Apr 30

Invest in an IRA When You Are Young

Just because you are young and are just getting started in the working world doesn’t mean you shouldn’t be thinking about saving for retirement.  One of the best investments you can make in yourself is an Individual Retirement Account, whether it be a traditional plan or a Roth option.  Investing now will reduce the amount of tax you’ll pay during your lifetime.  Finally, the more time the money is in a retirement account, the more it will work for you.

For 2013, you can contribute up to $5,500 plus an additional $1,000 if you are at least 50 years old.  At first, you may not be able to reach these contribution limits, but you should try to invest as much as you can.  Once the deadline has passed, you can longer invest in an IRA for the year.

There are two main types of IRAs you can invest in.  A traditional plan is funded with pre-tax money.  This lessens your earned income the year you can contribute.  Taxes are deferred meaning you don’t pay them until you withdraw from the account.  The Roth option is funded with after-tax dollars.  You do not receive the immediate tax break, but withdrawals are generally tax free.

Investing when you are younger also help to minimize the risk in the markets.  Historically, stocks rise over the long haul.  There are fluctuations from year to year that might hurt you when you are older.  However, when investing young, there’s no need to panic if there’s a dip in the market since you’ll have years to make up for it.  Patience is the key when dealing with volatile markets.

Finally, as I said earlier, the more time your money has to grow, the more earning power it will have.  The reason for this is compound growth.  What this means is that when your investments produce returns, those gains are also invested to produce even bigger gains.  The sooner this starts, the faster your money will grow.  A simple $5,000 contribution that earns 7% will turn to about $10K in ten years, $20K in as many years and $40K in 30 years.  Just think how that will he equate when contributing every single year!

If you are looking to open an IRA plan or have any questions about IRAs in general, feel free to contact the tax experts at the IRA Financial Group today.

Apr 29

Recharacterizing a Roth IRA

The major difference between a traditional IRA and a Roth IRA is when you pay the taxes.  Traditional plans are funded with pre-tax money and distributions are taxed while Roths are funded with after-tax money with tax-free distributions.  There are several reasons you may want to convert from a traditional plan to a Roth (i.e. you earn too much to contribute to a Roth).  However, if you are not happy with that conversion, the IRS will allow you to undo it.  This is known as a recharacterization.

First off, we’ll talk about the reasons you may want to recharacterize.  If the market takes a nose dive after you convert, you’ll end up paying more taxes than if you had waited until after the drop.  Since taxes need to be paid on the amount that is converted, you may realize that you won’t have the funds to do so by the tax deadline.  Also, the additional income created may make you ineligible for credits you may have received without the conversion.  Whatever the reason, you have the option of going back to your old plan within the time frame allotted by the IRS.

Speaking of which, there is a strict deadline that is in place.  You have until the tax deadline, April 15, of the following year to transfer the funds back to the original IRA.  This is the date when taxes become due on the original transfer.  After that date, you can no longer recharacterize and you must pay the taxes that are due on the conversion.

The process to recharacterize is straightforward enough.  You will have to fill out forms provided by your IRA custodian to transfer the money back into a traditional IRA (much like you would have done to put the money in the Roth).  If you do not still have a traditional IRA, you must set up one that will receive the funds.  Note that you don’t need to recharacterize the entire transfer.  Depending on your situation, you may only want to undo a portion of the original conversion.  You’ll receive a 1099-R for both transfers so the IRS knows how much of the original conversion was undone.

Finally, what are the tax consequences?  Assuming you recharacterize by the deadline, there is no impact on the amount that you rcharacterized.  If you missed the deadline, you will have to pay taxes on the total amount you withdrew from your traditional IRA.  This may put you into a higher tax bracket.

This is just one of the benefits of having an IRA.  Not many things in life have an undo button.  Take advantage of it if it suits your needs.  If you have any questions about this or other IRA-related topics, feel free to contact the tax experts at the IRA Financial Group today!

Apr 26

Contributing to a Retirement Plan After Starting RMDs

So you’ve hit age 70 1/2 and have started taking your Required Minimum Distributions (RMD).  What if you want to continue to work longer, can you still contribute to an IRA or 401k? You can, though rules are different for each type of plan.

First off, if you company’s 401k plan accepts IRA rollovers, you can roll over your IRA balance.  Doing so will eliminate the need to take RMDs since you will no longer have a traditional IRA.  If you have a Roth IRA, you don’t ever need to take RMDs since you’ve already paid the tax on your contributions.

If you are an employee and own at least 5% of the company that’s sponsoring your 401k plan, you must start taking distributions at age 70 1/2.  This is even if you’re still working.  You can still contribute to the plan.

No matter if you contribute to a traditional or Roth IRA, phase out rules are still in effect.  For a traditional plan, if you are married and both participate in a qualified plan and earn less than $95,000, you can make a deductible contribution.  Phase outs occur between $95,000 and $115,000.  If you are single, you must earn below $59,000.  Phase outs continue up to $69,000.  You can still contribute to a traditional IRA above these limits, but you will not receive a tax deduction.

If you are married and want to contribute to a Roth IRA, you can do so if you earn less than $178,000.  Phase outs are in place up to $188,000.  If you earn more than that, you cannot contribute to a Roth IRA.

One last thing to note, if you decide to keep your old IRA instead of rolling it over into your employer-sponsored 401k, you must continue to take RMDs.  However, you do not have to factor in your 401k balance when calculating those RMDs.

If you need (or want) to work past age 70, you can still contribute towards your eventual retirement even after starting your RMDs.  There are several options for you so it’s best to speak with a qualified person.  The tax experts at the IRA Financial Group can help you find out the best path for you.  Give them a call at 800.472.0646 or visit their website today.

Apr 25

Strong Interest in REITs Steering Investors to Self Directed IRAs

Tax savings involved in a REIT structure causing investors to look for similar tax benefits with a Self-Directed IRA LLC; IRA Financial Group responds with Special Real Estate Roth IRA LLC Solution

The growing interest of corporations in changing from a standard corporation to a Real Estate Investment Trust (REIT) in order to benefit from the tax advantages of the structure has many investors looking for other structures with similar tax benefits, according to Adam Bergman, a tax attorney with the IRA Financial Group. “Investors are seeing the growing trend of big companies taking full advantage of the tax benefits of a REIT, are looking for a structure with similar benefits that they can invest in, and are finding that structure in the Self-Directed IRA LLC,” Mr. Bergman stated.

The REIT structure allows corporations to declare themselves a special trust, which is typically exempt from paying federal taxes. Similarly, a Self-Directed IRA LLC allows entrepreneurs to make tax-deferred investments and in the case of a Self-Directed Roth IRA LLC, all gains are tax-free. Unlike a Traditional IRA, an individual is not permitted to take an income tax deduction for their Roth IRA contributions. All Roth IRA contributions are made with after-tax dollars, meaning that the amount of the contribution is treated as basis in the IRA. Earnings and gains from a Roth IRA are tax-deferred and may be tax-exempt if certain conditions are met. What this means is that all income and gains generated by a Roth IRA investment are not subject to income tax.

To meet the demands of investors looking for more tax-free investment solutions, the IRA Financial Group, the leading provider of Self-Directed Roth IRA LLC solutions, has introduced the Special Real Estate Roth IRA, a self-directed retirement solution for buying and selling rental properties tax-free.

The Special Real Estate Roth IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person, including real estate. The IRS only describes the type of investments that are prohibited, which are very few.

The IRS has always permitted an IRA to purchase real estate, raw land, or flip homes. “With IRA Financial Group’s Special Real Estate Roth IRA LLC solution, buying and flipping rental properties is as simple as writing a check and is tax-free,” stated Mr. Bergman. “As the manager of their Real Estate Roth IRA LLC, the IRA holder will have control over his or her IRA funds so that flipping a home can be made by simply writing a check,” Mr. Bergman added.

One major advantage of buying rental properties with retirement funds is that all rental income generated by the property is tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.

“The most attractive feature of the Roth IRA is that even though contributions are not deductible, all distributions, including the earnings and appreciation on all Roth contributions, are tax-free if certain conditions are met,” Mr. Bergman stated.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading facilitator of Self-Directed IRA plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate, without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

Apr 24

Who Should Inherit Your IRA?

One of the things we stress when opening up a retirement account is to name a beneficiary.  However, it’s not a “set it and forget it” type of move.  You should check your beneficiaries annually as your life changes.  Life changes occur all the time and the beneficiary you designate when you first open up your account likely will change as well.

Your IRA beneficiary could be your spouse, child(ren), another loved one or even an institution.  Naming a beneficiary will keep your assets out of probate when you pass away.  Also, usually your beneficiary will take priority of someone named in your will.  So if you designated someone when you created your plan and are now estranged, be sure to update it as soon as possible.

Another person you may have considered as a beneficiary is one who has smart financial sense and will do the best thing in case of your death.  But what if he or she passes before you?  What if your financial desires change before you can make it be known?  What if tax burdens are created for this person?  Being up to date will help keep possible complications to a minimum.

Your decision will have an effect on your estate as well.  Inheritances usually come with tax consequences.  Naming your spouse as a beneficiary eliminates estate tax (assuming you’re a US citizen).  If you name your child or sibling as beneficiary, the amount of your IRA assets will be included in the value of your taxable estate.  This could lead to higher estate tax to your heirs and then their heirs.  Also, your non-spouse heir might have to take required income distributions which would be subject to tax.

Lastly, if you decide to name a charity or 501(c)(3) nonprofit as your beneficiary, the assets will go to the charity without being taxed.  You estate may also qualify for a charitable deduction.

Making sure your beneficiary is up to date is one of the key factors of your planning you should look at regularly.  If you have any questions about this or other retirement-related issues, contact the tax experts at the IRA Financial Group today.

Apr 22

People Who Should NOT Invest in a Roth IRA

As you may know, a Roth IRA is an investment vehicle that’s funded with after-tax income.  The major benefit is that distributions during retirement are tax-free provided easy requirements are met.  On the other hand, traditional plans are funded with pre-tax money which gives you an immediate tax break.  Distributions are taxed at your current rate during retirement.  Roth plans are great for younger savers and those that expect to be in a higher tax bracket later on in life.  So, who doesn’t benefit from a Roth IRA?

First off, if you are going to need income from your IRA during retirement, you’re better off keeping your traditional plan.  Since most older savers already have traditional plans, they would need to convert to a Roth.  When you convert, you have to pay taxes on the money that’s converted.  You’ll need years to make the tax benefits of the conversion worth it.  If you’re taking money out of the plan, it makes it that much harder to reap those benefits.

Further dealing with conversion, if you can’t afford it, it doesn’t make much sense.  As previously mentioned, taxes are due when you convert to a Roth.  If you need to use money from your IRA to pay those taxes, it doesn’t pay to do a conversion.  It doesn’t make sense to lessen the amount of your plan just to convert.  The more funds in your account, the more you will earn.

The basic difference of the plans is when you pay taxes.  If you think (or know) you’ll be in a lower tax bracket come retirement, it’s better off to wait.  This is especially true for those already in their prime earning years.  If you’re being taxed at 25%, there’s no reason to pay the taxes up front.  Depending on your income, you traditional contributions may be tax-deductible.

If you’re someone who hates having to give up a lot of money, you probably shouldn’t convert.  The more your IRA is worth, the more taxes you’ll end up paying just to convert to a Roth.  The math usually works out in favor of a conversion, but in real life, it may not be the easiest decision, especially if you might need the money in the near future.

Finally, though it may sound harsh, you might not want to leave your heirs with this sweet of a deal.  A Roth IRA allows tax-free withdrawals forever when set up as an Inherited IRA.  You’ve paid the taxes already and your children (or other heirs) will reap the rewards.

Deciding on which plan is best for you is not always crystal clear.  The tax experts at the IRA Financial Group are here for you to help decide what course of action you should take to better set you up during retirement.  Give them a call at 800.472.0646 or visit their website today!

Apr 19

Reasons to Invest in a Roth IRA

As popular as Roth IRAs have become over the last several years, not everyone either knows about them or is taking advantage of them.  Here are a few reasons to make every effort to invest as much as your can in this relatively new option.

First and foremost, your earnings grow tax-free!  You don’t get a tax deduction for your contributions like traditional plans such as a 401k or regular IRA, but since you’ve already paid taxes on the money you contribute to a Roth, your distributions will be tax-free during retirement.  This is especially useful if you expect to pay higher taxes later on in life.  Note that if you rollover a traditional account you do have to pay the taxes on the money that is rolled over.

You may know about required minimum distributions.  Once you reach age 70 1/2, traditional plans require you to start withdrawing money from your account, whether you need it or not.  There are no RMDs for Roth IRAs.  The government requires distributions on other plans since they grow tax-deferred and they want their cut.  So, if you don’t need the money from your IRA, you can let it grow for as long as you want which is great if you’re planning on leaving the account to your heirs.

Another benefit is that you can withdraw your contributions at anytime and for any reason without incurring a penalty.  Withdrawing from traditional plans early will incur a 10% early withdrawal penalty.  Note that if you withdraw earnings, they will be subject to the penalty.  Even though you can withdraw the money, doesn’t mean you should however.  Any money taken from the account will not be earning for your retirement.  Only dip in when you have no other options.

Next, you can contribute to a Roth for as long as you want.  Unlike traditional plans, where you can no longer contribute once you reach age 70 1/2, you can invest in your Roth until the day you die.  This assumes that you have earned income (such as from a job or business).  There are income limits to contributing directly to an IRA.  However, you can always contribute to a traditional plan and then roll it into a Roth account.

Finally, a great benefit for younger people is the ability to use your Roth to get money for a first home purchase.  As long as you have has the account for five years, you can withdraw up to $10,000 (including earnings) tax- and penalty-free towards your new home .  To be a new home buyer, neither you or your spouse can have owned a house in the last two years.

In summary, if you’re not already contributing to a Roth IRA, you should seriously consider it.  If you’re not sure this is the right plan for you, contact the tax experts at the IRA Financial Group who will help you better understand how to save for retirement.

Apr 17

Back to Basics – Penalty-Free IRA Distributions

You can withdraw money from your IRA at anytime and for any reason, but you’ll face a penalty if you take non-qualified distributions.  Usually, these are early distributions taken before you reach age 59 1/2.  Doing so will result in a 10% penalty on the amount you withdraw.  These rules are in place to protect you from spending all the funds meant for retirement.  There are exceptions to take early withdrawals and not be hit with the penalty.  Further, Roth IRA withdrawals can be tax-free no matter what the money is used for.

Let’s talk about Roth IRA distributions first.  You can withdraw any (or all) of the contributions you made to the Roth at anytime and for any reason and not have to pay taxes or be hit with a penalty.  For example, if you have contributed $10,000 to your Roth IRA over the years, you can withdraw that amount penalty-free.  Anything above that may be subject to a penalty.  Moreover, qualified withdrawals will be tax-free even if you withdraw earnings.  To qualify, you must have had the account for at least five years.  Second you must be at least age 59 1/2, permanently disabled, withdrawing from an inherited IRA or taking out up to $10,000 on a first home purchase.

As for traditional IRA plans there are exceptions as well:

First, if you are unemployed, you can use funds to pay for health insurance premiums.  Note that this includes insurance for yourself, your spouse and dependents.  To qualify, you must have lost your job, received 12 weeks of unemployment benefits, taken the money out during the year (or the following year) you lost your job and taken the distribution no later than 60 days after starting a new job.

Next is general medical expenses.  This only applies to expenses that exceed 7.5% of your adjusted gross income (AGI).  Expenses include checkups, prescription medication, surgery and preventative care.  Expenses covered by insurance or other reimbursement cannot be counted.  So, if your AGI is $40,000 and you have $5,000 in expenses (which is $2,000 more than 7.5% of your AGI) you can withdraw $2,000 penalty-free.

If you, your spouse, children or grandchildren have higher education expenses, you can use money from your IRA to pay for them.  These expenses include tuition, fees, books and supplies.  Also, if the student is enrolled at least half the time at a trade school, college or graduate school, you can use the distributions to pay for room and board.  However, this does not include expenses covered by tax-free aid such as a scholarship or grant.

Finally, you can get up to $10,000 penalty-free as a first time home buyer.  To qualify, neither you nor your spouse can have owned a house over the last two years.  You do have the ability to utilize this distribution more than once, but you cannot exceed $10,000 over your lifetime.  You can also withdraw money to help a child, parent or grandparent in purchasing a home.  Again, the $10,000 lifetime max applies as well.  For example, if you use $7,000 towards a home, you only have $3,000 left to spend on another house for you or a family member.

While it’s not recommended to dip into your retirement funds, it may sometimes be your only option.  Do it when you have no other options.  You want the money to stay there for as long as possible so it can continue to earn for you.  If you have any questions, or are looking to open an IRA for yourself, contact the tax experts at the IRA Financial Group today!

Apr 16

Money Tips for Teenagers

Who wouldn’t want to be a teenager again?  It’s one of the best times in any person’s life.  As we get older, life gets more complicated.  However, young people do have a lot on their plates.  One of the most important lessons they should learn is the value of a dollar.  Teach them now to be smart with their finances and they’ll thank you later.  Here a few tips to help you accomplish this.

First off, young people should know to take money seriously.  If your child gets an allowance, make them earn it.  Teach them to save.  They don’t need to go out for lunch, they can make a sandwich at home.  They can wait a few months to buy that hot new video game when the price drops.  That old adage, “Money doesn’t grow on trees”, will always be true.  The younger they learn to take money seriously, the better off they will be in the long run.

Next, if they are getting paid to perform, they have earned income and can contribute to a retirement account.  This may include a part-time job, mowing lawns around the neighborhood or simply performing chores at home.  Have them open up a Roth IRA.  Contributions are made with after-tax dollars and distributions during retirement will be tax-free.  Even saving a few bucks a week will grow a ton if untouched until retirement.  Saving for retirement is another must for today’s youth.

When investing, buy stocks in brands they know.  Industries like restaurants, toys, entertainment and gaming offer a lot of upside in the market.  Pick out a handful of stocks and have your child keep track of them.  This knowledge will benefit them greatly when they start their careers.  The smarter you are when it comes to investing, the more you can earn.

Further, have them open up a savings account.  Use this account as an emergency fund only.  Unexpected expenses arise all the time and if you’re not prepared, they can put you in a tight spot.  Make sure they know that this fund should not be used for frivolous spending.

Finally, teach them to invest in themselves.  They don’t need to eat at the fanciest restaurants and buy the trendiest clothes.  Make them budget out their needed expenses and stick to it.  Spending $20 on a pair of jeans is a lot better than spending $50.  They can use the extra money they save to help fund the rest of their lives.

We talked about some pretty basic ideas here.  The major key being to save, save, save!  Learning about financial responsibilities while someone is young sets them up for success later on in life.  If you’re looking to help your child, the tax experts at the IRA Financial Group will help you get started on the right path.  Give them a call at 800.472.0646 or visit their website today!