Tag: Arc Accounting

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Retirement Savings Beyond the 401(k) Part I- Roth IRA

In the first part of our three part series on retirement savings options outside of employer sponsored plans, we will be discussing the Roth IRA. Many people have heard of the Roth IRA, or perhaps even been advised to open a Roth IRA by a parent, family member, or friend. As with many things in life, taking the first step in deciding to establish this type of account can be intimidating. However, there is no need to feel that way! We will be discussing who can participate in a Roth IRA, what are the contribution limits, and most importantly what makes the Roth IRA such a powerful long-term savings tool. Let’s dive in!

Who can participate?

There is no age restriction on who can open and contribute to a Roth IRA. The only requirement is that the account holder making contributions have earned income. Earned income is money made through working a job or through business ownership. Passive income types such as rental income, alimony, investment income, social security, and unemployment compensation are a few examples of unearned income that cannot be used to qualify for participation.

Participation is also limited by your MAGI (modified adjusted gross income) for the tax year in which you are making contributions. We will cover more on that in the next section.

As we will discuss in further detail below, keep in mind that your annual contribution limit cannot exceed your amount of earned income. For example, you must have at least $6,000 in earned income to be able to make the full allowable annual 2020 contribution of $6,000.

What are the contribution limits?

Roth IRA contribution limits can fluctuate slightly each year, but the maximum contribution limit for the 2020 year is $6,000 per person ($7,000 if you are 50+). Roth IRA contribution limits can be affected by the MAGI (modified adjusted gross income) of the account holder based on their tax filing status.

The participation phase-out window for a single filing tax payer is from $124,000 to $138,999. With participation being entirely disallowed with MAGI exceeding $138,999. Married filing jointly taxpayers face a phase-out window of $196,000 to $205,999. Participation for married filing jointly taxpayers completely phases out at MAGI equal to or in excess of $206,000.

What makes the Roth IRA special?

So, I know that by now you are probably asking, “What makes this Roth IRA savings option so attractive?” The answer to that questions is the unique quality of a Roth IRA that allows your after-tax contributions to grow tax-free for the life of your account and your withdrawals are also tax-free (if over age 59.5). This is the reason why a Roth IRA is a preferred savings method for someone in their 20’s and 30’s. The time that your invested money can grow tax-free until age 59.5 adds an immense amount of value to your investment.

If I have an emergency, can I access my funds prior to age 59.5?

The short answer is yes. The real answer is that if you are under age 59.5 and have not owned the account at least five years, your earnings are subject to taxes as ordinary income and are also subject to a 10% penalty. If you are under age 59.5 and have owned the account at least five years, your earnings are still subject to tax as ordinary income and you face a 10% penalty. If you are over age 59.5 and and have owned the account at least five years, there are no taxes or penalties assessed on any withdrawals. If you are over age 59.5 and have not owned the account at least five years, your earnings are subject to tax as ordinary income but there is no 10% penalty assessed.

Note: If you are under age 59.5, you may qualify for one of the exceptions to allow a withdrawal not subject to the 10% penalty (but not the tax). The exceptions are first-time home purchase, qualified education expenses, unreimbursed medical expenses, and disability.

I’m ready to open an account, what’s next?

If you are ready to enter the world of retirement savings through use of a Roth IRA, it is always a good idea to find a professional financial advisor (preferably a Certified Financial Planner) who serves as a fiduciary and protects your best interest when making investment choices. If you are interested in connecting with a CFP partner of ours, please reach out through the contact form on the blog page or email us at wisdomofwealthblog@gmail.com.

Be on the lookout for part two of the series next week!

-Wes

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Note: The information contained within this blog post is current with applicable laws and regulations as of the publishing date. Financial regulations are subject to change.

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Retirement Savings Beyond the 401(k)- Series Introduction

One common question that I receive from individual tax clients and my wife (Megan) gets from financial planning clients is, “What retirement savings options are available to me outside of an employer sponsored retirement plan?” A few of the reasons why someone might be interested in other types of personal retirement accounts can include investment choice flexibility, potential tax savings, or becoming self-employed.

This is a very important topic and I want to spend plenty of time thoroughly explaining the ins and outs of some of the IRA types that exist, so we will be working through this in a three part series over the upcoming days. We will cover these three key segments of IRAs and how each could benefit you:

  • Roth IRA
  • Traditional IRA
  • SEP IRA/SIMPLE IRA

We will discuss the qualifications of who can participate, dollar limits, income phase-out concepts, and why some of these might be a good option for you whether you are an employee who is already in a 401(k) plan or if you are self-employed and need to focus on putting back some money for retirement.

I hope that you will “Like” the Wisdom of Wealth Blog Facebook page and visit the Wisdom of Wealth website to sign up for notifications of new blog posts. I am excited to share some valuable information with you throughout this series, and hope that you will follow along!

Thanks for your support!

-Wes

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COVID-19 and the Gig Economy

As in all areas of our daily lives, technology has had a tremendous impact on how we define jobs, work, and professional development in recent years. As early as ten years ago, the typical professional career ladder looked very traditional beginning with gaining an education and ending thirty-something years later with some earned level of manager role inside an organization.

As technology and app-based tools were put at the fingertips of the masses, it became obvious to many that it doesn’t take a Zuckerberg level idea to be able to leverage technology in order to earn money. This realization has completely morphed our ideas of both work and earning money. Those that have embraced starting a “side hustle”, or even completely taking the plunge into self-employment while utilizing modern technology tools are referred to as “Gig Economy Workers”.

The “Gig Economy” is the fastest growing sector of our economy in terms of people becoming freelancers, independent contractors, and online small business owners. Gig economy workers often enjoy independence from traditional employment, creative freedom, and thrive in high levels of niche specialization. Examples of gig economy workers we interact with in our day to day lives can include the Etsy shop owner, Uber Eats driver, Lyft driver, freelance web designer, and a physician contracted in telemedicine.

Our current economic struggles associated with the COVID-19 pandemic have increased the interest of individuals to become more self-reliant and will likely cause an even more powerful surge in the gig economy following our nation’s recovery from the pandemic. Our view of remote work arrangements, as well as personal and professional priority balancing has rapidly changed as an entire society during this time. These effects will be long-term and will forever change the ways that we work.

As more people find themselves laid off from traditional employment or decide to walk away from corporate work and enter the gig economy, we will likely enter a period of innovation and strong entrepreneurship. The challenges that many people face when finding start-up success as a self-employed business owner, freelancer, independent contractor, or gig worker are associated with the legal and financial management of their businesses.

Self-employed individuals often need professional advice on entity selection and creation, accounting requirements and record keeping, payroll services, cash flow management, tax planning, estimated tax payments, and even personal budgeting. These are just a few examples of the many important aspects of joining this new economy as a successful entrepreneur and are issues which should be handled through working with a trusted professional. It is important to team up with a CPA and/or business attorney who operates as a licensed professional and keeps your best interest in mind.

Thinking about starting a small business and looking for a forward-thinking accounting firm? Contact us at info@bynumcpa.com for more information, or check out our sister companies at www.bynumcpa.com and www.arcactg.com for more information.

-Wes

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PPP Loan Update- New Forgiveness Rules

During the COVID-19 pandemic, many small businesses were able to work through their local banks and SBA lenders to access funds through the Payroll Protection Program (PPP). In response to a national emergency, this program was created quickly and many revisions to the terms have been made along the way. The most recent changes to the forgiveness terms were passed in the Paycheck Protection Program Flexibility Act and signed into law on June 5.

Many of my small business owner clients and friends were able to obtain funding through this program, and are now preparing to apply for forgiveness. If you are a small business owner and have not yet applied for the PPP program and feel like you might be eligible, act quickly. The deadline to apply through an approved SBA lender is June 30. I wanted to share with you some of the most important term revisions that the June 5 Flexibility Act created.

  • Extends the deadline to use PPP funds from June 30 to December 31, 2020.
  • Reduces the proportion of the loan that must be used for payroll-related costs from 75% to 60%.
  • Payback terms extended from two years to five years. No retroactive application of this rule for notes that were in place prior to June 5.
  • Eliminates the original forgiveness penalty based on businesses being required to maintain employee headcount at the same level as pre COVID-19.
  • Gives businesses 10 months to apply for loan forgiveness with their loan originator.
  • Defers loan payments of any kind until a forgiveness decision is made on each case by the SBA and original lender.
  • The period of time allowed to spend funds on allowable business expenses and apply for forgiveness is extended from the original 8 week period to 24 weeks from the date of loan issuance.
  • Businesses who received PPP funds can now utilize the payroll tax deferral rules that were included in the CARES Act and previously excluded PPP borrowers.

Your CPA business advisor can be a valuable resource in helping you with the application for PPP loan forgiveness.

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Check out www.bynumcpa.com and www.arcactg.com to learn more about professional services offered.