Double IRA Season Is Here

laptop-woman-hands_LI-532x266 Double IRA Season Is Here
Photo: Christin Hume

The start of each year might be considered “Double IRA” season. Until mid-April (the 15th, in 2019), you still can make contributions to an IRA for 2018, if you have funds you’d like to save for retirement. Most workers and their spouses may each contribute up to $5,500, or $6,500 for those who were 50 or older at the end of 2018.

If you have additional dollars to invest, you also can put them into an IRA for 2019, now that the year has begun. The sooner you put money into a 2019 IRA and choose investments, the sooner tax-advantaged buildup might begin.

Note that such IRA contributions are permitted even if you also participate in an employer’s retirement plan. The same is true if you participate in a SEP-IRA or SIMPLE IRA through your company or self-employment.

Three for the Money

Many workers can choose from among three types of IRAs.

Deductible IRAs. Whereas most workers and their spouses can contribute to regular (traditional) IRAs, only some people can deduct their contributions. A full deduction is available if you do not participate in an employer’s retirement plan; if you do participate, the deduction allowed depends on your income.

Example 1: Paula Adams, a single taxpayer who participates in a 401(k), must have had modified adjusted gross income (MAGI) of $63,000 or less in 2018 for a full deduction on her 2018 tax return. If her MAGI is greater than $63,000 but less than $73,000, a partial deduction is allowed.

Different MAGI numbers apply to married taxpayers filing joint returns, qualifying widows or widowers, and married taxpayers filing separate returns.

Contributions to traditional IRAs are not allowed after you reach age 70½.

 Roth IRAs. Contributions to Roth IRAs are never tax deductible. However, once you have had a Roth IRA account for five years and reach age 59½, all withdrawals ― including withdrawn investment earnings ― are untaxed.

There are no age limits for contributions to a Roth IRA. However, income limits apply.

Example 2: Rick Baker, a single taxpayer, must have had MAGI of $120,000 or less in 2018 for a full contribution to a Roth IRA for 2018. Rick can make a partial contribution if his MAGI is greater than $120,000 but less than $135,000, and no contribution if his MAGI is $135,000 or more.

Different MAGI numbers for Roth IRA contributions apply to married taxpayers filing joint returns, qualifying widows or widowers, and married taxpayers filing separate returns.

Nondeductible traditional IRAs. Some workers and workers’ spouses will not be able to deduct contributions to traditional IRAs or contribute to Roth IRAs because of their income.

Example 3: Carol Davis, a single taxpayer who participates in a 401(k), had MAGI of $220,000 in 2018. That puts her over the upper MAGI limits for traditional IRA deductions ($73,000) and Roth IRA contributions ($135,000), mentioned previously. However, as long as Carol was under age 70½ by the end of 2018, she can make a full nondeductible contribution to a traditional IRA. Any earnings within this IRA will not be taxed until money is withdrawn.

Once money is in a traditional IRA, it can be converted to a Roth IRA, in which future distributions may be untaxed. Roth IRA conversions have no income or age limits.

Tax Trap

Roth IRA conversions generate tax bills if pretax dollars are moving into an after-tax account. That may not be the case if only after-tax dollars are being converted.

Example 4: Suppose that Carol Davis from example 3 is 55 years old. She contributes $6,500 to a nondeductible traditional IRA for 2018. Carol has no pretax money in any other traditional, SEP, or SIMPLE IRA. If she converts that $6,500 to a Roth IRA, Carol will owe no tax. She will have made what’s known as a back-door Roth IRA contribution and will get around the income limits.

Behind the Back Door

  • Suppose a taxpayer with $26,000 of pretax money in a traditional IRA makes a $6,500 nondeductible contribution to a new traditional IRA.
  • That brings the IRA total to $32,500, of which $6,500 (20 percent) is after-tax money.
  • Then, a Roth IRA conversion of any amount will be 20 percent tax-free and 80 percent taxable, regardless of which IRA is used for the Roth conversion.
  • Such back-door Roth conversions may be most appealing to high-income taxpayers with little or no pretax money in traditional, SEP, or SIMPLE IRAs.

Additional Resources

If you need help with your financial plan, we can assist. In addition, below are some of our other financial planning tips you might like.

7 Ways to Prevent Financial Scams Directed At Elders

elderly_LI-532x266 7 Ways to Prevent Financial Scams Directed At Elders
Photo: Anthony Metcalfe

As tax season ramps up, so do the efforts of scam artists looking to steal people’s financial data and money. Such fraudulent activities often target older adults.

Whether you’re in this age bracket or worry about senior parents and other relatives, here are seven ways to prevent elder financial abuse:

  1. Keep both paper and online financial documents in a secure place. Monitor accounts and retain statements.
  2. Exercise caution when making financial decisions. If someone exerts pressure or promises unreasonably high or guaranteed returns, walk away.
  3. Write checks only to legitimate financial institutions, rather than to a person.
  4. Be alert for phony phone calls. The IRS doesn’t collect money this way. Another scam involves someone pretending to be a grandchild who’s in trouble and needs money. Don’t provide confidential information or send money until you can verify the caller’s identity.
  5. Beware of emails requesting personal data — even if they appear to be from a real financial institution. After all, shouldn’t your banker or financial professional already know these things? Ignore contact information provided in the email. Instead, contact the financial institution through a known telephone number.
  6. As much as possible, maintain a social network. Criminals target isolated people because often they’re less aware of scams and lack trusted confidants.
  7. Work only with qualified professionals, including accountants, bankers and attorneys.

Installment Sales: A Viable Option for Transferring Assets

Boston-street_LI-532x266 Installment Sales: A Viable Option for Transferring Assets
Photo: Michael Browning

Are you considering transferring real estate, a family business or other assets you expect to appreciate dramatically in the future? If so, an installment sale may be a viable option. Its benefits include the ability to freeze asset values for estate tax purposes and remove future appreciation from your taxable estate.

Giving Away vs. Selling

From an estate planning perspective, if you have a taxable estate it’s usually more advantageous to give property to your children than to sell it to them. By gifting the asset you’ll be depleting your estate and thereby reducing potential estate tax liability, whereas in a sale the proceeds generally will be included in your taxable estate.

But an installment sale may be desirable if you’ve already used up your $11.18 million (for 2018) lifetime gift tax exemption or if your cash flow needs preclude you from giving the property away outright. When you sell property at fair market value to your children or other loved ones rather than gifting it, you avoid gift taxes on the transfer and freeze the property’s value for estate tax purposes as of the sale date. All future appreciation benefits the buyer and won’t be included in your taxable estate.

Because the transaction is structured as a sale rather than a gift, your buyer must have the financial resources to buy the property. But by using an installment note, the buyer can make the payments over time. Ideally, the purchased property will generate enough income to fund these payments.

Advantages and Disadvantages

An advantage of an installment sale is that it gives you the flexibility to design a payment schedule that corresponds with the property’s cash flow, as well as with your and your buyer’s financial needs. You can arrange for the payments to increase or decrease over time, or even provide for interest-only payments with an end-of-term balloon payment of the principal.

One disadvantage of an installment sale over strategies that involve gifted property is that you’ll be subject to tax on any capital gains you recognize from the sale. Fortunately, you can spread this tax liability over the term of the installment note. As of this writing, the long-term capital gains rates are 0%, 15% or 20%, depending on the amount of your net long-term capital gains plus your ordinary income.

Also, you’ll have to charge interest on the note and pay ordinary income tax on the interest payments. IRS guidelines provide for a minimum rate of interest that must be paid on the note. On the bright side, any capital gains and ordinary income tax you pay further reduces the size of your taxable estate.

Simple Technique, Big Benefits

An installment sale is an approach worth exploring for business owners, real estate investors and others who have gathered high-value assets. It can help keep a family-owned business in the family or otherwise play an important role in your estate plan.

Bear in mind, however, that this simple technique isn’t right for everyone.

We can review your situation and help you determine whether an installment sale is a wise move for you. Contact us today, before transferring real estate.

How To: Trim the Inventory Fat

Inventory-costs_LI-532x266 How To: Trim the Inventory Fat
Photo: Samuel Zeller

Inventory is expensive. Here are some ways to trim the fat from your inventory without compromising revenue and customer service.

Objective Inventory Counts

Effective inventory management starts with a physical inventory count. Accuracy is essential to know your cost of goods sold — and to identifying and remedying discrepancies between your physical count and perpetual inventory records. A CPA can introduce an element of objectivity to the counting process and help minimize errors.

The next step is to compare your inventory costs to those of other companies in your industry. Trade associations often publish benchmarks for:

  • Gross margin ([revenue – cost of sales] / revenue),
  • Net profit margin (net income/revenue), and
  • Days in inventory (annual revenue / average inventory × 365 days).

Your company should strive to meet — or beat — industry standards. For a retailer or wholesaler, inventory is simply purchased from the manufacturer. But the inventory account is more complicated for manufacturers and construction firms. It’s a function of raw materials, labor, and overhead costs.

The composition of your company’s cost of goods will guide you on where to cut. In a tight labor market, it’s hard to reduce labor costs. But it may be possible to renegotiate prices with suppliers.

And don’t forget the carrying costs of inventory, such as storage, insurance, obsolescence, and pilferage. You can also improve margins by negotiating a net lease for your warehouse, installing anti-theft devices or opting for less expensive insurance coverage.

Product Mix

To cut your days-in-inventory ratio, compute product-by-product margins. Stock more products with high margins and high demand — and less of everything else. Whenever possible, return excessive supplies of slow-moving materials or products to your suppliers.

Product mix should be sufficiently broad and in tune with consumer needs. Before cutting back on inventory, you might need to negotiate speedier delivery from suppliers or give suppliers access to your perpetual inventory system. These precautionary measures can help prevent lost sales due to lean inventory.

Reality Check

Often management is so focused on sales, HR issues and product innovation that they lose control over inventory.

Contact us for a reality check.

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503769515 How To: Trim the Inventory Fat



Year-End Bonuses Shouldn’t Break the Bank

qtq80-GQ7bIA-1024x683 Year-End Bonuses Shouldn’t Break the Bank

Rewarding employees at the end of the year can brighten up their holidays and set the stage for your company to enjoy a good start to 2019. Some forethought and careful communications can avoid problems.

A key first step is to check your company’s financial condition. Year-end bonuses can boost morale, but you shouldn’t pay out more than your company can afford. On the other hand, if your business is doing well, some holiday generosity might help it do even better.

Spread the Word

Once you have a budget for bonuses in mind, tell your employees what to expect. Let them know as soon as possible so they can plan accordingly.

Long-time employees probably will expect the type and size of bonus they have received in the past. If that’s not going to be the case, explain the reason for the shortfall. Consider replacing any lack of cash with extra time off, if that’s practical.

Among possible methods of calculating bonuses, giving a flat amount to all full-time workers might be the simplest approach. Another tactic is to give everyone a percentage of their salary; the percentage might escalate for people with management responsibility or special tasks. Performance-based bonuses, which can be sizable, may motivate key employees and could help to retain valued workers.

Tax Treatment 

Cash bonuses are compensation for employees, so employment taxes apply. For income tax withholding, employers have some options about how to handle supplemental pay such as bonuses. Our office can help you choose the right method and properly comply with all the rules. If you use an outside payroll provider, that company should be notified in advance of your plans.

At many companies, cash bonuses might be a few hundred dollars per employee. Some firms, though, pay much larger bonuses as part of some workers’ compensation package. For ample bonuses, it may be advantageous to deduct them for 2018, but defer payment as late as March 15, 2019.

To qualify for this deduct-now-pay-later opportunity, your company must be on the accrual, rather than the cash, basis of accounting. You must spell out the recipients and the amounts involved, perhaps in corporate minutes, by year-end 2018. S corporation shareholders and over-50% C corporation shareholders don’t qualify for this tax benefit.

Reach Out For Assistance

At some companies, a pool of money for bonuses can be deducted at year-end without an employee-by-employee allocation, yet payments can be delayed until mid-March. Several rules apply, such as maintaining the amount declared at year-end. We can guide you through the complexities. Give us a call today.

Additional Resources