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Are Social Security Benefits Taxed?

Many people do not realize that their Social Security Benefits may be taxed. If you have a taxable income in retirement above a certain threshold, up to 85% of your social security benefits can be taxed. The calculation for the threshold income actually includes half of your social security benefits. Whether or not you trigger taxation on your benefits will depend on your “combined” income, which is a sum of your adjusted gross income (taxable income, which can include taxable sources such as qualified retirement plans), your nontaxable interest (from Muni bonds in particular, Roth IRAs are excludable), and half of your household Social Security benefits. Continue reading...

What are the Tax Implications for Taking Money Out of a Roth IRA?

Distributions taken from a Roth during retirement are not subject any income taxes. Interestingly, the “cost basis” or contributions made to a Roth can be taken out at any time, including before age 59 ½, without tax or penalty. Contributions are recorded on IRS form 5498 and a copy is mailed to you, but you need to keep up with your contributions if you might want to tap into your Roth early. The earnings that accumulate must satisfy the 59 ½ requirement and the five year rule, or be used for first-time homebuyers expense, to avoid the 10% penalty and taxation. The five year rule says that the earnings in a Roth may be taxable if the Roth account is under 5 years old. Continue reading...

Can I Start Collecting My Social Security Benefits If I’m Still Working?

Yes, you can start receiving social security benefits before you actually stop working, and your benefit amount will not be affected if you have attained normal retirement age, or NRA, which is determined based on the year of your birth. NRA is 67 for most people today. If you start to take benefits while working and before the normal retirement age, your benefit will be reduced. But there are a few caveats to consider if you start to receive the benefits before your normal retirement age. Continue reading...

What is the Difference Between Cash-Balance Plans and Other Retirement Plans?

Cash Balance plans are Defined Benefit plans, but are not much like Pensions as you may know them, or other types of retirement plans, for that matter. On one side of the retirement isle you have defined contribution plans, such as 401(k)s and SEPs and so on, where the contributions are certain, or at least ascertainable, while the ending balance or benefit of each employee’s account is unknown, or at least does not have to be (and in most cases isn’t). Continue reading...

What Are the Contribution Limits for My SEP IRA?

SEPs contain only employer contributions, and they must contribute the same percentage of every employee’s compensation. As of 2016, an employer may contribute the lesser of either 25% of an employee’s compensation or $53,000 annually. An important thing to note is that the employer decides whether to contribute to the employees’ SEP IRA each year; the employer is not required to make continuous yearly contributions. The equal treatment of all employees with respect to the retirement plans is a fundamental principle of all employer-sponsored retirement programs. Continue reading...

What is a Dividends Received Deduction?

A Dividends Received Deduction (DRD) is a tax deduction available to corporations when they are paid dividends from another corporation. This is a provision to reduce the number of times an amount of earnings can be taxed: company A, which is paying the dividend, will have already been taxed on it, and the shareholders of company B will be taxed as well, so the Dividends Received Deduction alleviates taxes at the intermediary stage when Company B receives it. Continue reading...

If I Want to Establish a Self-Employed 401(k), Do I Have to Establish One for All Owners of My Business?

This may be something you have to ask a CPA or tax attorney, but generally the answer will be yes. Some institutions will not allow you to open a self-employed 401(k) if you have more than one owner in the business, but by statutory definition these plans can be set up for partnerships. If you are part of a partnership and this is where your self-employed income is made, you will be getting on thin ice if you attempt to form an LLC for yourself as a conduit for the money, just so you can have a self-employed 401(k), because, while that is not recommended, it will be about your best chance of setting up a Solo K that does not include your partners. Continue reading...

Will My Cash-Balance Payments Affect My Social Security payments?

Social security can become taxable if a person has a certain level of income in retirement. Retirement income from pensions or 401(k)s and other taxable sources will contribute to the AGI of a person in retirement, but it will not ever disqualify a person from receiving their social security check in retirement if it is owed to them. Instead, social security benefits become taxable as income if a person has enough income in retirement to trigger the social security taxes. The level is actually quite low, and has not been adjusted for inflation recently. Continue reading...

What is a Pension?

Pensions are income streams guaranteed to employees upon their retirement. A Pension is a type of Defined Benefit Plan in which your employer promises to pay you a certain amount every month for the rest of your life. Employers who are part of the pension plans are sometimes called pensioners. An employer retains the funds in a trust, usually, and everyone’s pension assets are pooled together in what’s called a Pension Fund. Continue reading...

What Happens If I Withdraw Money From My Cash-Balance Plan Before I Retire?

In general, this won’t even be an option for many. Cash balance plans do not permit partial withdrawals. If you have separated from service at the employer, you can take your entire vested amount with you. You can cash out your balance and pay income taxes on it, as well as a 10% IRS penalty if you’re younger than 59 ½. This penalty may also be avoided if you separated a from service after age 55; these rules are the same for 401(k)s and other qualified plans. Continue reading...

How is a Roth 401(k) Different From a Regular 401(k)?

The main difference is that Roth contributions go in after tax and are not taxed on withdrawal. People sometimes don’t realize that Roth 401(k)s only exist as extensions of Traditional 401(k) plans. Some plans have been designed to also permit after-tax contributions, which become that employee’s Roth 401(k) account. This Roth side account has all of the same investment options as the rest of the plan on the traditional side. In fact, an employee can contribute to both the traditional 401(k) and Roth 401(k) with each payroll cycle. Continue reading...

How Much Should I Withdraw from my Retirement Accounts Once I Retire?

A general rule-of-thumb is to withdraw no more than 4% of your retirement savings per year. Since your retirement money has to last you for the rest of your life (and in most cases, your spouse’s), it’s extremely important to carefully calculate how much you can withdraw each year without risking running out of money. Retirees should avoid withdrawing more than 4% of your total retirement assets in any given year, and that’s assuming that your assets are invested for growth over time (with some equity exposure). Continue reading...

What’s So Special about an IRA?

When compared to other methods of investing, there are benefits to using an IRA. An IRA provides tax deferred growth of your assets, and the result of such growth, over the years, can be quite remarkable in comparison with a regular savings account. Using an advanced calculator online – or asking an advisor or a CPA to run some calculations for you – can be an eye-opening experience. For most investors, mutual funds will be their best option for cost-efficient diversification. Holding mutual funds outside of an IRA or 401(k) means that the investor will have some taxes, whether long term gains or short term gains, passed on to him or her from the mutual fund company every year that the fund experiences gains. Continue reading...

How do my IRA Withdrawals Get Taxed During Retirement?

Different IRAs have different tax treatments. Traditional IRAs, as well as SEPs, SIMPLEs, and 401(k)s are all taxed as income in retirement. Roth IRAs are not taxed. Traditional IRAs and the other pretax accounts will have distributions that are also includable in the Modified Adjusted Gross Income calculations which may subject them to 3.8% Medicare surtax, as well as the income calculations which determine what portion of Social Security income may be taxable in retirement. Continue reading...

What is a Limited Liability Company (LLC)?

A limited liability company (LLC) establishes a separate entity from the sole proprietor or partners in a business which shields them from some of the liability associated with the business. An LLC is a business entity that creates a distinction between the business’s assets and liabilities and the assets and liabilities of the owner or partners. Sole proprietors and partnerships who do not file for this distinction leave themselves and all of their personal assets at risk, in the event of a lawsuit or bankruptcy. Continue reading...

How Do Deductible and Non-Deductible IRAs Differ?

It is possible to make non-deductible contributions to an IRA, even if you have a qualified plan at work. Traditional IRAs are a good place to stash retirement money because of the tax treatment. Some people will choose to make contributions even when they are not deductible, which gives us two kinds of Traditional IRAs: deductible and non-deductible. Deductible IRAs provide a way to lower your taxes because you can deduct contributions to your IRA from your income. Nondeductible IRAs do not allow you to deduct your contributions, but they still retain their tax-deferred growth. Unlike a Roth, these after-tax contributions will be taxed upon withdrawal as income. Continue reading...

What is a Dividend Tax Credit?

In Canada, the dividend tax credit eliminates tax liability for eligible dividends. Eligible dividends can come from public companies, foreign-owned companies operating in Canada, and many privately owned companies. It allows Canadian citizens to avoid having their dividends double-taxed. Canada offers a dividend tax credit that allows investors to eliminate their taxes on dividends paid from eligible companies. Continue reading...

Where do I find a good CPA?

A good CPA can be a valuable ally. You should find one who works with clients similar to you and who is easy to talk to. Taxes and accounting are a part of nearly every financial instrument and consideration that people will be confronted with in their life. It can be very beneficial to work with a CPA who can advise you properly on the issues that affect you. It can also be detrimental to place too much trust in a CPA who isn’t really an expert in the areas he claims to be. Continue reading...

How Can I Establish a SIMPLE IRA?

A SIMPLE IRA must be established by an employer with fewer than 100 employees. An employer can establish a SIMPLE IRA if they have no more than 100 employees who earned $5,000 or more during the preceding calendar year. The employer cannot have any other type of qualified retirement plan going while a SIMPLE IRA is in effect. SIMPLEs should be established between Jan 1 and October 1 of the first year of the plan, unless the business started after that. Plans can be set up relatively quickly and can even use automatic enrollment if employees are given the ability to opt-out. Continue reading...

Can I Withdraw Money From My Cash-Balance Plan?

It’s not likely that a cash-balance plan will allow for early withdrawals. Generally speaking, you can’t withdraw money from a Cash-Balance Plan before you retire unless it is to roll over assets to a new employer’s plan or a personal IRA. Once the money is in another account, you could potentially have full access to it, minus the 10% IRS penalty if you’re under 59 ½. Loans from a cash balance plan may be permitted if they abide by the same rules as 401(k) loans — and if the IRS and the DOL will allow you to consider your vested amount in your hypothetical account as adequate collateral. Continue reading...