IRAs can be a powerful tool to lower your taxes while helping you save for retirement. Here are 5 little-known opportunities about IRAs that can help you and other family members save even more when contributing your IRAs.
A nonworking spouse can have an IRA. If your spouse doesn’t work, you may still be able to open and contribute to an IRA for your spouse, assuming that you work and file a joint tax return. This can be a great way to help reduce your taxable income each year.
Even children can have IRAs. If your child has earned income, you can open and contribute to an IRA. Just make sure you can document the earnings. While your child can contribute their own earnings, many parents will help keep track of things like babysitting money, then match those earnings in either a traditional or Roth IRA. Often the Roth IRA is preferred, because the future earnings could be tax free! Your child’s IRA is managed by an adult until the child is old enough for the account to be transferred into their name.
You may still contribute to an IRA if you have a 401(k) or similar program at work. As long as you do not exceed the income limits, you can have both an IRA as well as other types of retirement savings plans.
Non-deductible contributions may be made. If you exceed certain income levels, contributions to your IRA won’t be able to reduce your taxable income for the year. But you may still want to make after-tax contributions to a non-deductible IRA, as the earnings can still grow tax-deferred.
It’s not just for retirement. With traditional IRAs, if you withdraw funds before the age of 59 1/2 you may be subject to income tax AND an early withdrawal penalty. But there are exceptions to this rule, including withdrawals for a first time home purchase, major medical bills, college costs, birth and adoption expenses, and others. However, it is important to know the rules BEFORE you withdraw the funds.
Tax rules surrounding IRAs are vast and complex. But within the rules are numerous situations that if you know they exist, can help you plan for a more tax-efficient future.
Social media is an easy way for scammers and others to try encouraging people to pursue some really bad ideas, and that includes ways to magically increase your tax refund.
– IRS Commissioner Danny Werfel
Tax scammers continue to become more sophisticated, which means it’s more important than ever to pay attention to any person or message asking you to provide confidential information. Here are several of the more prevalent scams to be on the lookout for, according to the IRS.
Phishing and smishing. Taxpayers continue to be bombarded with email and text scams from fraudsters attempting to lure you into providing valuable personal and financial information that can lead to identify theft. Phishing involves fraudsters sending emails claiming to come from the IRS, while smishing uses text messaging and alarming language such as Your account has now been put on hold!
What you can do: Never respond to phishing and smishing messages, and never click on a link! Report all unsolicited emails, including the full email headers, claiming to be from the IRS to [email protected].
Online help to create an IRS account. A scammer may offer to help you set up an online account on www.irs.gov. While the IRS’s online account tool can provide convenient access to your tax information, it’s also a valuable source of information for identity thieves who use information from your account to submit fraudulent tax returns using your name in order to get a big refund.
What you can do: Schedule an appointment with someone you trust if you need help creating an online IRS account.
Fake charities asking for donations. Scammers masquerading as charitable organizations try to lure you into making a contribution after natural disasters and other publicized tragedies. Scammers also use fake charities to swipe personal and financial information from you, in addition to targeting certain groups such as senior citizens.
What you can do: Visit www.irs.gov, then search for Tax-Exempt Organization Search Tool. Use this tool to confirm that a charity to whom you want to donate is a legitimate organization registered with the IRS.
Fake tax advice and AI tools. Social media routinely circulates inaccurate and misleading tax information. These articles and videos share wildly inaccurate tax advice, including some that involve urging people to misuse common tax documents such as Form W-2 or Form1099. They will make is especially convincing by using AI as a buzz word.
What you can do: Don’t turn to the internet for tax advice. Remember, AI-generated ideas can also pull in inaccurate information as well!
It’s easy to fall victim to tax scams. So stay vigilant and if you see a scam, let everyone know. It’s with increased awareness that we can decrease the number of scam victims.
Kids can pose challenges from every direction for their parents – feeding times, car seats, sleep schedules, strollers, child care, and of course…taxes! What most parents don’t consider is that these bundles of joy complicate their tax situation. Here are some tax tips that may help:
Start a 529 education savings plan. 529 education savings plans are a great way to kick off the baby’s savings for the future. These plans offer low-cost investments that grow tax-free as long as the funds are used to pay for eligible education expenses (including elementary and secondary tuition). States administer these plans, but that doesn’t mean you are stuck with the plan available in your home state. Feel free to shop around for a plan that works for you. Starting to save early, even a little bit, maximizes the amount of tax-free compound interest you can earn in the 18+ years you have before kids go to college.
Bonus tip for family and friends: Anyone can contribute up to $18,000 to the plan in 2024 for each child! In addition, there is a special provision for 529 plans that allows five years worth of gifts to be contributed at once — a great estate-planning strategy for grandparents.
Update Form W-4. Every year, parents need to review their tax withholdings. Remember, the birth of a child brings new tax breaks, including a $2,000 Child Tax Credit, along with the Child and Dependent Care Credit for childcare expenses. These credits can be taken advantage of now by lowering tax withholdings and increasing take-home pay to help cover the cost of diapers and other needs that come with babies and children. On the other side of the coin, these benefits fall away as your kids grow older. The Dependent Care Credit is for children under the age of 13 and the Child Tax Credit is available for kids under the age of 17. So plan accordingly.
Prepare for medical expenses. Having a baby is expensive. So is watching your kids grow up! Fortunately, there are ways to be tax smart in covering the predictable medical and dental expenses. The first thing to do is try to pay for as many out-of-pocket expenses with pre-tax money. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA). So check this out and fund these accounts as much as possible. And while it’s more difficult to claim medical expenses as an itemized deduction, it’s impossible to do so if you don’t keep receipts.
Having a kid can be expensive. Schedule a tax review today to make sure you’re getting all the child tax breaks you deserve!
Keeping your taxes as low as possible requires paying attention to your financial situation throughout the year. Here are some tips for getting a head start on tax planning for your 2024 return:
Review your paycheck withholdings. Now is a good time to check your tax withholdings to make sure you haven’t been paying too much or too little. Use this online tool from the IRS to help calculate how much your current withholdings match what your final tax bill will be.
Action step: To change how much is withheld from your paycheck in taxes, fill out a new Form W-4 and give it to your employer.
Defer earnings. You could potentially cut your tax liability by deferring your 2024 income to a future year via contributions to a retirement account. For 2024, the 401(k) contribution limit is $23,000 ($30,500 if 50 or older); $7,000 for both traditional and Roth IRAs ($8,000 if 50 and older); or $16,000 for a SIMPLE IRA ($19,500 if 50 and older).
Action step: Consider an automatic transfer from either your paycheck or checking account to your retirement account so you won’t have to think about manually making a transfer each month.
Plan withdrawals from retirement accounts to be tax efficient. Your retirement accounts could span multiple account types, such as traditional retirement accounts, Roth accounts, and taxable accounts like brokerage or savings accounts. Because of this, consider planning your withdrawals to be as tax efficient as possible.
Action step: One way to structure withdrawals is to pull from taxable accounts first, and leave Roth account withdrawals for last. Another approach is to structure proportional withdrawals from all retirement accounts, which would lead to a more predictable tax bill each year.
Net capital gains with capital losses. If you have appreciated investments you’re thinking about selling, take a look through the rest of your portfolio to see if you have other assets that you could sell for a loss and use to offset your gains. Using the tax strategy of tax-loss harvesting, you may be able to take advantage of stocks that have underperformed.
Action step: Make an appointment with your investment advisor to look over your portfolio to see if there are any securities you may want to sell by the end of 2024.
Tax planning can potentially result in a lower bill from the IRS if you start taking action now. Please call if you have questions about your tax situation for 2024.
Many taxpayers start preparing their tax return with hopes of receiving a sizable refund, only to find out that their actual refund is much smaller than expected — or that they actually owe the federal government money instead! If this happens to you, here are some of the likely reasons:
Higher take-home pay. Look at last year’s W-2 and see how much was withheld for federal income tax. Now check this year’s W-2. If it is lower, you will need a corresponding reduction in your tax obligation to get the same refund as last year. The good news? You’ve had more of your income available to you throughout the year. The bad news? Paying less tax each pay period can result in a lower refund or even a tax due balance at tax filing time.
Withholding tables are not always accurate. The IRS provides businesses with tax tables to figure out how much of your paycheck should be withheld to pay your taxes. While these tables are mostly accurate, sometimes these tables instruct your employer to withhold more than necessary — leading to a refund. But sometimes the opposite is true and your employer may not withhold enough — leading to a balance due.
You earned money from a side hustle. You are responsible for making payments to the IRS for taxes you owe from working a side hustle or as a freelancer. If you didn’t make these payments to the IRS as you were earning the money throughout the year, you’ll have to make a lump-sum payment when you file your tax return.
Your state takes a different path. Tax laws passed by many states closely mirror tax laws passed by the federal government. But many times these laws never match 100%. This means that while you may see a refund on your federal tax return, you might end up owing money on your state tax return.
With the uncertainty of whether or not you’ll receive as large of a refund as you’re expecting, consider holding off on plans to spend your refund until your tax return is finalized.
Retirement accounts that provide tax breaks have very specific rules that must be followed if you want to enjoy the financial rewards of those tax breaks.
One of these rules defines WHEN you’re allowed to pull money from your retirement accounts. If you pull money too soon, you’re at risk of being levied with a penalty by the IRS. There are several exceptions to this rule, such as paying for qualified higher education expenses or paying for expenses if you become permanently disabled. In general, though, if you withdraw retirement funds before you reach age 59½, you’ll be hit with a 10% penalty in addition to regular income taxes. In the April 2023 court case Magdy A. Ghaly and Laila Ryad v. Commissioner, the taxpayers learned this rule the hard way.
The Facts
In 2018, Mr. Ghaly took two distributions from his retirement account.
Distribution #1: Withdrawal
Mr. Ghaly was laid off from his job, and in 2018, he withdrew money from his retirement account to provide for his family. He requested and received a withdrawal of $71,147 from his retirement account. His retirement company provided him with a Form 1099-R indicating the withdrawal was taxable.
Distribution #2: Deemed Distribution
In 2015, Mr. Ghaly took a loan from his retirement account. Because the loan followed certain IRS-approved guidelines, it was not considered a taxable distribution from his account that year. However, when Mr. Ghaly failed to repay that loan when it came due in 2018, it became a taxable distribution. His retirement company provided him with a 1099-R tax form for the deemed distribution.
Mr. Ghaly had not yet reached age 59½ before either amount was distributed.
The Findings
In an attempt to restore those distributions to his account to avoid both the tax on the distributions and the early withdrawal penalty, he opened two retirement accounts in 2020 and made the maximum contributions allowed for each account.
The Tax Court ruled against the taxpayers, stating that the contributions Mr. Ghaly made in 2020 were irrelevant when determining if his 2018 distributions were taxable. Mr. Ghaly was required to pay income taxes on the amounts withdrawn (to the extent those distributions were taxable) and was assessed an additional 10% early withdrawal penalty.
The Lesson
If you are planning an early withdrawal from a retirement account, understand before making the withdrawal whether the 10% penalty applies to you. In Mr. Ghaly’s case, he could have explored the substantially equal periodic payment exception or withdrawn money penalty free if used as hardship to pay for his health insurance while unemployed. The lesson: please call if you have questions about an early withdrawal you may be planning before you make it!
