Protecting Your Child with a Roth IRA Account

Ainer & Fraker, LLP – The long-term benefits of tax-free accumulation provided by Roth IRAs are hard to ignore. Parents can do their children a real service by encouraging them to establish a Roth IRA at the first opportunity. A Roth IRA, left untouched until retirement, will ensure that your child has a substantial nest egg.

Take for example a youngster, age 17, who contributes $2,000 to a Roth IRA and allows that single deposit to accumulate untouched until retirement at age 65. At a 8% annual growth, the Roth IRA will have grown to $80,421.

Consider what the result would be if that same young person continued to deposit $2,000 a year to their Roth IRA. Assuming an 8% annual growth, the Roth IRA will grow to $980,264 by the time they reach retirement age of 65.

But keep in mind that children, like adults, must have “earned income” to establish a Roth IRA. Generally, earned income is income from working, not from investments. Earned income can include income from a part-time job, summer employment, baby-sitting, yard work, etc. The amount that can be contributed to either a Traditional or a Roth IRA is limited to the lesser of earned income or the annual contribution limit. The following is the annual limits by year for younger individuals. For 2013, the contribution limit is $5,500, up from $5,000 in 2012.

Your children may balk at having to give up their earnings, especially since their focus at their age will not be on retirement. But this is not an obstacle if parents, grandparents or others are willing to fund all or part of the child’s Roth contribution.

If the parents or others contribute the funds, they need to keep in mind that once the funds are in the child’s IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax.

Is Your Spouse Retired?

San Jose Tax Attorney’s – When one spouse works and the other does not, tax law allows the non-working spouse to base their contribution to an IRA on the income of the working spouse.

This tax benefit is frequently overlooked when spouses have been working and basing their individual contributions on their own income for years, retire and fail to recognize the opportunity to make IRA contributions for a retired spouse. Even if the working spouse has a pension plan at work and his or her income precludes him or her from making an IRA contribution, the non-working retired spouse can still make a contribution based on the working spouse’s income.

However, be careful since traditional IRA contributions, both deductible and nondeductible, are not allowed in the year an individual turns 70-½ and all subsequent years. This restriction does not apply to Roth IRA contributions.

The maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is an active participant, is phased out for the non-active participant based upon their combined AGI. See the AGI phase-out limits in the table below.

Non-Active Participant Spouse
Year Phase-Out Range
2011
2012
2013
2014
169,000 – 179,000
173,000 – 183,000
178,000 – 188,000
Inflation Adjusted

Example – Phase Out for Joint Taxpayers – Sandra actively participates in a retirement plan at work, but her husband, Tim, is not involved in any plan. The couple has a combined AGI of $200,000 for 2013.

Result: Sandra: No Traditional IRA deduction due to her active participation in another plan and AGI is over $115,000. Tim: No Traditional IRA deduction because combined AGI is over $188,000. Assume that the couple’s combined AGI was only $125,000.

Result: Sandra: No Traditional IRA deduction due to her active participation in another plan and AGI is over $115,000. Tim: No active participation & AGI under $178,000. Deductible Traditional IRA is allowed.

Planning for Retirement? – IRA Limits and Catch-Up Contributions

Bay Area Tax Lawyers – For those who annually contribute to their IRA account and wish they could contribute more, there is good news. The annual contribution limit is inflation adjusted each year and is slowly increasing.

Taxpayers 50 and older are allowed larger contributions through so-called “make-up” provisions (see table below).

The contribution limit for Traditional IRA Accounts for taxpayers that do not have a qualified plan with their employer is as follows.

IRA Contribution Limits

Year
2008-2012
2013
2014
Under Age 50
5,000
5,500
Inflation Adjusted
Age 50 & Over
6,000
6,500
Inflation Adjusted

However, if a taxpayer is an active participant in an employer’s pension plan or a self-employed pension plan, the deductible amount will be ratably phased out if their income for the year (AGI) is within the phase out range and not allowed at all if the AGI exceeds the phase out range (see the table below). The phase-out ranges are adjusted annually for inflation.

Phase-Out Ranges

Filing Status
2012
2013
Single & Head of Household
58,000 – 68,000
59,000 – 69,000
Married Filing Jointly
92,000 – 112,000
95,000 – 115,000
Married Filing Separately
0 – 10,000
0 – 10,000

 

Special rule for a nonactive participant spouse – The limits for deductible IRA contributions do not apply to the spouse of an active participant. Rather, the maximum deductible IRA contribution for an individual who is not an active participant but whose spouse is an active participant, is phased out for the non-active participant if their combined AGI is between the inflation adjusted limits for the year as illustrated in the table below.

Nonactive Spouse Phase-Out Ranges

Year
2012
2013
Phase-Out Range
173,000 – 173,000
178,000 – 188,000

Can the Saver’s Credit Benefit You?

Saratoga Tax Lawyers – The Saver’s Credit provides a nonrefundable tax credit for contributions made by eligible, low income taxpayers to IRAs and qualified elective income deferrals.

The plan provides incentives for lower income individuals to save for their retirement through available qualified plans. To qualify, the taxpayer must have reached the age of 18 by the close of the year and cannot be a full-time student or dependent of another.

The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer’s modified AGI increases. The tables below are for 2012 and 2013.  The phase  outs are inflation adjusted from year to year; please call for the phase outs for other than the years shown.

Modified AGI– Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions.

The credit is nonrefundable and offsets alternative minimum tax liability as well as regular tax liability.

Example – Eric and Heather, both age 28, are married and file a joint return for 2013. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows:

Example – Eric and Heather file a return using the standard deduction for a married couple and their tax for the year is computed as follows:


Caution – To prevent taxpayers from withdrawing contributions from existing plans, and subsequently recontributing the funds in order to qualify for the credit, Congress built in a two-year look back period that generally reduces a taxpayer’s current year contribution by withdrawals during the look-back period.

Financing Nursing Home Care

Ainer & Fraker, LLP – In our previous post entitled, Eldercare and Planning, we discussed the dynamics of Medicaid when it comes to providing medical support for elderly family members.

FINANCING NURSING HOME CARE – Generally, a nursing facility’s administration will help determine if the patient is eligible for Medi-Cal to pay the costs of the nursing home. If not, they can explain under what conditions the patient may become eligible in the future. The law requires that nursing home residents receive identical treatment regarding transfer, discharge, and provision of services regardless of the source of payment. A Medi-Cal resident can stay in any bed in a nursing facility.

Spousal Impoverishment Provision – Couples looking at nursing home placement for a spouse need to be aware of the special laws enacted that allow the spouse remaining at home to keep a certain amount of income and resources when the other spouse enters a nursing home. This is intended to prevent impoverishment of the spouse at home. 

• Community spouse’s monthly maintenance needs allowance: The spouse at home may keep all of the couple’s income up to $2,739* per month. This is called the community spouse’s “monthly maintenance needs allowance”. Note: This amount is adjusted annually by a cost of living increase. The spouse at home may obtain additional income or resources through a “fair hearing”, or by court order. If the spouse at home receives income above the limit in his/her name only, he/she can keep it all (this is called the “name on the instrument rule”); however, he/she will not be allowed to keep any of the nursing facility spouse’s income. Income received by the nursing facility spouse will go to his/her share of cost. The spouse in the nursing home is allowed to keep $35 monthly for personal needs (“personal needs allowance”). 

• Resources: The spouse at home can keep up to $113,640* in resources, and the institutionalized spouse may keep up to $2,000. (Different laws apply to spouses who entered a nursing facility before September 30, 1989. If this is the case, the individual should contact a lawyer/advocate knowledgeable about this area of the law.) Both separate property (i.e., from a previous marriage or inheritance) and community property that is not exempt are combined and counted at the time of application for Medi-Cal. Once the resource limit has been reached, all ownership interest should be transferred to the spouse at home. The institutionalized spouse’s $2,000 resource limit should be kept separately and accounted for separately.

*The values are periodically adjusted for inflation.  The amounts listed were effective 1/1/2012.

TRANSFER OF ASSETS
 – Institutionalized Medi-Cal recipients or applicants who transfer non-exempt assets for less than fair market value during a 36-month “look back” period may be subject to a period of ineligibility. The length of the ineligibility period depends on the value of the transferred asset or resource and date of transfer period. The period of ineligibility begins on the date the transfer was made. The 36-month “look back” period begins when an institutionalized person applies for Medi-Cal or when a Medi-Cal recipient is admitted to a nursing facility. A 60-month “look back” period for assets from certain trusts is also required. Federal law amended trust regulations makes it more difficult to set up a Medicaid qualifying trust for eligibility and estate claims purposes. For a trust already established, it is recommended that an attorney review it.

Spring Cleaning for Your Tax Records

Bay Area Tax Lawyers – Are you doing your spring cleaning and wondering if you can throw out some of those old tax records? If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why you keep the records in the first place.

Generally, we keep “tax” records for two basic reasons: (1) we need to keep the records in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) we need to keep track of the tax basis of our capital assets so when we actually dispose of them we can minimize the tax liability.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, you can probably discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute.

Examples – Sue filed her  2010 tax return before the due date of April 15,  2011. She will be able to dispose of most of her records safely after April 15,  2014. On the other hand, Don filed his  2010 return on June 2,  2011. He needs to keep his records at least until June 2, 2014. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

So what’s the problem with discarding old tax records? Follow the link for more information: Discarding Tax Records – The Big Problem.

Foresting Your Taxable IRA Withdrawls

Bay Area Tax Attorneys Ainer & Fraker, LLP – Your age at the time that you make a taxable withdrawal from your Traditional IRA account can make a big difference in the amount of tax that you will pay. Generally, there are three periods within your lifetime where different tax rules apply:

  • Under Age 59 ½—If you withdraw IRA funds before you reach age 59 ½, you will pay tax and a 10% early withdrawal penalty unless you can avoid the penalty through one of the several exceptions provided in the tax law. Note: Some states also have small early withdrawal penalties.
  • Age 59 ½ to Age 70 ½—During this period, you can make withdrawals of any amount without penalty. You are only subject to income tax.
  • Above Age 70 ½—After reaching age 70 ½, you must begin taking at least the required minimum distributions or face the 50% excess accumulation penalty.

The key to minimizing taxes on IRA distributions is to match withdrawals to tax years, in which case you are in a low-tax bracket or even have a negative taxable income. Take, for example, a year when your income—because of illness, disability, unemployment, or large business losses—is less than your deductions and personal exemptions, which leaves you with a negative taxable income for the year. To the extent that your taxable income is negative, you could make a taxable IRA withdrawal and avoid any tax on the amount withdrawn. In this case, even if you were under age 59 ½, you would only pay the small early withdrawal penalty.

Generally, except as mentioned above, if you are under 59 ½, your IRA funds are not a good source of cash, except in cases of extreme need, simply because of the tax liability and penalties that come from withdrawing these funds early.

Click the following link to find out more about Early Withdrawal Penalty Exceptions.