Saturday, March 22, 2008

Managing Your Tax Bill – A Potential Benefit of the Roth IRA

A Roth IRA account can help you to manage your income taxes in a variety of ways. This article explores a number of these tax-savings benefits.

First, qualified distributions from a Roth IRA are paid free of federal income taxes. Reducing your federal income taxes in retirement can potentially free up a greater portion of your retirement income for your living expenses, as well as other discretionary spending such as travel or leisure activities. This preferred tax treatment also extends to the distributions that are paid to your beneficiaries as well.

Additionally, a Roth IRA comes with no minimum distribution requirements. Unlike a traditional IRA, a Roth IRA can give you greater control over withdrawals from your retirement savings. You can direct exactly when you want to take money out of a Roth IRA and how much you want to withdraw. In fact, you may never have to take a distribution from a Roth IRA, if you have alternate sources for your retirement income needs.

A Roth IRA can also lower the taxes you pay on your Social Security benefits. Because money you take out of a Roth IRA does not count as income when you figure the taxable portion of your Social Security income. However, withdrawals from a traditional IRA count as income, and can potentially increase the portion of your Social Security benefits that are subject to federal income taxes.

There are a few additional things to consider. To receive to future tax-free treatment on distributions, you must have reached the age of 59½. Additionally, you are required to satisfy a 5-year holding period requirement that is imposed upon each contribution of assets to the Roth account. Even though the withdrawals for Roth accounts can come out tax-free to you at retirement (and to your beneficiaries), your contributions to the account are paid with after-tax money. Granted qualified withdrawals come out free of federal income taxes, state income taxes may apply depending upon the tax rules of the state where you reside.

As previously mentioned, you are required to pay federal income taxes on amounts converted from a traditional IRA to a Roth account. However, the federal tax rules do allow you to spread out your conversion over multiple years through partial account conversions. This can help you to spread out your income taxes on the conversion over multiple years.

The Roth IRA can be an effective wealth-building tool and can also be a tax-efficient strategy for retirees. For more information on Roth IRA’s and how they work please call our office.

The following reports are available at our website or call our office:

“The 10 Things Your Banker Won’t Tell You About Your CD’s”
How To Protect Your Assets From the Government”
The 11 Biggest Mistakes Retirees Make and How to Avoid Them.
The Secret Alternatives to low CD rates.

Saturday, March 1, 2008

How to Avoid Costly Tax Mistakes This Filing Season

Disclaimer:Check with your CPA or Tax Professional about your Taxes!

Millions of taxpayers make mistakes on their tax returns each year even if they use professional tax preparers. The reasons range from sloppiness or ignorance about changes in tax laws to excessive caution or zeal when taking deductions. Mistakes could increase your tax bill, delay the processing of your return and/or draw the scrutiny of the IRS. What you need to know now to avoid mistakes when you do your taxes this year…

MISTAKE: Neglecting to follow new charity deduction rules. Recent changes in the law require more extensive documentation for charitable contributions.
All monetary contributions now must be documented by a bank record, such as a canceled check, or by a written acknowledgement from the charity. Merely noting the contribution in a log or a check register is no longer acceptable.
Donations of any kind of $250 or more must be documented by an acknowledgement letter from the charity.
If you donate a used car worth more than $500 to charity, your allowable deduction depends on how the vehicle is used for charity. If it is sold, you can deduct only the amount that the car was sold for as reported to you in writing by the charity. If the charity retains and uses the vehicle, generally you can deduct its fair market value.
If you donate noncash property worth more than $5,000 – other than stock—there are new restrictions and requirements on the appraiser you use to estimate the value. For further details of documentation rules that apply to donations you have made, see IRS Publication 526, charitable contributions.
MISTAKE: Sloppiness. The most common mistakes are inadvertent ones, such as math errors, reporting incorrect Social Security numbers, failing to attach required W-2s and schedules, and forgetting to sign returns. While these may seem minor, they can delay the processing of your return and arrival of any refund.
Britaney B. Saks, CPA PricewaterhouseCoopers LLP