Warren Wealth Article Archive
Articles Posted During 12/2009
Tax Alert: Plan To Take Advantage Of 2010
Monday 12/21/2009 - 11:11:05 am
The Bush tax cuts are set to expire – and other big changes are poised to occur.
Presented provided by Jacob Warren
Do you see a warning light flashing? Americans with high net worth and high incomes are preparing for the likelihood of higher taxes in 2011 and subsequent years. High earners are almost certainly going to take the hit if the EGTRRA and JGTRRA cuts fade away at the end of 2010. Here’s a summary of what’s happening – and a look at what might happen. There are some developments you will want to remember, and some tax breaks you might very well want to take advantage of.
No phaseouts on itemized deductions and personal exemptions in 2010. This may provide you with an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions. That has gradually decreased in this decade. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.1
As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.1
Lower long-term capital gains rates through 2010. Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.2
The Tax Extenders Act of 2009. The House passed this legislation on December 9, and the Senate is likely to follow suit. The final version of this bill would likely extend the additional standard deduction for real property taxes, the deduction for state and local sales tax, and deductions for tuition/education expenses and teachers' classroom expenses into 2010.3
The estate tax. 0% estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again in January. However, to prevent a complete repeal of the estate tax next year, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.4
The AMT. You know how it works – Congress comes up with another AMT patch at the stroke of midnight and middle-class taxpayers are saved once more. Well, just to make things interesting, the Tax Extenders Act of 2009 doesn’t include an AMT patch for 2010. Many tax professionals think the 2010 patch issue will be addressed early next year, with the patch for the 2010 tax year made retroactive.5
How will marginal tax rates rise in 2011? Does anyone think taxes won’t increase in the near future? At present, the marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%. If Congress doesn’t act by the end of 2010, the tax brackets will reset to 15%, 28%, 31%, 36% and 39.6%. By the way, President Obama and some Democrats have proposed future tax brackets of 10%, 15%, 25%, 28%, 36% and 39.6% for 2011 (that is, only the highest two brackets would revert to pre-EGGTRA levels).3
A healthcare surtax? If the healthcare reforms pass in 2010, taxpayers in the highest brackets might pay even more to the IRS. For example, the legislation that the House passed would require couples with MAGI of $1,000,000 or more or individuals with MAGI of $500,000 or more to pay an additional 5.4% surtax.3
And finally, a dilemma for Congress. Congress would like to extend the Bush-era tax cuts further to protect lower-income and middle-income taxpayers. However, some analysts say it would cost the federal government more than $1 trillion over the next decade to do so.3
Have you talked to your financial or tax advisor lately? If you have, good for you. If you haven’t, do so now. Prepare for change, and plan to take advantage of extended and potentially expiring tax breaks.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
--------------------------------------------------------------------------------
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Content Provided by Peter Montoya, Inc.
Neither Woodbury Financial Services, Inc. nor its representatives offer tax or legal advice. For assistance with these matters please contact your tax or legal advisor.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 webcpa.com/news/CCH-Sees-Little-Help-from-2010-Tax-Inflation-Adjustments-51737-1.html [9/17/09]
2 usatoday.com/money/perfi/taxes/2007-06-15-mym-capital-gains_N.htm [6/15/07]
3 fa-mag.com/fa-news/4914-higher-tax-rates-ahead-so-make-the-most-of-2010.html [12/17/09]
4 marketwatch.com/story/story/print?guid=8639F258-5FD1-467F-AE47-3D5BD4572CB6 [12/18/09]
5 tax.cchgroup.com/Legislation/2009-Tax-Extenders-Act.pdf [12/10/09]
[Permalink]
Presented provided by Jacob Warren
Do you see a warning light flashing? Americans with high net worth and high incomes are preparing for the likelihood of higher taxes in 2011 and subsequent years. High earners are almost certainly going to take the hit if the EGTRRA and JGTRRA cuts fade away at the end of 2010. Here’s a summary of what’s happening – and a look at what might happen. There are some developments you will want to remember, and some tax breaks you might very well want to take advantage of.
No phaseouts on itemized deductions and personal exemptions in 2010. This may provide you with an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions. That has gradually decreased in this decade. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.1
As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.1
Lower long-term capital gains rates through 2010. Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.2
The Tax Extenders Act of 2009. The House passed this legislation on December 9, and the Senate is likely to follow suit. The final version of this bill would likely extend the additional standard deduction for real property taxes, the deduction for state and local sales tax, and deductions for tuition/education expenses and teachers' classroom expenses into 2010.3
The estate tax. 0% estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again in January. However, to prevent a complete repeal of the estate tax next year, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.4
The AMT. You know how it works – Congress comes up with another AMT patch at the stroke of midnight and middle-class taxpayers are saved once more. Well, just to make things interesting, the Tax Extenders Act of 2009 doesn’t include an AMT patch for 2010. Many tax professionals think the 2010 patch issue will be addressed early next year, with the patch for the 2010 tax year made retroactive.5
How will marginal tax rates rise in 2011? Does anyone think taxes won’t increase in the near future? At present, the marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%. If Congress doesn’t act by the end of 2010, the tax brackets will reset to 15%, 28%, 31%, 36% and 39.6%. By the way, President Obama and some Democrats have proposed future tax brackets of 10%, 15%, 25%, 28%, 36% and 39.6% for 2011 (that is, only the highest two brackets would revert to pre-EGGTRA levels).3
A healthcare surtax? If the healthcare reforms pass in 2010, taxpayers in the highest brackets might pay even more to the IRS. For example, the legislation that the House passed would require couples with MAGI of $1,000,000 or more or individuals with MAGI of $500,000 or more to pay an additional 5.4% surtax.3
And finally, a dilemma for Congress. Congress would like to extend the Bush-era tax cuts further to protect lower-income and middle-income taxpayers. However, some analysts say it would cost the federal government more than $1 trillion over the next decade to do so.3
Have you talked to your financial or tax advisor lately? If you have, good for you. If you haven’t, do so now. Prepare for change, and plan to take advantage of extended and potentially expiring tax breaks.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
--------------------------------------------------------------------------------
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Content Provided by Peter Montoya, Inc.
Neither Woodbury Financial Services, Inc. nor its representatives offer tax or legal advice. For assistance with these matters please contact your tax or legal advisor.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 webcpa.com/news/CCH-Sees-Little-Help-from-2010-Tax-Inflation-Adjustments-51737-1.html [9/17/09]
2 usatoday.com/money/perfi/taxes/2007-06-15-mym-capital-gains_N.htm [6/15/07]
3 fa-mag.com/fa-news/4914-higher-tax-rates-ahead-so-make-the-most-of-2010.html [12/17/09]
4 marketwatch.com/story/story/print?guid=8639F258-5FD1-467F-AE47-3D5BD4572CB6 [12/18/09]
5 tax.cchgroup.com/Legislation/2009-Tax-Extenders-Act.pdf [12/10/09]
[Permalink]
The DCA Way
Wednesday 12/16/2009 - 12:15:38 pm
Dollar cost averaging offers you a way to invest
consistently and a chance to take advantage of some great buys.
Presented by Jacob Warren
Are you investing inconsistently … or not at all? Inconsistent investment can sabotage your retirement savings efforts. There’s a way to avoid that problem: a strategy called Dollar Cost Averaging.
By investing equal dollar amounts on a regular monthly basis, you can plan to build wealth in a way you can afford today.
DCA to the rescue. Many people think they can’t afford to invest – their budgets won’t allow them to do so. DCA makes it easier. Arranging a monthly salary deferral of even $100 into your 401(k), for example, can help you plan to build wealth in a tax-advantaged way.
Remember, you won’t retire on the dollars you put aside today for retirement; you’ll retire on the assets accumulated from those early dollars as a result of investment and compounding. Most retirement accounts feature tax-deferred contributions and tax-deferred growth – why should you wait to take consistent advantage of that?
Look at it this way: you can't make retroactive contributions to a 401(k), so each dollar you didn’t contribute last year is an opportunity you've lost forever. Not to mention the opportunity for tax-deferred growth of those assets.
That’s one compelling reason to adopt the DCA approach.
Additionally, DCA ensures a constant flow of new money into the retirement account. That factor alone may help you take advantage of current market conditions.
The DCA strategy is designed to lower cost per share. When you practice Dollar Cost Averaging, you buy more shares when prices are low and fewer shares when prices are high. So with time, you may end up with a lower overall cost for shares purchased.
In last year’s market downturn, there were some great buys – quality companies whose share prices had fallen to amazing lows. Through DCA, investors had a way to exploit this buying opportunity and pick up more shares. For example, on February 20, 2009, you could have picked up 107 shares of General Electric for $1,000. A year earlier, the same $1K would have bought you 29 shares.1
In the downturn, the DCA strategy by no means guaranteed a great return in the future – but it did offer investors a chance to position their assets for the market rebound. And so far, the market has rebounded significantly.
Speaking of market downturns and rebounds, Ibbotson Associates did some research and found that a hypothetical investor who would have invested $100 a month in Wall Street for 30 years starting in September 1929 would have seen that total investment of $36,000 grow into a $411,000 nest egg by September 1959.2 Yes, the crash of 1929 was an extraordinary circumstance – but didn’t the Great Recession feel pretty extraordinary to you? This is a good argument for DCA for the long-run stock market investor.
The DCA strategy makes sense for many. Right now, many Americans would be hard-pressed to come up with a lump sum of say, $4,000 or $10,000 to invest. DCA allows people to contribute equivalent amounts toward retirement savings a little at a time.
The really great thing about it is how “automatic” it all is. By arranging, say, regular salary deferrals into a employer-sponsored retirement plan or regular monthly contributions to an IRA, you can go out and live your life and simply get that quarterly statement showing your ongoing contributions to the account. It is “off your plate” but never neglected.
Are you saving for the future using a Dollar Cost Averaging method? Talk to a financial professional today and see how convenient it can be for you. You should also consider your ability to continue purchases throughout periods of both high and low prices due to fluctuating markets.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
---------------------------------------------------------------------------------
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Dollar cost averaging and similar periodic investment plans do not ensure a profit or guarantee against loss in declining markets.
Content Provided by Peter Montoya, Inc.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 portfolio.com/views/blogs/market-movers/2009/02/20/why-dollar-cost-averaging-makes-sense/ [2/20/09]
2 online.wsj.com/article/SB123696727736421823.html [3/16/09]
[Permalink]
consistently and a chance to take advantage of some great buys.
Presented by Jacob Warren
Are you investing inconsistently … or not at all? Inconsistent investment can sabotage your retirement savings efforts. There’s a way to avoid that problem: a strategy called Dollar Cost Averaging.
By investing equal dollar amounts on a regular monthly basis, you can plan to build wealth in a way you can afford today.
DCA to the rescue. Many people think they can’t afford to invest – their budgets won’t allow them to do so. DCA makes it easier. Arranging a monthly salary deferral of even $100 into your 401(k), for example, can help you plan to build wealth in a tax-advantaged way.
Remember, you won’t retire on the dollars you put aside today for retirement; you’ll retire on the assets accumulated from those early dollars as a result of investment and compounding. Most retirement accounts feature tax-deferred contributions and tax-deferred growth – why should you wait to take consistent advantage of that?
Look at it this way: you can't make retroactive contributions to a 401(k), so each dollar you didn’t contribute last year is an opportunity you've lost forever. Not to mention the opportunity for tax-deferred growth of those assets.
That’s one compelling reason to adopt the DCA approach.
Additionally, DCA ensures a constant flow of new money into the retirement account. That factor alone may help you take advantage of current market conditions.
The DCA strategy is designed to lower cost per share. When you practice Dollar Cost Averaging, you buy more shares when prices are low and fewer shares when prices are high. So with time, you may end up with a lower overall cost for shares purchased.
In last year’s market downturn, there were some great buys – quality companies whose share prices had fallen to amazing lows. Through DCA, investors had a way to exploit this buying opportunity and pick up more shares. For example, on February 20, 2009, you could have picked up 107 shares of General Electric for $1,000. A year earlier, the same $1K would have bought you 29 shares.1
In the downturn, the DCA strategy by no means guaranteed a great return in the future – but it did offer investors a chance to position their assets for the market rebound. And so far, the market has rebounded significantly.
Speaking of market downturns and rebounds, Ibbotson Associates did some research and found that a hypothetical investor who would have invested $100 a month in Wall Street for 30 years starting in September 1929 would have seen that total investment of $36,000 grow into a $411,000 nest egg by September 1959.2 Yes, the crash of 1929 was an extraordinary circumstance – but didn’t the Great Recession feel pretty extraordinary to you? This is a good argument for DCA for the long-run stock market investor.
The DCA strategy makes sense for many. Right now, many Americans would be hard-pressed to come up with a lump sum of say, $4,000 or $10,000 to invest. DCA allows people to contribute equivalent amounts toward retirement savings a little at a time.
The really great thing about it is how “automatic” it all is. By arranging, say, regular salary deferrals into a employer-sponsored retirement plan or regular monthly contributions to an IRA, you can go out and live your life and simply get that quarterly statement showing your ongoing contributions to the account. It is “off your plate” but never neglected.
Are you saving for the future using a Dollar Cost Averaging method? Talk to a financial professional today and see how convenient it can be for you. You should also consider your ability to continue purchases throughout periods of both high and low prices due to fluctuating markets.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
---------------------------------------------------------------------------------
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Dollar cost averaging and similar periodic investment plans do not ensure a profit or guarantee against loss in declining markets.
Content Provided by Peter Montoya, Inc.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 portfolio.com/views/blogs/market-movers/2009/02/20/why-dollar-cost-averaging-makes-sense/ [2/20/09]
2 online.wsj.com/article/SB123696727736421823.html [3/16/09]
[Permalink]
Options For Taking Money Out Of A Roth
Wednesday 12/09/2009 - 1:56:26 pm
Explaining some of the intricacies of withdrawals.
Presented by Jacob Warren
Sometimes people want to access Roth IRA funds for early retirement or other purposes. Maybe you’re one of them. If you have ever thought about taking money out of a Roth IRA, be sure to consult your financial professional first before you make a move … and keep the factors mentioned below in mind.
You can withdraw regular contributions tax-free, but not your earnings. This is a critical distinction, and many Roth IRA owners don’t seem to know about it.
When you withdraw assets from a Roth, there is a set order in which contributions and earnings must be distributed - the IRS ordering rules for distributions.1
• The IRS regards the first layer of withdrawals from a Roth as regular contributions instead of earnings. So this layer is treated as coming from your annual after-tax contributions. Therefore, if you just withdraw this layer of money, there are no taxes or penalties involved. (You can do this at any time, whether you have held your Roth for 5 years or not.) Basically, the IRS is permitting you to remove a percentage of your account before the alarm sounds on the five-year clock (see below).2,3
• The next assets to be removed from the account, according to IRS rules, are the conversion and rollover contributions to your Roth. These are removed on a so-called “first in, first out” basis. For example, the amount of a contribution to your Roth resulting from a conversion made in 2002 would come out before the amount of a contribution to your Roth resulting from a conversion made in 2008. The taxable portion of the conversion/rollover contribution comes out first (the amount claimed as income), and then the non-taxable portion.(By the way, the IRS disregards Roth-to-Roth rollover contributions in these rules.1)
• Finally, earnings accrued by the Roth IRA are distributed.
So in other words, merely withdrawing your regular contribution will not trigger tax. But if your Roth has realized earnings from contributions, the earnings will be subject to income tax if they are withdrawn.
Is your withdrawal a qualified distribution? Here’s another important consideration. If you have owned your Roth IRA for less than 5 years and/or are younger than age 59½, you risk taking a nonqualified distribution if you withdraw money from it. You know what that means – a 10% penalty for early withdrawal in addition to taxes. (There are some exceptions to this outlined in IRS Publication 590, which is certainly worth reading.)1
If you have owned your Roth IRA for more than 5 years …
• You can make a qualified withdrawal of earnings.
• You can make a qualified withdrawal of taxable conversions (conversions made in separate tax years will have to meet separate 5-year tests).
You can withdraw nontaxable conversions to your Roth IRA at any time.3
Watch the 5-year clock. Yes, how is the 5-year period preceding a qualified distribution measured? The clock starts on January 1st of the tax year of your initial contribution, conversion or rollover to a Roth IRA. For example, let’s say you opened up a Roth IRA account on January 1, 2007. On January 1, 2012, your Roth IRA will meet the five-year test.1
What if you have multiple Roths? Well, when it comes to distributions, the IRS has some aggregation rules for you. You will have to figure out the taxable amounts withdrawn, distributions and contributions using a little addition. You must …
• Add up all distributions made from all your Roth IRAs during the tax year.
• Add up all regular Roth IRA contributions made during the relevant tax year (including ones made after the close of the tax year, but before April 15 of the following year). Now add that total amount to the total undistributed regular contributions made in previous years.
• Add all conversion and rollover contributions made during the year together. To quote Publication 590: “For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2008 and the conversion or rollover contribution is made in 2009, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2009.”1
There are additional rules for recharacterized contributions that end up in a Roth IRA.
If all this makes you want to talk to a financial professional or accountant, before you take money out of your Roth IRA … well, that is a wise step to take. Confer with the financial or tax professional you know and trust.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Content provided by Peter Montoya, Inc.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 irs.gov/publications/p590/ch02.html#en_US_publink10006523 [12/4/09]
2 investopedia.com/ask/answers/179.asp?viewed=1 [12/4/09]
3 smartmoney.com/personal-finance/retirement/nine-frequently-asked-questions-about-iras-7950/ [1/21/09]
[Permalink]
Presented by Jacob Warren
Sometimes people want to access Roth IRA funds for early retirement or other purposes. Maybe you’re one of them. If you have ever thought about taking money out of a Roth IRA, be sure to consult your financial professional first before you make a move … and keep the factors mentioned below in mind.
You can withdraw regular contributions tax-free, but not your earnings. This is a critical distinction, and many Roth IRA owners don’t seem to know about it.
When you withdraw assets from a Roth, there is a set order in which contributions and earnings must be distributed - the IRS ordering rules for distributions.1
• The IRS regards the first layer of withdrawals from a Roth as regular contributions instead of earnings. So this layer is treated as coming from your annual after-tax contributions. Therefore, if you just withdraw this layer of money, there are no taxes or penalties involved. (You can do this at any time, whether you have held your Roth for 5 years or not.) Basically, the IRS is permitting you to remove a percentage of your account before the alarm sounds on the five-year clock (see below).2,3
• The next assets to be removed from the account, according to IRS rules, are the conversion and rollover contributions to your Roth. These are removed on a so-called “first in, first out” basis. For example, the amount of a contribution to your Roth resulting from a conversion made in 2002 would come out before the amount of a contribution to your Roth resulting from a conversion made in 2008. The taxable portion of the conversion/rollover contribution comes out first (the amount claimed as income), and then the non-taxable portion.(By the way, the IRS disregards Roth-to-Roth rollover contributions in these rules.1)
• Finally, earnings accrued by the Roth IRA are distributed.
So in other words, merely withdrawing your regular contribution will not trigger tax. But if your Roth has realized earnings from contributions, the earnings will be subject to income tax if they are withdrawn.
Is your withdrawal a qualified distribution? Here’s another important consideration. If you have owned your Roth IRA for less than 5 years and/or are younger than age 59½, you risk taking a nonqualified distribution if you withdraw money from it. You know what that means – a 10% penalty for early withdrawal in addition to taxes. (There are some exceptions to this outlined in IRS Publication 590, which is certainly worth reading.)1
If you have owned your Roth IRA for more than 5 years …
• You can make a qualified withdrawal of earnings.
• You can make a qualified withdrawal of taxable conversions (conversions made in separate tax years will have to meet separate 5-year tests).
You can withdraw nontaxable conversions to your Roth IRA at any time.3
Watch the 5-year clock. Yes, how is the 5-year period preceding a qualified distribution measured? The clock starts on January 1st of the tax year of your initial contribution, conversion or rollover to a Roth IRA. For example, let’s say you opened up a Roth IRA account on January 1, 2007. On January 1, 2012, your Roth IRA will meet the five-year test.1
What if you have multiple Roths? Well, when it comes to distributions, the IRS has some aggregation rules for you. You will have to figure out the taxable amounts withdrawn, distributions and contributions using a little addition. You must …
• Add up all distributions made from all your Roth IRAs during the tax year.
• Add up all regular Roth IRA contributions made during the relevant tax year (including ones made after the close of the tax year, but before April 15 of the following year). Now add that total amount to the total undistributed regular contributions made in previous years.
• Add all conversion and rollover contributions made during the year together. To quote Publication 590: “For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2008 and the conversion or rollover contribution is made in 2009, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2009.”1
There are additional rules for recharacterized contributions that end up in a Roth IRA.
If all this makes you want to talk to a financial professional or accountant, before you take money out of your Roth IRA … well, that is a wise step to take. Confer with the financial or tax professional you know and trust.
Jacob Warren
Warren Wealth Management
111 West Port Plaza Drive, Ste 300, Saint Louis, MO 63146
(866) 463- 0752 ext. 52337 toll free, (314) 819-0464
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC, and Registered Investment Advisor. Warren Wealth Management and Woodbury Financial Services, Inc. are unaffiliated entities.
Content provided by Peter Montoya, Inc.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 irs.gov/publications/p590/ch02.html#en_US_publink10006523 [12/4/09]
2 investopedia.com/ask/answers/179.asp?viewed=1 [12/4/09]
3 smartmoney.com/personal-finance/retirement/nine-frequently-asked-questions-about-iras-7950/ [1/21/09]
[Permalink]
Previous Month: November 2009 >>