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Last Minute IRA Contributions: Traditional & Roth IRAs

We at Mitlin Financial hope that you had a healthy and successful 2016. As we move full steam ahead into 2017 and into tax season, we want to make sure that you are all set when it comes to saving for your retirement. Contributing to an Individual Retirement Account, better known as an IRA, can be a powerful retirement saving tool. It is important to understand your time and contribution constraints for making last minute contributions. In addition to the inherent benefits of contributing to your IRA, staying informed of the correct contribution limits and deadlines can be the difference between contributing to your account correctly and incurring unwanted penalties or fees.

Last Minute Small Business IRA Contributions: SEP & SIMPLE IRAs

Although tax season may not be a crowd favorite, there are instances where individuals and employers can benefit. Taking preemptive measures and planning year-round in anticipation of everyone’s favorite day, Tax Day, there are situations that allow for lowering taxable income. In our previous edition, we discussed strategies for individuals and in this edition, we are going to delve into the strategies geared towards small business owners. Business owners have the opportunity to lower their taxable income and to motivate and entice their already hardworking employees.

Mitlin Minute: "Write Your Financial Future" at RT Booklovers Convention

In this edition of Mitlin Minute we provide you with a replay of our presentation of "Write Your Financial Future" at the RT Booklovers Convention in Atlanta, GA.  This was presented to a group of successful authors in which we discussed what they should be thinking about when trying to write their happily ever after.

  

 Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Mitlin Minute: Last Minute IRA Contributions

In this edition of Mitlin Minute we discuss what options are available to still take advantage of 2016 tax deductions.
 

 
Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Small Business Owners Looking for a Tax Deduction

SEP IRA Small Business

 

Is this going to be a good year financially? Did you have a new product or service that was a huge success? Do you think you will pay too much in taxes due to that success? Would you prefer to pay less in taxes and keep more for yourself and save for retirement at the same time?

Setting up a retirement plan could alleviate some of the stress of your tax bill and put you on the right path for retirement. As a small business owner, your business is typically set up in one of two ways. You may be established as an independent contractor or 1099 employee, which is typical in some service businesses, or you may be a corporation. Small businesses that are set up as corporations are very often S- Corps. Under either circumstance, you can take advantage of setting up a retirement plan, which will lower your tax burden while putting monies away for your financial future.

Retirement plans can be set up and funded by a small business regardless of their business structure. The type of plan, the amount you can contribute and your overall tax deduction may differ based upon your structure. Let’s take a look at one of the most popular options that would be available, the SEP IRA.

The SEP IRA allows a business owner to defer a maximum of 25% of their income into the retirement plan each year, which in turn will lower your tax liability. The 25% maximum applies to those business owners who are on payroll and paying themselves via W-2, which is the least common method for independent contractors. Paying yourself via W-2 will allow you to defer a maximum of 25% of the compensation listed on your W-2 for the year.  

Those business owners that are simply using a Schedule C to determine their income for the year, which is most common for 1099 employees, have a maximum contribution of 20% of net income. Schedule C or 1099 employees are synonymous with the same type of employment status and are treated the same for retirement plan purposes.

It does not matter whether you are limited to 20% or 25%, the maximum dollar amount you can contribute for 2018 is $55,000. This amount changes annually, visit the IRS website for current limits. Keep in mind, a SEP IRA simply needs to be set up and funded before your tax filing deadline. The contributions are not mandatory and can change from year to year based upon your annual success. This gives you a lot of flexibility from year to year and plenty of time to review your year-end tax situation prior to contributing.

As an example, if you are an independent contractor (1099) in the 25% tax bracket who had a net income of $200,000 and set up a SEP IRA. The SEP IRA would allow you to make a maximum contribution of $40,000 (20% of your net income). This would lower your taxable income from $200,000 to $160,000. In turn, your tax bill will be reduced by $10,000. Essentially the $40,000 contribution made to your SEP IRA only cost you $30,000.

The SEP IRA will work the same way for those businesses set up as corporations. The only difference will be that they will be able to contribute 25% of their W-2 wages. Keep in mind that you if you are paying yourself via W-2, you can only include the W-2 wages to determine your maximum contribution. Shareholder distributions are not included as compensation for calculating your SEP IRA contribution.

You need to be aware that if you have employees this may not be the best option because you will be required to contribute for employees that have been with you three years or more. The percentage used to determine your contribution would be used for your employees as well, which may create a financial burden.

Mitlin Financial assists our clients in setting up retirement plans for them and their businesses. We would be more than happy to assist you with any questions that you may have on this topic, including which retirement plan would be best for your business. Feel free to contact us, Mitlin Financial, at (844) 4-MITLIN x12 if you or someone you know needs assistance in reviewing their options.

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Tax Planning Is a Year Round Concern

 Tax Planning Is A Year Round Concern

 

Income tax planning is something you need to be aware of year-round and should continuously evaluate.  Although your tax returns are not due until April 15th each year, without extensions, it is important to make sure you are aware of your tax situation all year.  Decisions made over the course of the year that have a financial impact could hinder or improve your tax liability and a little extra work during the year can save you hours of review and alleviate your tax burden too.

When it comes to taxes, it is important to have the right financial team in place. You need to have your wealth management firm, CPA and other advisors on the same page working in your best interest. While you are in the process of, or shortly after, filing your most recent tax return there are several things you can review to make sure you are making the most tax efficient use of your investable assets.

One of the easiest ways for you to alleviate your income tax burden would be to take advantage of investment accounts that can provide a tax deduction. It is easy to see from your previous year’s W-2 how much you took advantage of your company’s retirement plan, be sure to read2019 IRS Limits Affecting Qualified Plans and IRA’s for specific limits. It may make sense for you to consider increasing your contributions in order to lower your income tax liability and concurrently help you increase your retirement savings. Should your company not have a 401(k) or company retirement plan be sure to explore the possibility of using an IRA in a similar manner.

Utilizing different types of retirement savings vehicles would make sense too. It is important for you to understand that all of the money that is being saved on a tax-deferred basis towards retirement will be taxable in the future when you withdraw it. It may make sense for you to utilize a Roth 401(k) option, if available, or a Roth IRA which would enable access to funds in retirement that would not be taxable. By taking advantage of both forms of savings, it will allow you flexibility down the road to have more control over your income taxes.

In addition to retirement accounts, it is also important to have investment accounts that will allow you access to your money at any time without penalty, unlike most of the retirement accounts mentioned thus far. Investment accounts can generate different forms of taxable income, such as dividend income, short term capital gains and long-term capital gains, and you should have a basic understanding of what they are and how they work. Simple things like holding investments for at least 12 months and one day will turn a short term capital gain into a long one, which can mean a significant tax savings. Have you ever sold an investment only a few days prior to the one-year mark only to pay short term capital gains instead of long term, when there was no imminent need to sell? Mutual Funds should be reviewed carefully as they can produce taxable income and capital gains. It is especially important to know when mutual funds will be distributing their capital gains. We have seen clients purchase funds in early November, only to receive a significant capital gain distribution after only owning it for a few weeks. In these cases, it may make sense to wait to make the purchase or purchase an equivalent investment that has no distribution scheduled.

You will also want to make sure that you have the right investments in the right accounts. It would be ideal for you to place investments that would have the highest tax implications in your tax deferred accounts. Simply placing the highest income producing investments or those you plan to hold short term in the most ideal accounts could save you quite a bit in taxes. When making investments, it is best to place them in the type of account that will help your tax situation based upon their propensity to produce taxable income.

Lastly, you should be reviewing your accounts on an annual basis, around November, to see if there are any opportunities to harvest tax losses. As the end of the year approaches it is important to see if there are ways to mitigate your income tax liability for the year. We know most people do not necessarily like taking losses, but many times it will make sense to take the loss and reduce your tax liability. Should you feel really convicted about the holding, you can always double up the position thirty plus days before the end of the year and on day thirty one sell the initial lot for the loss. This will provide you the opportunity to capture the loss and still own the position, while participating in the upside potential of the holding.

This type of planning is how we assist our clients regularly. In many cases we will coordinate with their CPA to make sure everyone is on the same page and the portfolio changes will indeed be of help to the client. Having an open dialogue between your financial team is important to make sure everything is being done to put you in the best position possible.

Please feel free to contact us, Mitlin Financial, at (844) 4-MITLIN x12 if you or someone you know has encountered tax issues with regards to their investments or simply does not feel their CPA and advisor are on the same page. We look forward to helping you, and them, make the decision that is best for all.

 

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.