Episode: 03-22-2022 | Last Minute Tax Moves & IRA Mechanics

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP® Dollars & Common Sense · Last Minute Tax Moves IRA Mechanics Last Minute Tax Moves Allison Dubreuil, Wealthway Financial: Tis the season for taxes so we thought it would be apropos to talk about some tax filing issues or strategies that you could do […]

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Last Minute Tax Moves

Allison Dubreuil, Wealthway Financial: Tis the season for taxes so we thought it would be apropos to talk about some tax filing issues or strategies that you could do at the last minute. The tax filing deadline this year is April 18. Tonight, we’re going to focus on some last-minute tax planning moves. And I shouldn’t call it tax planning. Because if you’ve listened to our show for any period of time, you’ve heard us say before, your tax planning needs to happen well in advance of the end of the year, and certainly in advance of the tax filing deadline. But there are a few things that you can do to reduce the tax bite still this year, so we’ll talk about some of those ideas.

Kevin Zywna, Wealthway Financial: Yes, certainly with taxes on a lot of people’s mind this time of year, we’ll give you some last-minute tidbits. A little bit more information on tax rates to taxes as they relate to investments, and then some practicality admin – How long do you have to save these tax documents for? What type of documents should you save? etc.  Big picture tax planning does not happen in March, prior to April 15, or 18th. In the case of this year, of the filing date. Tax planning is year-round. So right now is a good time to be planning your 2022 tax strategy, because now you have time to implement certain planning options during the course of the year. Tax planning is year-round.

Last Minute IRA Contribution

Allison Dubreuil, Wealthway Financial: Right. And we always like to be proactive rather than reactive. But here we are March 22. So if you are looking for some last minute moves, one of the things you may be able to take advantage of is making an individual retirement account or IRA contribution. So if you have earned income, you are able to contribute $6,000 a year to an individual retirement account. Or you can add $7,000, if you’re over the age of 50 – you get to do a little bit of extra and money that is in an IRA, a traditional IRA then grows tax deferred, and then you can use it in retirement as income. So it’s a really good savings vehicle. Now, one of the advantages of making an IRA contribution is that it may be tax deductible. So depending on your level of income, and depending on whether or not you have access to another retirement plan, like through your employer, you may be able to take a tax deduction for that contribution. So that can help lower your tax bill at the very last minute, because you have until April 18 to make those IRA contributions.

Kevin Zywna, Wealthway Financial: Yes, and everyone is eligible to make some sort of IRA contribution. It just depends on what type is best for you and what you’re eligible for. So anyone can make a nondeductible IRA contribution. And for people with high income, above the income limits for deductible IRAs, that is an option for them. However, there is a fair amount of record keeping and administration around nondeductible IRA contributions. So you have to be up to the task if you even want to attempt an nondeductible IRA contribution. Because if you don’t do it right, when the money eventually comes out of the IRAs, if you haven’t properly accounted for the nondeductible contributions, then they could be subject to taxation a second time. Then you’ve defeated the whole purpose of making nondeductible contribution. For most people, we say while you might be eligible for them, you probably shouldn’t, unless you either have professionals working with you, or you are a good long term record keeper. And then within income thresholds, you might be able to make deductible IRA contributions and that way you can reduce your taxable income and get a tax break. And for those where it’s appropriate, you might also within income limitations be able to make Roth IRA contributions. You don’t get a tax deduction for contributions to a Roth. But when you withdraw the money, ostensibly at retirement, you don’t have to pay tax on it – unlike a deductible IRA which comes out as ordinary income. So a lot of options for everyone to make some tax advantaged type of contribution to an IRA.

Allison Dubreuil, Wealthway Financial:  And it just has to be done in the account by April 18.

Kevin Zywna, Wealthway Financial: And you can do it for tax year 2021.

Allison Dubreuil, Wealthway Financial: Now, something you may not most people may not realize is that I had mentioned, first off that you have to have earned income to make these contributions. You have to have at least $6,000 of earned income to make a $6,000 IRA contribution. Well, what if you don’t work and you don’t have earned income? What if you are a stay at home spouse? You can make contributions on behalf of a spouse that doesn’t have earned income. So if you are a married couple and one of you works, and one of you doesn’t work, you will most likely be able to make an IRA contribution on behalf of your spouse of this the same amount $6,000 a year for most people, and then an extra $1,000 on top of that for those over age 50. So even if you don’t have earned income, if your spouse does, it still will likely open the door for you to make a deductible IRA contribution.

Kevin Zywna, Wealthway Financial:  And in particular, if you’re married filing joint  (which most people are) and your adjusted gross income is less than $204,000, then the non-working spouse can make this fully deductible IRA contribution. So the number there, let’s call it $200K just to be safe. Gross income below that number, you can make that spousal deductible IRA contribution. Alright, we’re going to pause right here and go to Hampton and speak to Bill. Good evening, Bill, you’re on Dollars & Common Sense.

Can You Have A Traditional IRA And A Roth IRA At The Same Time?

Caller: I do have a question on IRAs. And I’m not sure if you’ve covered this. But can you have a Traditional IRA and a Roth IRA at the same time?

Allison Dubreuil, Wealthway Financial: Good question, Bill. Yes, you can have both a Traditional and a Roth IRA. And in fact, you can contribute to both a Traditional IRA and a Roth IRA. But the limits we were talking about (the $6,000 a year or $7,000 a year for those over age 50) apply across all IRAs. So you can only put a total of $6,000 in between both your Traditional and Roth IRA in a year.

Kevin Zywna, Wealthway Financial:  And you can contribute to both as long as you don’t go over that annual limit in one calendar year.

Spousal IRA Contributions And SEP IRAs

Kevin Zywna, Wealthway Financial:  Now we’re going to hear from Steve and Poquoson and good evening, Steve. You’re on Dollars & Common Sense.

Caller: I am a business owner and my wife does work. As a business owner, I am an LLC, and it’s not tons of profits. But what I do is I have a draw and my wife, she has her income and we file taxes but it’s not a lot of money, right? And so my question would be, far as my understanding, the lay down that for taxes, it’s $6,000 per person. So if you file jointly, like my wife and I do it’s 12,000 and to itemize and get over the amount to get more back in taxes. So basically, the bottom line is, if my company that I have and I take drawls and the taxes and this at me other if I am LLC, sole owner, and the only person pulling money from my wife and I take together first question is, can I be able to do an IRA or be able to invest with an IRA, my wife and I and use it as a deduction?

Kevin Zywna, Wealthway Financial:  And just to clarify, Steve, do you have any sort of retirement plan? As part of your LLC Corporation?

Caller: No.

Allison Dubreuil, Wealthway Financial:  Okay. Is your wife eligible for a retirement plan at her work?

Caller:  It’s not a pension. She just switch companies, she is eligible to put money in. But it’s not a pension, it’d be like an IRA.

Allison Dubreuil, Wealthway Financial:  So she has access to a company retirement plan? Okay. Well, then it is going to depend on your income. If you are married, filing jointly, and your modified adjusted gross income is less than $109,000, then it looks like your wife would be able to make a fully deductible IRA contribution. And there’s a phase out.

Caller:  So I heard earlier the other spouse could put in. So if she was not doing deductions from her paychecks, to go into the IRA, but I gave her the money to put into her IRA, would that be (of course, it’s not pretax out of her paycheck, because she’s not putting in), deductible for both of us?

Allison Dubreuil, Wealthway Financial:  We were talking about spousal IRAs. We were talking about making a contribution for a spouse who has no earned income. In your case, you each have earned income. So your spouse, she can make a contribution to her own IRA based on her own earned income. And you can as well. It just depends on the level of your modified adjusted gross income. That will determine whether you’re able to take a tax deduction for those contributions.

Allison Dubreuil, Wealthway Financial:  Steve has his own earned income. He would be making his own contribution. You would be able to take the deduction for it as long as your modified adjusted gross income is less than $204,000. There’s a few limits going on. There’s a different limit for your wife who has access to a retirement plan and a different limit for you who doesn’t have a retirement plan. That’s where your tax advisor can help you get more specific. And I will say this, Steve, that you may also be able to, in addition, add to a SEP IRA, because you own your own business. So you may be able to make an IRA contribution and a SEP IRA contribution both at the same time that would both potentially be deductible, but you’d probably want to work with your tax advisor on that.

Kevin Zywna, Wealthway Financial:  SEP – Self Employed Pension IRA. Which takes a little bit more admin and set up, then regular IRA contributions. But it’s out there and available. And you might have access to it.

Caller: Okay, I appreciate your time.

Allison Dubreuil, Wealthway Financial:  It does get a little complicated. I know we’re rattling off all these adjusted gross income levels. We’re just using the lower limits. There’s actually a phase out period where you can make pro rata contribution. So I just want to stress to anyone that’s listening. If you think you might want to do this or might be eligible, talk to your tax preparer.

IRA Contributions And Working Overseas

Kevin Zywna, Wealthway Financial:  Right, there are a lot more nuances and details that we can’t translate that well over the radio. Right now we’re going to go up to Yorktown to speak with Marge.

Caller: Hi, so my question might be a little weird. I’ve got a daughter who is 30. She has a small business in France and pays French taxes as well as files US taxes. She has no US income but she does have us dividend income.  To keep everything straight, she still files both taxes. Can we contribute to an IRA for her?

Kevin Zywna, Wealthway Financial:  Okay, that’s a good complicated question there Marge, and your in luck because Alison was a French major undergrad in college and I’m sure she’s fluent in the language.

Allison Dubreuil, Wealthway Financial:  I’m not going to break out my French for anybody today but Marge, is your daughter single or she married?

Caller:  She’s cohabiting

Allison Dubreuil, Wealthway Financial:  Okay, technically single so she files single. And sounds like she files and pays taxes in France, but for administrative reasons, she also files in the US but doesn’t end up having any taxable income on the US tax return. Is that right?

Caller:  Um, I’m not sure just how much her dividends are. For the last couple of years we’ve been giving the full $30,000 to her as well as some other dividends that she would have had even before. Her accounts would have been small before the last couple of years where we’ve given her the full 30.

Allison Dubreuil, Wealthway Financial:  For gifting?

Caller:  Yes.

Allison Dubreuil, Wealthway Financial:  Okay. Well, unfortunately, dividends don’t count as earned income. So you aren’t eligible to make IRA contributions based on investment income. It has to be actually W2 earned income or through 1099, or business income. It does have to be taxed through the US. Income that’s excluded from taxation on her US tax return, would not allow her to make an IRA contribution is my understanding.

Caller:  Yes, and the French income doesn’t count either?

Allison Dubreuil, Wealthway Financial:  No, it has to be taxed as earned income on her US tax return to enable her to make an IRA contribution.

Kevin Zywna, Wealthway Financial:  But your idea is a good one, Marge. By gifting money to her on a regular basis, she can always save that money and invest it in a brokerage type of account. And while she can’t get a tax deduction for it, she can continue to grow her net worth by doing so.

Caller:  Yes, so that’s the idea. It’s investing. Probably a Schwab account?

Kevin Zywna, Wealthway Financial:  Yes. Okay, good.

Caller:  Yes, it’s not going into her hot little spending account.

Kevin Zywna, Wealthway Financial:  Well, you’re doing a good thing for her, Marge. And I hope she’s enjoying herself over there in France. But unless she has US income and claimed it on a US tax return, then she’s not eligible for the IRA contributions.

Caller:  Yes. She actually works for a US company, but she takes her money in Euros in order to justify her business in France for her being in France. Otherwise, they would probably send her packing.

Kevin Zywna, Wealthway Financial:  Yes, a unique circumstance.

Allison Dubreuil, Wealthway Financial:  Well, it really doesn’t sound like she would be eligible to make IRA contributions. But if she wants to run that by whoever’s preparing her taxes, they would be certainly a good resource. A good double check.

Kevin Zywna, Wealthway Financial:  Usually American expatriates who worked for a large enough company overseas have access to sophisticated tax planning companies that understand the nuances of the tax code. But from the information you shared with us, we don’t think she’s eligible. But the fact that you worked for us company, that might open a door.

Caller:  Yes, it’s a tiny company. It’s a startup in fact, Well, thank you.

Can I Contribute To A Roth IRA And My Company 401K?

Kevin Zywna, Wealthway Financial: We’re going to hear from Warren right now. He’s been hanging out in Virginia Beach waiting patiently. Good evening, Warren. You’re on Dollars & Common Sense.

Caller:  Hey, good evening, guys. Glad to talk to you. Got a quick question. I am actively investing in my company’s 401k for 33 years. I’ve invested the max. I’ve got upwards to about $750-80,000 in it. Can I also invest in a Roth IRA to offset some of those taxes that I’m going to pay when I start getting my R&Ds?

Allison Dubreuil, Wealthway Financial:  Good question. Warren. We haven’t talked about this yet. You can contribute to both your company sponsored 401K plan, as well as an individual retirement account. It’s not one or the other, you are able to do both – as long as you’re under the income limits that are set. Are you married or do you file single?

Caller:  I’m engaged.

Allison Dubreuil, Wealthway Financial:  So let’s see. Will you be married this year?

Caller: More than likely.

Allison Dubreuil, Wealthway Financial:  So more than likely filing joint this year. If your modified adjusted gross income is less than $204,000, then you can make a Roth IRA contribution.

Caller:  Combined?

Allison Dubreuil, Wealthway Financial:  Combined.

Caller:  Okay, well, we’re above that.

Allison Dubreuil, Wealthway Financial:  Okay, there is a little bit of a phase out. But it completely phases out at $214,000.

Caller:   I couldn’t invest in a Roth, is that what you’re saying?

Allison Dubreuil, Wealthway Financial: Right. So between $204K and $214K, you could do a partial contribution in a Roth. But if your modified adjusted gross income is above $214K, then you are likely not eligible to make a Roth IRA contribution. However, do you know if your company has a Roth option in your 401k? Plan?

Caller:  Don’t believe? No.

Allison Dubreuil, Wealthway Financial:  It’s becoming more and more prevalent where 401K plans allow you to either do pretax Traditional or Roth IRA contribution. I was going to say that’s another option, because that is not limited based on your income, if the plan is offered, but doesn’t sound like that’s the case for you.

Caller:  If I were married, filing separate, does the $214K still come into effect? I am under 214K, and filing separate. Can I invest in a Roth IRA at that point?

Allison Dubreuil, Wealthway Financial:  If you file married filing separate, I believe it goes then to the single limits, which are much lower.

Kevin Zywna, Wealthway Financial:  There are very few advantages and many disadvantages of filing married separately. So no, you can’t quite game it that way, Warren. You’re still going to give up other advantages of filing by doing it separately rather than doing it jointly.

Real Estate Tax Exclusions

Caller:  Okay. Now, I have a unique situation in that I own my home. Shshe owns her home. I’m not sure whether I’m going to sell mine, or she’s going to sell hers, or we rent one or the other out. So if I don’t get rid of my home, does that change the whole dynamics of it all? I know, these are complicated questions.

Allison Dubreuil, Wealthway Financial:  So you may potentially get married, and you may sell one of the homes and you’re wanting to know if that impacts your ability to make an IRA contribution.

Kevin Zywna, Wealthway Financial:  The home sale shouldn’t really have an impact on your ability to contribute to an IRA. Now, if either of you sells your home for a profit, that could be a taxable event – depending on how much profit you make on the sale of the home. But as it relates to contributions to either the 401K or an IRA, that should not have a bearing.

Caller: If we’re married, and the event comes, that I sell my home, are we eligible for the $500,000 tax-free income from home?

Allison Dubreuil, Wealthway Financial: How long? Have you owned your home Warren?

Caller: 20 years, I guess.

Allison Dubreuil, Wealthway Financial: And you’ve always lived there, it has never been an a rental property?

Caller: That’s correct.

Allison Dubreuil, Wealthway Financial: Then, yes, I believe you would qualify for the exclusions, you’d be able to exclude up to $500,000 worth of the capital gain from taxation.

Caller:  Even if my future wife’s not lived here?

Allison Dubreuil, Wealthway Financial: That’s my understanding, although that’s a pretty detailed question that you would certainly want to run by your tax advisor.

Caller: All right. Great. You’ve definitely enlightened me on some things. I appreciate everything.

Contributing To Roth IRA And 401K

Kevin Zywna, Wealthway Financial: We’re going to go up to Newport News and speak with Dale. Good evening, Dale, you’re on Dollars & Common Sense.

Caller: I was wondering our 401K does allow Roth as well as regular pre-tax deferrals. So can I also contribute to a Roth IRA?

Allison Dubreuil, Wealthway Financial:  Yes, so you are able to contribute to an individual retirement account, as well as a 401k. The limits are different. They’re separate and different. So how old are you, Dale?

Caller:  Almost 62.

Allison Dubreuil, Wealthway Financial:   Okay, so you would be eligible for the catch-up. You’d be eligible to contribute up to $27,000 into your 401K, whether that’s pretax or Roth. And then, depending on income limits (if your income was below the limits for an individual retirement account), you may be able to make a $7,000 contribution to an IRA or Roth IRA.

Caller:  Okay, good. So you can add them right? As long as you’re not over the limit.

Allison Dubreuil, Wealthway Financial:  Right. As long as your income is below the threshold, it allows you to save into both buckets, which is a great benefit. They aren’t mutually exclusive.

Should I Contribute To A Roth IRA Close To Retirement?

Caller:  Right. And this is a difficult question. I know you need more information. Similar to the previous caller, if you are trying to get more Roth IRA benefits at my age – where I have, like 90% of my savings and regular and just a small amount in Roth IRA-  rather than try to roll it over and pay the taxes. Would it be better to do some Roth at this late stage or is it late because of a five year rule?

Allison Dubreuil, Wealthway Financial:  Yes, that’s a good question. Dale. We do a lot of analysis on that. I am a believer that it can sometimes make sense to make Roth IRA contributions even in the later years. Even if you’re still in somewhat of a high tax bracket, just to start building that bucket that is treated differently than all of your pretax money. You said that 90% of your money is pretax. So that’s all going to be taxable to you once you start withdrawing it. So I don’t think there’s anything wrong with making Roth IRA contributions that that can hopefully grow. You still have years ahead of you in retirement so they’ll grow tax-free.

Caller:  Right, right. Okay. Sounds good. Thanks for the advice.

Kevin Zywna, Wealthway Financial:  And to tag on to what Dale was saying, is the reason we like some diversification and types of IRAs because Roth IRAs are not subject to required minimum distributions. So much like Dale, most people have most of their money in the traditional form of IRAs, or in 401K’s which work the same way. And at age 72, you will be required to start taking money out of those types of accounts.  The money that comes out of a Traditional IRA or 401K plan will be will come out and be taxed as ordinary income. If you have a Roth IRA bucket, then, and if you need some additional cash flow, you can somewhat manage your tax brackets a little bit by having options for both.

What Is The Roth IRA 5 Year Rule?

Allison Dubreuil, Wealthway Financial:  Part of his question that I didn’t directly address yet was the five year rule. So there is a rule that when you make Roth IRA contributions, the account has to be open for at least five years before you can take your contributions out tax and penalty free. But like I said, he still has a long-time horizon, even though he’s 62. He probably has other buckets he can pull from if he needs money. So that time restriction is not a deal breaker.

Kevin Zywna, Wealthway Financial:  Let’s say five more years of work history, and if you’re able to max out your contributions, you’re looking at over $100,000 over the next five years of contributions into a Roth type 401K vehicle there. And maybe even more with Roth IRA contributions. So for people even later in life, who typically are at their peak earning years, they still have options and opportunities to take advantage of some tax-preferred investment accounts. If you organize your affairs appropriately.

Tax Planning Versus Net Worth

Allison Dubreuil, Wealthway Financial:  I did want to say that when you’re doing tax planning, it’s not always about trying to reduce your tax bill to zero at all costs. We of course help our clients minimize taxes as much as possible whenever possible, but our ultimate goal is growing your net worth so that you can live a secure comfortable life. We don’t want to make tax moves at to the detriment of our overall net worth right.

Kevin Zywna, Wealthway Financial:  Don’t let the tax tail wag the dog. The main objective is to build your net worth and taxes are a natural consequence of successful investing.

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