Personal Tax | Wisdom of Wealth

August 10, 2020August 23, 2020

Retirement Savings Beyond the 401(k)- Traditional IRA

Welcome to part two of our three-part series on retirement savings outside of the employer sponsored 401(k) plan. This series may be relevant to you if you are self-employed or are an employee and desire to save additional funds for retirement in a personal account. Before we dive in to part two of this series that focuses on Traditional IRAs, I would encourage you to first check out the series introduction and part one that focused on Roth IRA savings.

What is a Traditional IRA?

Basically, a traditional IRA is an account type that offers you the opportunity for tax-advantaged retirement savings. Traditional IRAs give individuals the opportunity to save in addition to, or in place of, employer sponsored 401(k) type retirement savings. They are an account type in which you are able to buy investments to take advantage of market gains over time to grow your account value.

What are the pros of opening a Traditional IRA?

Ownership of account at brokerage or bank of your choice
Flexibility in investment choices
No income limits on traditional IRA ownership
Deferral of tax on investment growth and earnings until time of withdrawal
Avoidance of early withdrawal penalty for some first time homebuyer expenses and certain educated-related expenses

What are the cons of a Traditional IRA?

10% penalty and tax on withdrawals before age 59 1/2
Required minimum distributions must be taken beginning at age 72
If you have a retirement plan at work, your tax deduction benefit will phase out at higher income levels (see table below)

How is a Traditional IRA different from a Roth IRA?

A traditional IRA is different from a Roth IRA when we look at it from a tax benefit perspective. Contributions to traditional IRAs can be deductible from gross income on the individual tax return in the year of contribution. This simply means that as opposed to the Roth IRA, you receive the tax benefit of contributing to a traditional IRA upfront as you are allowed deductibility of your contributions in the year that they are made. This is much different from the characteristics of a Roth IRA because with those contributions you do not get a deduction at the time of contribution. However, with the Roth IRA, your earnings accumulate tax-free and your qualified withdrawals are tax-free.

Unlike Roth IRA withdrawals which are tax-free, Traditional IRA withdrawals are taxed at the time of withdrawal as ordinary income. This makes them more attractive to someone who feels like they will be in a lower tax bracket during retirement than they are during their working/contributing years.

Also, Roth IRA accounts do not require distributions at age 72 in the same way as Traditional IRAs.

Who can contribute?

Anyone can open and contribute to a Traditional IRA, but not everyone with qualify for tax deductible contributions.

Who can make tax deductible contributions?

See table below for the details on income, contributions, and deductibility.

Filing Status	2020 MAGI	Deduction
Single or Head of Household	$65,000 or Less	Full Deduction
	>$65,000 but <$75,000	Partial Deduction
	>$75,000	No Deduction
Married Filing Jointly	$104,000 or Less	Full Deduction
	>$104,000 but <$124,000	Partial Deduction
	>$124,000	No Deduction
Married Filing Jointly	$196,000 or Less	Full Deduction
(spouse covered by employer retirement plan)	>$196,000 but <$206,000	Partial Deduction
	>$206,000	No Deduction
Married Filing Separately	<$10,000	Partial Deduction
(you or spouse covered by employer retirement plan)	>$10,000	No Deduction

Which choice is best- Roth vs. Traditional

After looking at the characteristics of the Roth IRA is part one of the series, and now diving into Traditional IRA characteristics in part two of the series, we can compare the two based on both short-term and long-term value and tax advantage.

In my opinion, as long as you qualify for a Roth IRA based on the income qualifications, you should utilize that account type before looking at putting money in any other IRA type. You should also be sure that if you have an employer 401(k) plan available to you, that you are at least contributing enough to get your employer match before looking into other IRA types.

Next steps

If you believe that you are ready ramp up your retirement savings through the use of a Roth IRA as discussed in part one, or a traditional IRA as discussed in part two of this series you should speak to a trusted financial advisor, bank, or look into self-managed options that may be right for you.

For more clarification on the tax effects of IRA savings, talk with your CPA. If you do not yet have a relationship with a CPA, feel free to reach out to us at info@bynumcpa.com.

Check out more blog posts at our site www.wisdomofwealth.net, or if you have questions/requests send them to wisdomofwealthblog@gmail.com

Wisdom of Wealth is owned and operated in partnership between Bynum CPA, PLLC and Arc Accounting, PLLC.

April 18, 2020

I Haven’t Received My Stimulus Payment… Now What?

Many Americans woke up to a nice surprise this past week. They received the direct deposit of their “Economic Impact Payments”. As most of you are probably aware, the economic impact payments were included as part of the 2020 CARES Act which injected cash to the tune of $2 trillion back into the national economy during this time of crisis through loan programs aimed at businesses, as well as direct stimulus payments made to individuals and families.

The basics of the program are that the IRS bases your program eligibility and amount due on the filing status and Adjusted Gross Income (AGI) from your most recently filed tax return (2018 or 2019). If you are filing single and had AGI less than $75k, you are eligible to receive $1,200. If file taxes as married and joint, you would need to have household AGI less than $150k to get the full benefit of $1,200 per adult. Also, you would receive an additional $500 per child dependent 16 years of age or younger that you claimed on your most recently filed tax return. There is a phaseout range for a reduced amount (single $75k-$99k and married $150k-$198k). AGI outside of the top end of these ranges results in not receiving a stimulus payment.

If you feel that you are eligible to receive this benefit, but did not receive yours last week when it came through for others- Don’t worry! The IRS has only sent out one wave of payments which we are now learning went to people who filed and received a refund by direct deposit in either 2018 or 2019. If you had a tax liability due after filing and paid by either sending a check or through direct withdrawal with the IRS, they are now telling us that they will not automatically use the bank information on file that was used for making a payment as the account to deposit your stimulus payment. If you are in this group, you will need to access the new IRS “Get My Payment” tool and update your bank information on file if you wish to receive your payment by direct deposit. If you do not update the banking information that the IRS has on file, you will receive a paper check which will be a much slower method. See link below.

https://www.irs.gov/coronavirus/get-my-payment

If you enter your personal information and receive an error message, also Don’t Worry. This message does not necessarily mean that you are ineligible to receive the stimulus payment. The IRS has announced some issues with the “Get My Payment” tool and say that an individual should check back once per day to access and update their information as the IRS adds access for more taxpayers to this system.

-WB

July 27, 2019July 27, 2019

Home Sale and Capital Gains Tax…?

Due to the explosive growth of population and industry in Nashville, our geographic area has been in a very bullish housing market for the last 3-5 years. This is generally good news for the local economy since this means more families are moving into an area to fill available jobs, more homes are being built, more land is being purchased for development, more people are employed in building trades, etc. However, there are other questions concerning real estate transactions that arise for people in an area that has a booming real estate market.

Likely the most common question received by financial professionals in this type of economic climate is, “the value of our home has increased greatly since we purchased, and we want to cash in on the increase in value by selling the house and unlocking the equity. What does this mean for our taxes?” This is a very good question for homeowners who are considering the sale of a personal residence. Many of you have probably heard of the concept of capital gains tax, and this is the type of tax we will be discussing in greater detail.

First off, let’s clear up the definition of a “personal residence”, as this is the most important definition to understand when considering this transaction. A house has to be your personal residence for two of the last five years preceding the date of the sale in order to gain exclusion from capital gains tax. This means that if a home is sold for a gain (profit) in 2019, all (or a portion of) that gain is non-taxable if that specific house was your primary personal residence in any full two-year period of the last five leading up to the date of sale. A personal residence is defined as “where you ordinarily live the majority of the time”, and you can only have one main residence at any time.

A married filing jointly taxpayer can exclude up to $500,000 of gain on the sale of a personal residence, and a single taxpayer can exclude up to $250,000 of gain if the following three part test is satisfied.

Ownership– You owned the home for at least two years prior to the date of sale.
Use– The home was your primary residence (as defined above) for at least two of the five years preceding the date of sale.
Exclusion Period– You have not utilized an exclusion of gain for the sale of another residence within the two-year period up to the date of the sale in consideration.

If you do not meet the two year use and ownership test for the sale of your personal residence, you might still be eligible for a partial exclusion of your gain from capital gains tax treatment if one of the following is the reason for your sale:

A change in place of employment
Health-related move
Unforeseen circumstances

So.. What is capital gains tax?

If for some reason you do not meet one of the exclusion tests discussed above, but still decide to sell your home, your gain will be subject to capital gains tax. The capital gains tax is a preferential rate tax that is imposed on the sale of many types of property that we normally consider “investments”. There are two types of capital gains (short-term and long-term). Short-term capital gains are considered sales of investment property held for less than one year. These gains are subject to your ordinary income tax rate. Long-term capital gains are for property held greater than one year and are given preferential rate treatment at the rates discussed below:

0% Rate (Single taxpayer $0-$39,375 taxable income, Married taxpayer $0-$78,750 taxable income)
15% Rate (Single taxpayer $39,376-$434,550 taxable income, Married taxpayer $78,751-$488,850 taxable income)
20% Rate (Single taxpayer $434,551+ taxable income, Married taxpayer $488,851+ taxable income)

If you sell your home and believe you are exempt from capital gains treatment on your gain, you may still receive a 1099-S form from your title company/closing agency and that form would require you to report the sale on your tax return regardless of exemption from capital gains tax implications since the IRS will also be receiving a duplicate of this form to match to your tax return!

This post covers the basics of the tax treatment of a home sale, but is not intended to cover all aspects of the tax law. As with most other tax topics, there are other exceptions/rules that apply to more complicated aspects of these transactions. It is always a good idea to maintain a client relationship with a CPA Tax Pro when engaging in this type of transaction. If you are considering this type of sale, and need CPA guidance and tax preparation services, reach out the me at wes@arcactg.com.