ve maxed out your taxable social security), or if it’s nowhere near the threshold, then it’s not really an issue for you. But for many seniors, extra taxable income can be a big problem for them. The Roth IRA can be a real lifesaver when you’re older.

If it’s not completely obvious yet, I’m a big Roth fan. That said, if you need a tax deduction now, then traditional IRA is the way to go. For example: one year, I needed to lower my personal income by $310 to claim a $2000 tax credit. That’s a no brainer, of course I spent $310 on a traditional IRA to save $2,000. I put the rest of my retirement money into a Roth. You can do stuff like that when and if you need to.

There’s so much to know about IRAs and it can be really confusing. This little post is just the tip of the iceberg. For detailed information about IRAs, the IRS has a book called Publication 590. Here’s a link to it: Pub 590

Okay, I confess, that publication looks a little intimidating. It’s 110 pages long. But if you look at page one, the chapters and sections are set up based upon the questions people ask. Look for your question and it will tell you the right page to find your answer. It’s not so scary when you know that in advance.

Posted on December 20, 2010June 7, 2018 by Jan Roberg

Qualified Charitable Distributions

If you are over 70 and 1/2, you may be able to take advantage of a Qualified Charitable Distribution.

UPDATED FOR 2018

The Qualified Charitable Distribution (also known as a Charitable IRA Rollover) is is a great strategy for seniors to reduce their taxable income under the new tax code.

What is a Qualified Charitable Distribution (or QCD)? If you’re 70 and 1/2 or older, you’re required to make required minimum distributions (RMDs) from your Individual Retirement Account (IRA.) Even if you don’t need the money, you have to take it out of your retirement account and you have to pay tax on it. If you don’t, the penalties are even worse than any tax you’d have to pay. Additionally, many seniors don’t get the benefit of claiming their charitable donations on their income tax returns because they don’t have enough other things to deduct like mortgage interest. With the new, higher standard deduction for 2018, even fewer seniors will be able to itemize their deductions.

The Qualified Charitable Distribution helps with this problem by allowing you to take money out of your IRA and make a direct contribution to a charity. The distribution counts towards your RMD and it’s tax free to you because it went to the charity. That’s a win/win situation!

Another advantage to the QCD is that the income from the distribution never shows up as income on the face of your tax return. This is really helpful for people who may be able to claim other deductions or benefits based on having a lower Adjusted Gross Income (or AGI.) For example: The taxability of your Social Security income is based upon your AGI, so for some people, a lower AGI could reduce how much of their Social Security income gets taxed.

Can you make a contribution for more than your RMD? Yes you can. You can actually make a charitable distribution of up to $100,000 from your IRA with no federal income tax impact. $100,000 – that wasn’t a typo. If you’re in a financial position to make a donation like this, that would be $100,000 to a charity of your choice with no limitations as to its deductibility because it’s part of an IRA charitable rollover.

Can you make a QCD if you’re less than 70 and 1/2 years old? No, I’m afraid not. You must be at least 70 and 1/2 at the time you make the distribution.

If you’re interested in making a Qualified Charitable Distribution, talk it over with your financial advisor and your charity. You’ll want to make sure that it’s done correctly and you’ll want to keep good records in case there’s ever any question about your RMDs.

Can I still take a charitable deduction on my tax return for my QCD? No, the QCD will be exempt from tax so you can’t claim it as an additional deduction.

The Qualified Charitable Deduction is one of the best ways for seniors to reduce their tax liability under the new tax code. If charitable donations are something you do, then definitely check out the QCD.

Posted on October 11, 2010May 31, 2016 by Jan Roberg

Roth IRA Conversions-In Plain English

A real deer in headlights, not my husband.

I was having dinner with my husband and was telling him that we needed to think about doing a Roth IRA conversion this year. The more detail I went into, the further his eyes glazed over. Finally, he waved his hand over his head and said, “You do the calculations and let me know if we should or not.” He gets that way when I go into “tax speak.” He’s not stupid either, he understands money, he has an MBA, but taxes tend to give him that deer in the headlights look. I’m guessing he’s not alone. Here’s my attempt at making it easy.

A regular IRA is money that you get a tax deduction for when you put the money in, but you pay taxes on it when you take the money out. If you take the money out before you’re 59 1/2, you also pay a 10% penalty on top of the tax you pay for taking it out.

A Roth IRA doesn’t give you any tax deduction when you put the money in, but when you take it out there is no tax on the withdrawl. The penalty, if you take it out early, is only on the earnings, not the main amount of money. It’s usually very small.

The whole issue of Roth vs regular is Pay Now or Pay Later. Normally I’m a “pay later” kind of person, but I like the benefits of the Roth so much that they often outweigh the disadvantage of Pay Now.

So what’s a Roth conversion? That’s when you have money that you put into a regular IRA and move it into a Roth IRA. When you do that, you will have to pay tax on the IRA money, but you won’t have to pay the penalty.

Why would anyone want to do that? It’s back to pay now versus pay later. It looks like tax rates will go up in the future. Roth IRA money would be tax-free income during retirement and we all like tax free income!

Why is it a big deal now? Normally, you can only convert to a Roth IRA if your income is less than $100,000 — that’s including the money being moved into a Roth IRA because that also counts as income. For this year only, 2010, there is no income limit. Anybody can play.

So what’s the catch? If you do a conversion, you have to pay the tax. You have two choices: 1. You pay all of the tax on the conversion with your 2010 tax return, or 2. You split the tax you pay into two equal installments with your 2011 and 2012 taxes.

Once again, normally I’m a pay later person, but right now Congress hasn’t extended the Bush tax cuts yet. Until we hear otherwise, tax rates are scheduled to go up for 2011. I’d make my decision based upon paying it all in 2010. If things change, then you’ve got options, otherwise, go for pay now.

Do I have to convert all of the money in my IRA to a Roth? No. Only as much as you want/can afford to.

Do you think I should do it? That depends. The younger you are, the more inclined I am to say yes. If you’ve ever put money into an IRA that you didn’t get a deduction for, I’m more inclined to say yes. How are you going to pay the additional tax? If you’re going to take it out of the IRA money you withdraw, then I’m definitely leaning against that. If’ you’ve got it in savings, or have withheld extra and are just giving up a big refund, then you’re good.

Bottom line is: as much as I like Roth IRAs and this is a once in a lifetime opportunity, it also involves paying more taxes. If you have the cash and can afford to do it, I say go for it. If you’re cash strapped already, it’s not such a good choice.