• Thinking of Tapping Your Retirement Savings? Read This First

    22 May 2017
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    Before you start tapping into your retirement savings, you may want to read this first:

    If you are under age 59½ and plan to withdraw money from a qualified retirement account, you will likely pay both income tax and a 10% early-distribution tax on any previously un-taxed money that you take out. Withdrawals you make from a SIMPLE IRA before age 59½ and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited. These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.

    The following exceptions may help you avoid the penalty:

    • Withdrawals from any retirement plan to pay medical expenses—Amounts withdrawn to pay unreimbursed medical expenses are exempt from penalty if they would be deductible on Schedule A during the year and if they exceed 10% of your adjusted gross income. This is true even if you do not
    • IRA withdrawals annuitized over your lifetime—To qualify, the withdrawals must continue unchanged for a minimum of 5 years, including after you reach age 59½.
    • Employer retirement plan withdrawals—To qualify, you must be separated from service and be age 55 or older in that year (the lower limit is age 50 for qualified public-service employees such as police officers and firefighters) or elect to receive the money in substantially equal periodic payments after your separation from service.
    • Withdrawals from any retirement plan as a result of a disability—You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activities because of a physical or mental condition. A physician must certify your condition.
    • IRA withdrawals by unemployed individuals to pay medical insurance premiums—The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You also must have received unemployment compensation for at least 12 weeks during the year.
    • IRA withdrawals to pay higher education expenses—Withdrawals made during the year for qualified higher education expenses for yourself, your spouse, or your children or grandchildren are exempt from the early-withdrawal penalty.
    • IRA withdrawals to buy, build, or rebuild a first home—Generally, you are considered a first-time homebuyer for this exception if you had no present interest in a main home during the 2-year period leading up to the date the home was acquired, and the distribution must be used to buy, build, or rebuild that home. If you are married, your spouse must also meet this no-ownership requirement. This exception applies only to the first $10,000 of withdrawals used for this purpose. If married, you and your spouse can each withdraw up to $10,000 penalty-free from your respective IRA accounts.

    You should be aware that the information provided above is an overview of the penalty exceptions and that conditions other than those listed above may need to be met before qualifying for a particular exception. You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both normal taxes and other penalties, which can take a significant bite out of the distribution. However, with carefully planned distributions, both the taxes and the penalties can be minimized. Please call Dagley & Co. for assistance.

     

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  • Looking for Ways to Maximize Your Retirement Contributions?

    16 September 2016
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    Are you a sole proprietor with no full-time employees other than yourself and/or your spouse? Also, are you are seeking to maximize your retirement plan contributions? If so, a Solo 401(k) may be right for you. The key benefits of a Solo 401(k) plan are as follows:

    • Manage your own account directly without any brokers, banks, or trust companies as middlemen.
    • Generally contribute larger amounts, approximately equal to the 401(k) and profit-sharing amounts combined.
    • Legally avoid the unrelated business income tax (UBIT) that would apply to certain self-directed IRA transactions.
    • Make Roth contributions to the 401(k) element (not the profit-sharing part) of the plan, regardless of the AGI limitations that apply to regular Roth contributions.
    • Transfer existing retirement funds into the Solo 401(k).
    • Direct your investments with absolutely no restrictions on investment choices (including real estate, private companies, foreign assets, precious metals, etc.).

    Solo 401(k) Contributions – The maximum annual contribution to a Solo 401(k) for 2016 is $53,000 but not exceeding 100% of compensation. The Solo 401(k) contribution consists of two parts: (1) a profit-sharing contribution of up to 20% of net self-employment income for unincorporated businesses or 25% of W-2 income for incorporated businesses and (2) a salary-deferral contribution (same as the 401(k)) of as much as 100% of the first $18,000 ($24,000 if age 50 or over) of the remaining compensation after the profit-sharing contribution, as a tax-deductible contribution.

    Given sufficient income, a self-employed individual and spouse (assuming the spouse is employed in the same business) may contribute, for 2016, up to $106,000 combined. Because of the way the contribution is calculated, a larger contribution can usually be made into a Solo 401(k) than to a Keogh or SEP IRA at the same income level.

    Discretionary Funding –The funding of the Solo 401(k) plan is completely discretionary and flexible every year. Funding can be increased, decreased, or skipped entirely, if necessary.

    Where Deducted – If your business is organized as a Subchapter S or C corporation, or LLC electing to be taxed as a corporation, then you are an employee of the business, so the salary-deferral contribution reduces your personal W-2 earnings and the profit-sharing contribution is deducted as a business expense.

    For a sole proprietorship, a partnership, or an LLC taxed as a sole proprietorship, the owner’s salary-deferral and profit-sharing contributions are deductible only from personal income (i.e., on page 1 of Form 1040, as an adjustment to gross income), and not as an expense of the business.

    Deadlines – The deadline for establishing a Solo 401(k) is December 31st for an individual or the fiscal year end for corporations. For unincorporated businesses, the deadline for making the contributions is the regular April income tax filing due date plus extensions. For incorporated businesses, the deadline is 15 days after the close of the fiscal year.

    Roth Option – The 401(k) portion of the contribution can be designated as a non-deductible qualified Roth contribution, provided the plan document permits Roth contributions.

    If you think a Solo 401(k) might be right for you, please call Dagley & Co. at (202) 417-6640 for further details. We will help you to determine if your particular circumstances permit you have, and whether you will benefit from a Solo 401(k).

     

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  • Breaking News: IRS Releases Pension Limits For 2016

    4 November 2015
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    You’ve heard it once, and you’re hearing it again: Saving for retirement is one of the most important things a person should do. Contributing to tax-advantaged retirement plans while you are working is one of the best ways to build up that nest egg. That said, the tax law doesn’t allow unlimited annual contributions to these plans.

    If you have been wondering how much you can contribute to your retirement plans in 2016, the IRS has released the inflation-adjusted limits for next year’s contributions. Since inflation has been low this past year (according to the government’s calculation), most limits won’t increase over what they were in 2015, but some of the AGI phaseout thresholds that work to reduce allowable contributions will change. Here’s a review of the 2016 numbers:

    For 401(k) plans, the maximum contribution will be $18,000 again. If you are age 50 or over, that limit is increased by a so-called “catch-up” contribution to a maximum of $24,000, the same as in 2015. These limits also apply to 403(b) tax sheltered annuities and 457 deferred compensation plans of state and local governments and tax-exempt organizations.

    Traditional IRA and Roth IRA contributions are limited to a combined total of $5,500 ($6,500 if you are age 50 or over), also unchanged from 2015. However, both types of IRAs have certain income (AGI) limitations.

    When you are an “active participant” in another qualified plan, the traditional IRA contributions are only deductible by lower-income individuals, and the deductibility phases out for unmarried tax filers with AGIs between $61,000 and $70,999. For married joint filers the phaseout range is between $98,000 and $117,999. The phaseout of traditional IRA contributions starts at $0 AGI for married individuals filing separately and tops out at $10,000—essentially, MFS filers rarely qualify to contribute to an IRA if they or their spouses also participate in an employer’s plan. For married couples in which one spouse is an active participant and the other is not, the phaseout AGI limitation for the non-active participant spouse has gone up by $1,000 and is between $184,000 and $193,999.

    Roth IRA contributions are never tax deductible, although they do enjoy tax-free accumulation. However, the contribution limits are phased out for unmarried taxpayers with AGIs between $117,000 and $131,999. For married joint filers the phaseout range is between $184,000 and $193,999. Each of these amounts reflects a $1,000 increase for 2016. Married individuals filing separately are not allowed Roth IRA contributions if their AGI is $10,000 or more. The AGI phaseouts will limit the contributions you can make to a Roth IRA even if you do not participate in an employer’s plan or other qualified plan. Unlike traditional IRAs, contributions to which cannot be made after you reach age 70½, contributions can be made to a Roth IRA as long as you have earned income of an equal amount.

    If you are self-employed and have a self-employed retirement plan (SEP), the maximum contribution is the lessor of $53,000 (the same limit as for 2015) or 20% of the net earnings from self-employment; contributions are allowed regardless of age. If your retirement plan is a profit-sharing Keogh plan, the limitations are the same. For defined benefit plans the amount contributed can’t create an annual benefit in excess of the greater of $210,000 or 100% of your average compensation for the highest 3 years.

    Simple IRA or Simple 401(k) plan contribution limits will be $12,500 or $15,500 for those ages 50 or over. These amounts are unchanged from 2015.

    If have questions or would like to discuss your retirement contribution options, please get in touch with us at Dagley & Co! You’ll find our information at the bottom of this page.

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