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Mapping Retirement | Alpha Wealth Funds

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April means it’s Tax and IRA Season: don’t pay the government when you can pay yourself.

It’s April 1st and that means a few things.  First, spring has begun, the days are getting longer and the temperature is getting warmer.  Second, but on the higher stress side, the tax deadline is only a few days away and you’re running out of time.  With that comes the end of contributing to your 2018 retirement plans.  It could also mean the mandatory contribution to a plan, so you don’t owe Uncle Sam.

In this post I will go over the different IRA’s and what I like to call the 400 something plans (401(k)-403(b)-457).  I’ll focus on the Usual Suspects, which I consider the Traditional IRA, Roth IRA and 401(k) in this post.  My next post will be dedicated to the Unusual Suspects, which I consider the SEP IRA, SIMPLE IRA, 403(b) and 457b).

Before we go over the different ways you can save your money, I need to make one thing unequivocally clear.  This is not tax advice, nor am I a tax professional, which is anything similar to a CPA, tax attorney, tax consultant or tax specialist.  If you have any questions regarding your taxes, please consult a professional and reference the IRS website www.irs.gov.  If you don’t have a tax professional, feel free to contact me, my job is to answer your questions and reduce your stress.  I can go over a list or professionals that we trust from personal use, or that come recommended from our clients.

How do I owe Money?  This situation may sound familiar from a family member or personal experience.  A week or so ago my brother gave me a call to pick my brain.  Essentially, he did his taxes and was told that he had two options.  One was to file his taxes and pay the government instead of getting a refund; or two, put a few thousand dollars in an IRA or 401(k).  Since his employer didn’t offer a 401(k), his option became very simple, he opened an IRA (Individual Retirement Plan).

There any many types of retirement plans, and I’ve listed them below.  Each of these is very specific, and regulated plans to save for life after work.  They are not all created equal, and your personal situation should dictate which is the best for you.  One last thing is, you will not have all of them offered to you.  By working through what’s available to you, what your income is and what your future plans are, you can get a solid understanding of what fits you the best.

Types of Retirement Plans

·       Traditional IRA ·       Roth IRA
·       401(k) ·       403(b)
·       SEP Plans (Simplified Employee Pension) ·       SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
·       Payroll Deduction IRA ·       SARSEP Plans (Salary Reduction Simplified Employee Reduction)
·       Profit-Sharing Plans ·       Defined Benefit Plans
·       Money Purchase Plans ·       ESOPs (Employee Stock Ownership Plans)
·       457 Plans ·       Governmental Plans

 

The Usual Suspects

IRA = Individual Retirement Account

Traditional vs. Roth is always something people look at.  It’s usually the first retirement account someone opens or at least it was for me.  The big differences are that you can’t deduct contributions to a Roth IRA (you can for a traditional), you have to qualify for a Roth IRA (traditional doesn’t have the requirements you have to meet), you can contribute to a Roth IRA after age 70.5 (traditional stops at that point) and you can leave assets in your Roth IRA as long as you’re alive (traditional has Required Minimum Distributions = RMD’s).

The biggest difference here, and what my brother ran into, is the tax deduction aspect.  Traditional IRA, SEP IRA and HSA accounts are all tax deductible.  This means that you can deduct them from your personal income on your tax return.  It’s a great way to change your situation from owing the IRS money to getting a tax refund.  I’m a simple guy and I have to hear things a few times to imprint them in my head, so I apologize if I get repetitive.

You can contribute to your 2018 IRA (traditional or Roth) through April 15th, 2019.  This gives you the chance to maximize the contribution limits.  The contribution limits change yearly so it’s very important that you, your tax professional or Financial Planner are up to date with changes.  If you accidentally contribute over the maximum amount you will pay a 6% penalty tax ever year it remains in the account.  Since the IRS is so nice, they allow you to pull that out up to the day your return is due. This also includes extensions.

The golden age for IRAs is 70.5.  This is when (some) of then stop allowing contributions and the dreaded Required Minimum Distributions (RMD) begin.  First, the bad news, if you do not withdrawal your RMD by the deadline, you’ll face a 50% tax on that.  It’s imperative to keep track of those yourself or ensure that your tax or investment professional are on top of it.  They will not be understanding if you forget or don’t take out the correct amount.  They’ve earned their reputation for a reason, they’ll enforce the law, which means they take your money.

Below is a simplified chart that explains how they’re similar and different.  This was taken directly from the IRS’s website which leaves things to zero debate.  They are the ones that will enforce the law and audit you, so it’s best to play by their rules.

Features Traditional IRA Roth IRA
Who can contribute? You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older. You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts (see 2018 and 2019limits).
Are my contributions deductible? You can deduct your contributions if you qualify. Your contributions aren’t deductible.
How much can I contribute? The most you can contribute to all of your traditional and Roth IRAs is the smaller of:

For 2018, $5,500, or $6,500 if you’re age 50 or older by the end of the year; or

your taxable compensation for the year.

For 2019, $6,000, or $7,000 if you’re age 50 or older by the end of the year; or

your taxable compensation for the year.

What is the deadline to make contributions? Your tax return filing deadline (not including extensions). For example, you can make 2018 IRA contributions until April 15, 2019.
When can I withdraw money? You can withdraw money anytime.
Do I have to take required minimum distributions? You must start taking distributions by April 1 following the year in which you turn age 70½ and by December 31 of later years. Not required if you are the original owner.
Are my withdrawals and distributions taxable? Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. None if it’s a qualified distribution (or a withdrawal that is a qualified distribution). Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.

 

shamelessly stolen from & All Credit is due to: https://www.irs.gov/retirement-plans/traditional-and-roth-iras

 

401(k)

A 401(k) is an account that employers offer to their employees.  So, you have the option to use it or to not use it, but you can’t go to the bank and open one.  These accounts are a qualified profit-sharing plan from the employer’s standpoint but allow you to have your pay automatically investment into it.  Their unique characteristics are salary deferrals that are excluded from your taxable pay (automatic contribution), employers can match the contribution (the 401(k) match you always hear about and companies are judged on and allows the employer to make distributions (which includes earnings too).

Typically, your employer will also match a contribution.  This means if they have a 5% match, that if you put 5% of your wages into it, they will match with 5%, which means you’ll have 10% invested in it.  You’re broken down into two basic categories, Plan Sponsor (employer) and Plan Participants (employee).

They have their own intricacies like every other plan.  For instance, the Deferral Limit was raised to $19,000.00 in 2019, up from $18,500.00 in 2018.  They also can incorporate other plans as well.  The Deferral Limit for SIMPLE 401(k) Plans is $13,000 for 2019, up from $12,500.00 in 2018.  The IRS even made up a nice 401(k) Resource Guide and a 401(k) Plan Checklist to make things easy.  As a former Marine and Aviator, I’m always happy to have a checklist.

There is also a Designated Roth Account which is NOT the same as a Roth IRA.  They differ in many ways so it’s easier to just think of it as the only similarity they have is the fact that they use the word Roth.  A Designated Roth Account is open to 401(k), 403(b) or 457 government plans.  The investment choices are vastly different since they’re part of an employer plan, you only can pick from what they offer.  With a Roth IRA you’re open to nearly anything, there is a prohibited list though.  If you want to get into the weeds, and not leave it to the ones unfortunate enough to work in the space (Financial Advisors, CPAs, etc..) you can read Roth IRA & Designated Roth Differences

These can get a little confusing which is why you need to make sure you understand how your specific employer sets it up, and what all your options are.  This means that you need to get a good microscope and some Advil to read all the fine print, OR you can pass it on to a tax professional or Investment Professional such as myself.  I’ll take the headache for you and make sure every piece is understood by not only you but those you entrust with your retirement and taxes.

 

The Unusual Suspects

The S-IRA’s ( SIMPLE IRA – SEP IRA) & The 400 somethings (403(b) and 457b)

SIMPLE IRA = Savings Incentive Match Plans for Employees

A SIMPLE IRA provides an avenue for both employers and employees to contribute to a retirement account.  They targeted for small businesses, usually 100 or less, and have little start-up and operating costs.  They have their own regulations, such as the company cannot have any other retirement plan option, the company doesn’t need to file and the contribution match limit for the employer.  I will include more detail on these in the next post which breaks down the S-IRAS (SIMPLE & SEP).

SEP IRA = SEP Plan = Simplified Employee Pension Plan

This allows employers and employees some unique options.  This is also known as a SEP-IRA due to the name and the government’s love for acronyms.  It’s unique in the fact of only the employer can make contributions, but also in that you can contribute much more than the IRA (Traditional or Roth) limitations ($5,500 in 2018 and $6,000 in 2019).  These are so beneficial for small business owners, that I will write an entire post dedicated to them.  Any size business can utilize them, but they’re the most popular with small business or self-employed (single person business).

403(b) Plan = TSA = Tax-Sheltered Annuity Plan

If you’re a public-school teacher or work for a charity (selected companies that are tax-exempt and named on the 501(c)(3) list), then these are for you.  Due to the specific nature of them, if you don’t have one, you probably don’t know about them.  Braking it down Barney style, these are a 401(k) Plan for a non- profit, the K’s are for-profit companies.  They’re also known as a Tax-Sheltered Annuity Plan, which is simplified even further to TSA.

457b Plan

In layman’s terms (don’t worry I had to google it because even auto correct didn’t know what I was typing), a 457b is if you’re a government employee.  It covers both state and local government or if your company is identified in IRC 501(c), which means it’s a tax-exempt organization.  They’re nice, which most government benefits are, in the fact that the contributions ANS earnings on the contributions are both tax-deferred.  There are a few more intricacies, such as the possibility of Roth Contributions and others.  You’ll have to wait and see, those are saved for the next post.

 

Conclusion

Regardless of your plan, you need to understand it, at least at a basic level.  That doesn’t mean you have to do everything related to it though, there are specialized professionals in these areas for a reason.  I’ve always believed if it’s something could result in death or owing money (owing to the IRS through an audit may wish you were the former), I’ll leave it to a professional.

For the tax side, neither you or I are a tax professional unless that really is your day job.  Now on the actual investment, estate planning, retirement planning or financial planning sides, we are a one-stop shop.  Our holistic approach works through every aspect of your life and different scenarios.  That is of course if that’s what you want.  If pure investment options are what you’re looking for, we can help with that to.  Since we’re a boutique investment firm, if we don’t have what you’re looking for, we can build it for you.  Feel free to call 435-658-1934 or e-mail me at mtorrence@alphawealthfunds.com with any and all questions.  My job is to work for you.

 

 

 

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