esop small

Handling ESOP Shares & Taxes

Joe OcchipintiJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 


Sometimes an employer’s benefits program can include an employee stock ownership plan, commonly referred to as an ESOP plan. An ESOP plan is an employee benefit that allows its company’s participants to purchase the common stock of their company. Those who participate often receive tax benefits for purchasing these shares, and companies believe that allowing their employees to purchase shares of the company will incentivize employees to perform well and boost the share price.

This is an excellent program to take advantage of if your company provides it, but there is something to be mindful of, which is: How can these shares impact my tax liability?

Well, the tax issue doesn’t become relevant until you approach retirement and begin to think about taking your balance out of the plan. When you become ready to do this, you are presented with two options on how to handle the balance.

Option 1 is to take the shares from the ESOP program and roll them into an IRA. Taxes do not come due, but you will be liable for the taxes when you take a withdrawal from the account. The amount will be taxed at your current ordinary income rates.

Option 2 is to move the shares into a non-retirement account. In this method, the ESOP shares are moved in-kind and you pay ordinary income tax rates on the average cost basis of the shares, which is the average price you paid for all the shares you own and typically below market value. Then when the shares are sold within the account, the amount in excess of cost basis is taxed at long term capital gains rates.

 

(1)


It may seem like you’re paying taxes twice in the second option, but by taking advantage of net unrealized appreciation (or NUA), you might be able to save yourself on taxes in the long run. You see, long term capital gains rates are typically lower than a person’s income tax rates with capital gains being 0, 15, or 20%, so a person would be paying ordinary income tax on a portion, then long term capital gains on the remainder, again assuming the shares have been held for 1 year or longer.

This can be a tricky process, and most employee benefits programs only allow you to execute this process once. Make sure you have it right.

Warren Street Wealth Advisors has worked with employee ESOP shares before and executed NUA strategies. Contact Us today and schedule a free consultation on how to best handle your ESOP shares.


 

  1. This item  is only used as an illustration of the strategy. Illustration does not indicate how all tax liabilities could play out. All investments carry specific risks and please consult your financial professional before making investment decisions.

Warren Street Wealth Advisors are not Certified Public Accountants (CPA), and this is not considered personal or actionable advice. Please consult with your accountant or financial professional for further guidance on whether an NUA strategy is right for you.

Disclosure: Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

"There is no getting away from you guys."

9 Year End Tax Tips for Investors

Blake Street

Blake Street
Chartered Financial Analyst
Certified Financial Planner®
Founding Partner & CIO  
Warren Street Wealth Advisors



I know, I know, you’d rather be thinking about the holidays than taxes. Consider us
The Grinch for even bringing this up, however, the timing is important. As the years draws to a close it is important that you consider year end tax planning before 2017 strikes our calendars.

Here are the some of the biggest items for consideration for an investor before year end:

1) Changes to the tax code?

There were no significant changes to tax law from 2015 to 2016, prepare for much of the same for your 2016 filing.

2) Don’t forget your RMDs (Required Minimum Distribution)

If you’re over age 70 ½, make sure you take your required minimum distribution (RMD) by December 31st. Investors who turned 70 ½ this year can defer their 2016 RMD until April 1st of next year, but that will mean taking two RMDs next year. Investors who turned 70 ½ last year and deferred their 2015 RMD to 2016 need to make sure they take their 2016 RMD by December 31st. Important to note: RMDs apply to most retirement accounts, not just IRAs; 401(k)s and even Roth 401(k)s are subject to RMDs.

3) Max out your IRAs

If you are eligible, be sure to max out your IRA when you can. An individual can contribute up to $5,500 per year, or $6,500 if over the age of 50. These contributions can be on a tax deferred basis or after-tax basis (ROTH IRA) depending on your personal goals and objectives.

The truth is you can cut these checks all the way up until the time you file your taxes, but as like I to say to myself, “save early, save often.”

4) Consider a ROTH conversion

If you think you’re in a lower tax bracket now then you will be in the future, and you’ve got most your assets in pre-tax buckets like a 401(k) or an IRA, it may pay to consider converting some of those assets to a ROTH IRA. The ROTH IRA grows and can be withdrawn from tax free after age 59 ½. Converting assets to a ROTH may create a tax bill today for future savings, so be aware.

One wonderful perk of a conversion is the fact that you can undo it should the terms or tax implications look unfavorable before you file. This is called recharacterization. You’re eligible to recharacterize the conversion all the way up until the time you file, including extensions.

Consider converting small portions over a long period of time when your tax scenario makes sense.

5) Make the Most of your Charitable Giving

Charitable contributions are usually deductible up to 50% of your adjusted gross income (AGI). If you have a habit of being charitable, might as well get credit for the deduction. If you plan to give, consider doing it in years when you need the tax break. Also, if you’re at the limit for giving, consider delaying gifts until your deduct limit clears out next year.

One other strategy we like to see considered is gifting highly appreciated securities. You can deduct the market value of the securities subject to your deduction limit, and avoid the capital gains taxes you would have been exposed to should have sold the securities in your name.

If you’re curious for a ballpark figure on what you can deduct, you can see your AGI on Page 1, Box 37 of your 1040, also known as your tax return.

6) Consider Qualified Charitable Distributions

Two bullet points for charity, we can’t be The Grinch! Qualified Charitable Distributions (QCDs) are a wonderful part of the tax code that allows you take distributions from your IRA and send directly to a charity of your choice, tax free.

The best part, QCDs don’t count as income, but do count against your RMDs. QCDs will also reduce your adjusted gross income and could reduce your Medicare Part B premiums, in addition to reducing the amount of your Social Security benefits that are taxable.

7) Gifts to Non-charitable Interests

I know, sometimes your loved ones feel like charity, but if you’ve got any large gifts planned to grandkids, children, or whomever, timing matters. You’re able to gift $14,000 to any individual each year without any gift tax implications. You and your spouse can gift that amount separately to the same person for a total of $28,000.

These gift amounts are a great way to reduce your taxable estate or even fund your wishes in your lifetime without getting into messy gift and estate tax issues. One additional creative idea, you’re able to gift five years worth of gift limits into a 529 plan in a single year, so in this case, $70,000. One asterisk, you can’t gift to this person again for five years. We see folks use this technique if they want to fund large portions of someone’s advanced education while reducing their taxable estate at a faster rate.

8) Tax Loss Harvest

This is something we do on behalf of our clients, but if you manage outside assets on your own, consider booking some of your losses. We all have some, don’t be shy. Losses can be used to offset capital gains generated within your portfolio, carried forward to future years, or even a small portion used to reduce taxable income. One great idea when harvesting losses is trying to replicate your exposure of what you sold, so that you’re not sitting in cash waiting for the IRS 30-day wash sale rule to pass to buy back the original security. If it sounds complicated, let us show you how we do it for our clients.

9) Take Your Gains

To add some intrigue after the last bullet point, it’s equally as important to harvest your gains at the appropriate time. Depending on your income level, you could pay as low as 0% in long term capital gains tax rates. It makes sense to know in what years you’ll fall below this income threshold so that you can pay as little taxes as possible.

 

RMD? IRA? What are these things exactly? If you need help navigating your financial picture, contact us  and schedule a free consultation.

 


Blake Street is a Founding Partner and Chief Investment Officer of Warren Street Wealth Advisors. Blake graduated from California State University, Fullerton in 2009 with a Bachelor of Arts in Finance, and  he is a CERTIFIED FINANCIAL PLANNER™ (CFP™) and a Chartered Financial Analyst (CFA).

Disclosure: Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

 

1eywfs

Tax Write Offs. Tax Write Offs Everywhere…

It’s no secret that streamers don’t like paying taxes, we don’t either. Don’t let taxes drag down your profits as a streamer or content creator.

Using bookkeeping software should be one of the first things you do to take control of your stream as a business and attempt to reduce your tax liability. Bookkeeping will allow you to classify your stream expenses and potentially turn them into tax write offs.

What can you write off you might be asking? Well let’s start with some of the easy ones:

Computer Equipment & Software – Yes this means games. Since you are most likely using games or other pieces of software to entertain your audience, this is a necessary business expense for you. Don’t forget that if you purchase computer parts, upgrades, or even a whole new system that this is necessary for you to complete your work  they can be written off

Your Streaming Space – Also known as your home office. Most people are streaming out of their homes, and that means that part of your mortgage or rent goes towards the space for your stream. This percentage of space can be written off every year. As a simple example, if you use 25% of your space for your stream, and your rent is $1,000, then you can write of $250 per month for a total of $3,000 per year.

Travel Expenses – I’m assuming you went to Twitchcon. Well, you guessed it, that travel expense can be deducted. You went to a location to help promote your business, maybe took some meetings, and tried to grow your brand. All of which are very legitimate business expenses.

Meals & Entertainment – Do you have a partner for your stream? Are you collaborating with other streamers? Well, if you go meet with them for coffee, lunch, or dinner, and discuss business during the meals, then the meal expense can be written off as a tax deduction. Up to 50% of the total expenses associated with meals & entertainment can be deducted as long as you are conducting business.

As you can see, if you are spending money on your business, the stream, then there is a possibility that the expense can be written off to lower your taxable income.

Contact Us to learn more about what you can do to lower your taxable income and protect your earnings as a streamer.

 

Joe Occhipinti


Joe Occhipinti
Joe@warrenstreetwealth.com
714.823.3328

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Keep more of what you earn

It’s Your Stream, Your Money

As many have come to learn, taxes can be the most complicated part of being a full time content creator, streamer on Twitch or professional gamer. With some people being considered contractors or employees of a team, or both, it can be difficult to navigate your tax liability and learn how to reduce it.

However, there are solutions available. The biggest solution for those receiving a majority of their income via 1099 is the Solo 401(k) option, or “Solo(k)”. The Solo(k) is essentially a 401(k) plan but for a single person, and potentially a spouse, giving them the ability to defer their taxes and profit share themselves to help reduce tax liability come April.

So what can the Solo 401(k) do for a streamer or pro player?


solo projection
Table provided by Robert McConchie, CPA/PFS®

This example shows a streamer/player earning $225,000 in 1099 income, assumes $30,000 in business expenses across the year, a standard deduction (single person, 2016), and standard exemption (single person, 2016). Additionally, California state tax rate was used in conjunction with the Federal tax, and you can see the savings between utilizing and not utilizing the Solo 401(k), a $20,000 savings to be exact.

The savings comes from the $18,000 personal deferral then a profit share from the business of $35,000 for a max total deferral of $53,000 income within the year. Establishing a Solo 401(k) account is beneficial on multiple fronts; it allows you to set money aside for your retirement date, reduces your tax liability today, and can even be borrowed against should you find yourself in a pinch.

Now, for some streamers who are married, you have the ability to put your spouse on to your business’ payroll. How can that impact your tax savings come year end? Here’s a conservative estimate below.

solo projection spouse
Table provided by Robert McConchie, CPA/PFS®

Using the same amount of income, we can see that tax savings can also be found by correctly setting up your business to include your spouse on payroll, a 401(k) contribution for them and take advantage of additional tax savings.

Opening a Solo 401(k) is one thing you can do, but you can see the immediate impact it can make for full time content creators.

The Solo 401(k) is one of many things that every content creator should do to help minimize their tax liability into the future. Don’t wait to open one. In order to receive the tax benefit, the account must be opened within the calendar year.

Contact us today to set up a free consultation and learn what you can do to maximize your tax savings for 2016 and into 2017.

 

Joe Occhipinti

Joe@Warrenstreetwealth.com
714.823.3328
www.warrenstreetwealth.com/esports

 

The contents of this article are not meant to be personal or actionable tax advice. Please consult a tax professional or your personal advisor before making any decisions. IRS & DOL guidelines must be carefully considered before choosing the retirement plan or tax advantaged savings vehicle that is right for you. The illustrations above are of hypothetical scenarios and are meant strictly for informational purposes.

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

lightning-storm-clouds-wallpaper-3

Black April: The Twitch Partner Reckoning

April 2016 may have seemed like just another month on Twitch.tv, but the volume of Twitch partners struggling with the complexity of taxes on social media was louder than ever.

 

People are continuing to take their hobby of streaming video games and turning it into careers, many with great success. These successful careers are creating lives for many people that they haven’t experienced before, getting paid to do what they love. With this new found success and income came an increase in payments to the outstretched hand of the tax man, Uncle Sam. While for a majority of the people who have experienced this before, their thought may be: “Seems standard.” In this case, many who were impacted the most were not prepared for the impending tax bill and did not know what steps to take to soften the blow. Successful streamers in the past got away with standard tax preparations in their first year of business, but they did not anticipate the increase in the complexity of their taxes with the increase in their annual pay. This has always been a problem for those making a significant amount of money, a relatively new situation in the Twitch world.

 

Obviously, some may allude to the fact that tax preparation should be common knowledge. It’s hard to disagree with that statement, but many of these young entrepreneurs look at themselves as employees taking home a paycheck instead of as small business owners looking to manage their tax burden. Streamers who grew their respective gaming communities were thrust into a new position that some were not prepared for from a financial standpoint.

 

What is the glaring issue here? The main issue was the lack of knowledge on the streamer front as to how to handle taxes proactively. This was a first time experience for many, and for someone working under the 1099 independent contractor banner, it can be easily forgotten that taxes are a looming liability. The even more forgotten concern is the full 15.3% payroll tax that becomes the liability of the streamer versus only paying half as a W2 employee. If taxes are not adequately addressed in the current tax year, it can create years of future problems, additional payments, and more time spent dealing with the IRS.

 

The silver lining to this story is the viability of the interactive media market as a career for professional players, streamers, or content creators. This growing market is a breeding ground for sponsors to find new users of their products and create lifetime customers. Each micro-community on Twitch represents a unique opportunity for streamers to leverage their audience.

 

With taxes continuing to be an annual problem for streamers, there are solutions. Individual firms, consultants, and even pro-bono counseling groups are being formed for the sole purpose to better educate, prepare, and potentially offer professional services to those in need. One example is the Player Resource Center being developed by esports lawyer Bryce Blum and former professional gamer Stephen “Snoopeh” Ellis to fill this exact void. The growing interactive media environment needs professional infrastructure to help it continue to thrive into the future.

 

Outside of being able to generate a living via streaming, the biggest financial problem that streamers face is proper consideration towards taxes at the end of the year. With many firms looking to help and resources becoming available to those in need, there is hope that these entrepreneurs will continue to increase their efficiency and make the most of their success for years to come.

warrenstreetadvisors006
Joe Occhipinti
Joe@warrenstreetwealth.com
714.823.3328

Purple-100-Dollar-Money

Reduce your Tax Bill: ESPORTS & Streamer Edition

Co-Authored by:
Blake Street CFP® & Joe Occhipinti

 

The world of eSports has turned a hobby into a full time profession for many people around the world. Streamers, professional players, and YouTube stars have been able to take their specific talents and turn their passion into a career.

However, with this newly found cash flow comes a new liability in the form of taxes. The knock from Uncle Sam will only get louder as revenue streams, prize pools, and sponsorship deals increase.  Many eSports professionals find themselves scratching their heads come tax time, trying to sort through W2 wages, 1099 income, and even how to handle income from organizations that didn’t report it in the first place.

The burden remains on the the individual to accrue cash to pay taxes, keep their books, properly report income, and make sure they are in compliance with the IRS. The IRS, as always, does no favors in helping you make your tax bill small.

If you’re a streamer, influencer, or competitor there is a high likelihood that you yourself are considered a small business in the eyes of the IRS. This means you’re liable for the 15.3% payroll tax on your earnings that you might only otherwise be liable for half of as a W2 employee. In addition, you may have liabilities from your business activities and even employees or contractors you may hire to do work for you.  From what we’ve found thus far, few have addressed these variables with adequate intent.

 

How do you fix this problem?

 

1) Keep Good Books

First things first get setup to adequately track  business related expenses and any deductions that may reduce your tax burden.  This is the first and easiest thing to control. A good start is separate banking for your business efforts and a solid piece of accounting software.

2) Incorporation

Next, how are you incorporating your business? Sole proprietor? LLC? S-Corp? Each classification has its own nuances that will impact the bottom line dollars you keep and the liability you bare. It is important to look at not only the amount you make, but also the consistency of earnings, and the amount of liability your services or content generate before choosing a type of incorporation.

3) Build Cash Reserves

As money comes in the door, aside from saving for goals, you need to save for taxes. Companies should be withholding taxes on your W2 wages, but any other forms of income the burden is on you. Generally our clients set aside 20-30% of every dollar of revenue aside for potential taxes. The struggle is real!

4) Tax Deferral & Planning

Still have lots of profits left and nothing to spend it on? Why pay taxes on those dollars now? Consider opening a tax advantaged savings plan. Depending on your need, one might consider a Traditional IRA, ROTH IRA, SEP IRA, SIMPLE IRA, or Solo 401(k). All of these plans allow for tax deferred or tax advantaged savings and investing but each offers a different level of complexity and contribution limits.

5) Hire the Right People

Find folks with the expertise to guide you through the setup and management of each step we detailed above. This person or firm will need to network with their CPA’s and attorney’s or even your existing team to make the most of your new found success. The goal is to minimize your tax bill, grow your net worth, and protect you from some of the common financial pitfalls seen in both traditional and eSports.

 

More About Us

Warren Street Wealth Advisors was founded by a retired Counter-Strike: Source professional, and we are well aware of the challenges you face. We offer services that give streamers, professional esports players, and interactive media talent the ability to transform themselves from just a  revenue generating entity to a well rounded and tax efficient business. If you’d like to learn more, feel free to contact Blake Street or Joe Occhipinti directly.

 

Disclaimer
Blake Street and Joseph Occhipinti are Investment Advisor Representatives of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Common Deductions Taxpayers Overlook

Make sure you give them a look as you prepare your 1040.

Provided by: Warren Street Wealth Advisors

 

Every year, taxpayers leave money on the table. They don’t mean to, but as a result of oversight, they miss some great chances for federal income tax deductions.

 

While the IRS has occasionally fixed taxpayer mistakes in the past for taxpayer benefit, you can’t count on such benevolence. As a reminder, here are some potential tax breaks that often go unnoticed – and this is by no means the whole list.

 

Expenses related to a job search. Did you find a new job in the same line of work last year? If you itemize, you can deduct the job-hunting costs as miscellaneous expenses. The deductions can’t surpass 2% of your adjusted gross income. Even if you didn’t land a new job last year, you can still write off qualified job search expenses. Many expenses qualify: overnight lodging, mileage, cab fares, resume printing, headhunter fees and more. Didn’t keep track of these expenses? You and your CPA can estimate them. If your new job prompted you to relocate 50 or more miles from your previous residence last year, you can take a deduction for job-related moving expenses even if you don’t itemize.1

 

Home office expenses. Do you work from home? If so, first figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation.) If you use 15% of your home’s square footage for business, then 15% of your homeowners insurance, home maintenance costs, utility bills, ISP bills, property tax and mortgage/rent may be deducted.2

 

State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid the previous year.1

 

Student loan interest paid by parents. Did you happen to make student loan payments on behalf of your son or daughter last year? If so (and if you can’t claim your son or daughter as a dependent), that child may be able to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t necessary.1

 

Education & training expenses. Did you take any classes related to your career last year? How about courses that added value to your business or potentially increased your employability? You can deduct the tuition paid and the related textbook and travel costs.3,4

 

Those small charitable contributions. We all seem to make out-of-pocket charitable donations, and we can fully deduct them (although few of us ask for receipts needed to itemize them). However, we can also itemize expenses incurred in the course of charitable work (i.e., volunteering at a toy drive, soup kitchen, relief effort, etc.) and mileage accumulated in such efforts ($0.14 per mile, and tolls and parking fees qualify as well).1

 

Armed forces reserve travel expenses. Are you a reservist or a member of the National Guard? Did you travel more than 100 miles from home and spend one or more nights away from home to drill or attend meetings? If that is the case, you may write off 100% of related lodging costs and 50% of meal costs  and take a mileage deduction ($0.56 per mile plus tolls and parking fees).1

 

Estate tax on income in respect of a decedent. Have you inherited an IRA? Was the estate of the original IRA owner large enough to be subject to federal estate tax? If so, you have the option to claim a federal income tax write-off for the amount of the estate tax paid on those inherited IRA assets. If you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and thereby hit with $40,000 in death taxes, you can deduct that $40,000 on Schedule A as you withdraw that $100,000 from the inherited IRA, $20,000 on Schedule A as you withdraw $50,000 from the inherited IRA, and so on.1

 

The child care credit. If you paid for child care while you worked last year, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12.) Tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.1

 

As a precaution, check with your tax professional before claiming the above deductions on your federal income tax return.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

714-876-6202 – fax

714-876-6284 – direct

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – kiplinger.com/article/taxes/T054-C000-S001-the-most-overlooked-tax-deductions.html [1/7/15]

2 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction [1/9/15]

3 – irs.gov/publications/p970/ch06.html [2015]

4 – irs.gov/publications/p970/ch12.html [2015]

 

 

2015 IRA Deadlines Are Approaching

Here is what you need to know.

Provided by: Warren Street Wealth Advisors

 

Financially, many of us associate April with taxes – but we should also associate April with important IRA deadlines.

 

*April 1 is the absolute deadline to take your first Required Mandatory Distribution (RMD) from your traditional IRA(s).

*April 15 is the deadline for making annual contributions to a traditional or Roth IRA.1

 

Let’s discuss the contribution deadline first, and then the deadline for that first RMD (which affects only those IRA owners who turned 70½ last year).

 

The earlier you make your annual IRA contribution, the better. You can make a yearly Roth or traditional IRA contribution anytime between January 1 of the current year and April 15 of the next year. So the contribution window for 2014 is January 1, 2014- April 15, 2015. You can make your IRA contribution for 2015 anytime from January 1, 2015-April 15, 2016.2

 

You have more than 15 months to make your IRA contribution for a given year, but why wait? Savvy IRA owners contribute as early as they can to give those dollars more months to grow and compound. (After all, who wants less time to amass retirement savings?)

 

You cut your income tax bill by contributing to a deductible traditional IRA. That’s because you are funding it with after-tax dollars. To get the full tax deduction for your 2015 traditional IRA contribution, you have to meet one or more of these financial conditions:

 

*You aren’t eligible to participate in a workplace retirement plan.

*You are eligible to participate in a workplace retirement plan, but you are a single filer or head of household with modified adjusted gross income of $61,000 or less. (Or if you file jointly with your spouse, your combined MAGI is $98,000 or less.)

*You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible and your combined 2015 gross income is $183,000 or less.3

 

If you are the original owner of a traditional IRA, by law you must stop contributing to it starting in the year you turn 70½. If you are the initial owner of a Roth IRA, you can contribute to it as long as you live provided you have taxable compensation and MAGI below a certain level (see below).1,3

 

If you are making a 2014 IRA contribution in early 2015, be aware of this fact. You must tell the investment company hosting the IRA account what year the contribution is for. If you fail to indicate the tax year that the contribution applies to, the custodian firm may make a default assumption that the contribution is for the current year (and note exactly that to the IRS).4

 

So, write “2015 IRA contribution” or “2014 IRA contribution” as applicable in the memo area of your check, plainly and simply. Be sure to write your account number on the check. Should you make your contribution electronically, double-check that these details are communicated.

 

How much can you put into an IRA this year? You can contribute up to $5,500 to a Roth or traditional IRA for the 2015 tax year, $6,500 if you will be 50 or older this year. (The same applies for the 2014 tax year). If you have multiple IRAs, you can contribute up to a total of $5,500/$6,500 across the various accounts. Should you make an IRA contribution exceeding these limits, you will not be rewarded for it: you will have until the following April 15 to correct the contribution with the help of an IRS form, and if you don’t, the amount of the excess contribution will be taxed at 6% each year the correction is avoided.1,4

 

If you earn a lot of money, your maximum contribution to a Roth IRA may be reduced because of MAGI phase-outs, which kick in as follows.3

 

2014 Tax Year                                                          2015 Tax Year

Single/head of household: $114,000 – $129,000          Single/head of household: $116,000 – $131,000

Married filing jointly: $181,000 – $191,000                      Married filing jointly: $183,000 – $193,000

Married filing separately: $0 – $10,000                 Married filing separately: $0 – $10,000

 

If your MAGI falls within the applicable phase-out range, you may make a partial contribution.3

 

A last-chance RMD deadline rolls around on April 1. If you turned 70½ in 2014, the IRS gave you a choice: you could a) take your first Required Minimum Distribution from your traditional IRA before December 31, 2014, or b) postpone it until as late as April 1, 2015.1

 

If you chose b), you will have to take two RMDs this year – one by April 1, 2014 and another by December 31, 2014. (For subsequent years, your annual RMD deadline will be December 31.) The investment firm hosting your IRA should have already notified you of this consequence, and the RMD amount(s) – in fact, they have probably calculated the RMD(s) for you.5

 

Original owners of Roth IRAs will never face this issue – they are not required to take RMDs.1

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

714-876-6202 – fax

714-876-6284 – direct

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [11/3/14]

2 – dailyfinance.com/2014/12/06/time-running-out-end-year-retirement-planning/ [12/6/14]

3 – asppa.org/News/Browse-Topics/Sales-Marketing/Article/ArticleID/3594 [10/23/14]

4 – investopedia.com/articles/retirement/05/021505.asp [1/21/15]

5 – schwab.com/public/schwab/nn/articles/IRA-Tax-Traps [6/6/14]