Unless you’re near retirement, chances are you’re depositing a certain amount of cash each year in your IRA at tax time, then kind of forgetting about it, not thinking much about it until the next year. This dynamic can cost you a lot of money – today and at retirement age. Here are a few ways to make all your hard-earned money work even harder.
Invest your money; don’t simply fund it. According to a Vanguard study, two-thirds of last-minute IRA contributions end up just sitting in money market funds. The result? They’re just a little more than a checking account with a fancy name. Lesson: Don’t let your funds sit idle. They should be placed in the right investment, perhaps a target-date mutual fund. Maybe a bond fund or some carefully selected stocks. Do the work now. Take time to analyze what’s right for you so you can max out your investment.
Convert to a Roth. This scenario might not apply to you, but it’s a reality that quite a few have encountered: A sharp mid-career income loss, say, because of the pandemic, which would put you into a lower tax bracket. If this applies to you, it’s a good time to convert your traditional IRA to a Roth. Another scenario where converting might be a good idea is if tax rates are temporarily lowered by Congress. There’s also the backdoor Roth, which is a good tax reduction strategy; it works best for people who have high salaries (think C-suite) and access to a workplace retirement plan that causes them to be ineligible to deduct their traditional IRA contributions in the first place. It’s easy. Open a new traditional IRA, make non-deductible contributions, then convert it to a Roth. All said and done, no matter where you fall on the income spectrum, Roth IRAs are well worth looking into.
Avoid the procrastination penalty. Sure, making a full-sized IRA contribution right before your filing deadline feels good. You’re doing what you’re supposed to do, right? Taking the tax break for the prior year, right? Yes, but not so fast. (Just to refresh, it’s $6,500 for individuals in 2023; $7,500 for people 50 and older; the contribution cap is $7,000 for individuals in 2024 and $8,000 for people 50 and older.) But here’s the rub: You’ve left more than 15 months of potential investment income on the table. What? Yes, that is $6,500 that you should have invested during the previous year, maybe placed in a mutual fund or stock that could have been earning for you. So, think again about waiting until the last minute to contribute. It might end up being quite costly.
Invest in stocks and bonds – strategically. If you’ve been lucky enough to maximize your tax-advantaged account contributions and have some cash left over in your standard investment accounts, think about buying bonds in your IRA and stocks in your standard account. But why? Bond dividends are taxed as ordinary income. Stocks and stock-filled mutual funds generally generate capital gains. Specifically, these gains aren’t simply regular payments you get from your stocks. They’re the increase in their sticker price each year. It’s important to understand the difference. Capital gains, which only occur when you sell a stock or fund, are taxed at a lower rate. It makes sense to put them in taxable investment account and then save your tax-advantaged accounts for larger investments. Regardless of which IRA you decide upon, you won’t pay taxes on money while it stays put in your account.
Saving for retirement is one of the most important things you can do. Granted, life happens, and sometimes you get off track. But if you keep your eyes on your future nest egg and max out contributions while you’re working, you’ll be better prepared to enjoy your next season of life.
Unless you’re near retirement, chances are you’re depositing a certain amount of cash each year in your IRA at tax time, then kind of forgetting about it, not thinking much about it until the next year. This dynamic can cost you a lot of money – today and at retirement age. Here are a few ways to make all your hard-earned money work even harder.
Invest your money; don’t simply fund it. According to a Vanguard study, two-thirds of last-minute IRA contributions end up just sitting in money market funds. The result? They’re just a little more than a checking account with a fancy name. Lesson: Don’t let your funds sit idle. They should be placed in the right investment, perhaps a target-date mutual fund. Maybe a bond fund or some carefully selected stocks. Do the work now. Take time to analyze what’s right for you so you can max out your investment.
Convert to a Roth. This scenario might not apply to you, but it’s a reality that quite a few have encountered: A sharp mid-career income loss, say, because of the pandemic, which would put you into a lower tax bracket. If this applies to you, it’s a good time to convert your traditional IRA to a Roth. Another scenario where converting might be a good idea is if tax rates are temporarily lowered by Congress. There’s also the backdoor Roth, which is a good tax reduction strategy; it works best for people who have high salaries (think C-suite) and access to a workplace retirement plan that causes them to be ineligible to deduct their traditional IRA contributions in the first place. It’s easy. Open a new traditional IRA, make non-deductible contributions, then convert it to a Roth. All said and done, no matter where you fall on the income spectrum, Roth IRAs are well worth looking into.
Avoid the procrastination penalty. Sure, making a full-sized IRA contribution right before your filing deadline feels good. You’re doing what you’re supposed to do, right? Taking the tax break for the prior year, right? Yes, but not so fast. (Just to refresh, it’s $6,500 for individuals in 2023; $7,500 for people 50 and older; the contribution cap is $7,000 for individuals in 2024 and $8,000 for people 50 and older.) But here’s the rub: You’ve left more than 15 months of potential investment income on the table. What? Yes, that is $6,500 that you should have invested during the previous year, maybe placed in a mutual fund or stock that could have been earning for you. So, think again about waiting until the last minute to contribute. It might end up being quite costly.
Invest in stocks and bonds – strategically. If you’ve been lucky enough to maximize your tax-advantaged account contributions and have some cash left over in your standard investment accounts, think about buying bonds in your IRA and stocks in your standard account. But why? Bond dividends are taxed as ordinary income. Stocks and stock-filled mutual funds generally generate capital gains. Specifically, these gains aren’t simply regular payments you get from your stocks. They’re the increase in their sticker price each year. It’s important to understand the difference. Capital gains, which only occur when you sell a stock or fund, are taxed at a lower rate. It makes sense to put them in taxable investment account and then save your tax-advantaged accounts for larger investments. Regardless of which IRA you decide upon, you won’t pay taxes on money while it stays put in your account.
Saving for retirement is one of the most important things you can do. Granted, life happens, and sometimes you get off track. But if you keep your eyes on your future nest egg and max out contributions while you’re working, you’ll be better prepared to enjoy your next season of life.
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Update to Clients Regarding Covid-19 Enacted Legislation
Posted by Alan F. Burke, CPA, PA on March 23, 2020
We continue to keep up with the daily changes and updates regarding governmental relief in regards to the Covid-19 virus. This notice is an attempt to keep you informed of what we understand to be actual enacted rules and regulations. We are not addressing what we understand to be proposals, opinions, and/or speculations.
At President Trump’s and Congress’s direction, the IRS has issued notices regarding relief for taxpayers due to the Coronavirus. On March 21, 2020, the IRS issued Notice 2020-18 and announcement IR-2020-58. The following are some specific details from this Notice:
The federal tax filing deadline for income taxes due April 15, 2020 has been extended to July 15, 2020.
Federal income taxes due April 15, 2020, may be paid as late as July 15, 2020 without any interest, penalty, or addition to tax for failure to pay federal income tax.
The penalty- and interest-free deferral applies to all taxpayers, including individual, trusts and estates, corporations, and other non-corporate tax filers, as well as those who pay self-employment tax, regardless of the amount owed.
First quarter estimated tax payments that would have otherwise been due April 15, 2020, are now due July 15, 2020.
The Act does not include payroll taxes or excise taxes.
This is an automatic extension that requires no additional filings by the taxpayer.
As of the issuance of Notice 2020-18, no guidance has been given regarding second quarter estimates that are due June 15, 2020.
Each State’s legislature decides at its level how it will handle tax returns and payments. We are closely monitoring our resources to keep up-to-date on each State’s measures of tax relief. Below are summaries of what we know at this time from the most common States our clients file in:
The NC Department of Revenue has announced that they will extend the April 15 tax filing deadline to July 15 for individual, corporate, and franchise taxes and will not charge late filing penalties or late payment penalties through July 15, 2020; however, they indicated they do not have the authority to waive interest. The NC Legislature would have to pass a provision to waive late payment interest. However, to put it into perspective, if a taxpayer owes $5,000 to NC and waits until July 15, 2020 to pay the tax, the interest would be around $75. No guidance has been issued yet regarding estimated tax payment deadlines or deferrals.
As of March 17, 2020, South Carolina has announced that tax returns and payments due April 15 through June 1 will now be due June 1, 2020. Penalties and interest will not be charged if payment is made by June 1.
Update to Clients Regarding Covid-19 Enacted Legislation
Posted by Alan F. Burke, CPA, PA on March 23, 2020
We continue to keep up with the daily changes and updates regarding governmental relief in regards to the Covid-19 virus. This notice is an attempt to keep you informed of what we understand to be actual enacted rules and regulations. We are not addressing what we understand to be proposals, opinions and/or speculations.
On Thursday March 18, 2020, the Families First Coronavirus Response Act (FFCRA) was passed and signed by President Trump. This legislation is primarily to support businesses with fewer than 500 employees who continue to pay employees who are not working (neither on-site nor tele-working) due to:
Employee Subject to quarantine or isolation order
Employee who has been advised by a health provider to self-quarantine,
Experiencing symptoms and seeking diagnosis,
Caring for an individual subject to quarantine or isolation order, or
Caring for a child whose school has been closed
A very important provision of this act is that it does not come into effect until 15 days after enactment (March 18, 2020). Therefore, these provisions appear to only apply after April 2, 2020. We believe there will be additional guidance forthcoming, and we will continue to update and advise or clients as we obtain additional guidance.
The FFCRA is designed to reimburse employers who continue to pay their employees even though the employee is not working due to one of the five reasons mentioned above. The mechanism to do this is through tax credits against payroll tax deposits (i.e. subtract from Form 941 deposits) and if the credits exceed the total Form 941 deposit requirements, the excess would be refunded after filing the quarterly payroll tax reports.
There are numerous requirements that include continuing to pay the affected employee a certain specific percentage of their normal compensation (in some cases required to be 100% of their compensation). There are also limits in the reimbursement (for example, for qualifying reasons 1-3, the maximum is $511/day – $5,110 total; for qualifying reasons 4-5, the maximum is $200/day – $2,000 total).
Recap:
Due to the deferral of enactment to April 2, 2020, we recommend documenting every employee who is not coming to work due to one of the reasons above and notify your contact at our office that you have one of these situations and you are in a position to consider continuing to pay them, even though they are not actually working.
Unless you’re near retirement, chances are you’re depositing a certain amount of cash each year in your IRA at tax time, then kind of forgetting about it, not thinking much about it until the next year. This dynamic can cost you a lot of money – today and at retirement age. Here are a few ways to make all your hard-earned money work even harder.
