TAX-DEFERRED ACCOUNTS are great, until they aren’t—when we have to pay taxes on our withdrawals. Millions of Americans have tax-deferred accounts, pundits laud them, companies help fund them, institutions service them and markets help them grow. But when it comes time to empty them, often the only person to guide us is Uncle Sam, who’s patiently awaiting his cut.
Efficiently managing 30 years of retirement withdrawals from a 401(k), 403(b), IRA or other tax-deferred account is just as important as the 40 years of accumulation.
TRADITIONAL OR ROTH retirement accounts? Below are eight key questions to ask. Your decision should be based on your answers to these eight questions—including the importance you put on each.
Do you want a tax break now? Assuming you qualify, a traditional IRA allows you to deduct your contributions, resulting in a lower taxable income for the year. Ditto for tax-deductible contributions to an employer’s 401(k) or 403(b) plan. But with Roth accounts, you don’t get this tax benefit.
IT’S LATE NOVEMBER. Is there anything you can still do to trim your 2019 tax bill? There might be. One overlooked aspect of mutual funds is how they can significantly—though quietly—impact shareholders’ tax returns.
By way of background, mutual funds—including exchange-traded funds (ETFs)—are required to pay out to shareholders, on a pro-rata basis, all of the income that they generate each year. This includes interest paid by bonds, dividends paid by stocks and capital gains created when a fund sells an investment at a profit.
SAVE FIRST FOR THE kids’ college or for your own retirement? Pundits generally recommend that parents put themselves first. But I’d argue the question demands a more nuanced answer. The tax code offers numerous tax-savings opportunities for families with dependent children—and those tax breaks shouldn’t be overlooked.
To be sure, for cash-strapped parents, the top two financial priorities should be building up an emergency fund and putting at least enough in their 401(k) or 403(b) to capture the full employer match.
SHORTLY AFTER I retired in March 2017, I was asked to consult on some projects. I knew it was going to be a more complex tax year than I’d faced before. I had earned income from my previous employer, pension income and self-employment income from my consulting.
On top of all that, my wife started a new fulltime job the Monday after I retired. We switched to her benefits, but her company didn’t have a high-deductible health plan with an HSA,
I’M PONDERING WHETHER to make my biggest transaction in four years—and it might be the trickiest financial decision I’ve ever made. My quandary: Should I take advantage of today’s low tax rates to convert a big chunk of my traditional IRA to a Roth?
This financial navel-gazing was sparked by an article by John Yeigh, one of HumbleDollar’s contributors. As John pointed out, you can now have a much higher annual income and still avoid the top federal tax brackets,
“FINANCIAL WRITERS always seem to assume everybody’s married.” That’s a complaint I’ve heard more than once—and it came to mind as I reviewed our 2018 tax return.
That tax return reflected the impact of 2017’s tax law, which—among other things—roughly doubled the size of the standard deduction, while capping the itemized deduction for state, local and property taxes at $10,000. One result: Many couples now get little or no tax benefit from either the mortgage interest they pay or the charitable contributions they make.
THE NCAA BASKETBALL season concludes every year with the March Madness playoffs. Many Americans engage in bracketology—trying to figure out which teams will get knocked out in each round and which will advance. Warren Buffett even offers an annual bracket-picking challenge, where Berkshire employees can win $1 million a year for life.
This year, however, Americans with substantial retirement accounts might also want to try another form of bracketology: studying the 2017 tax law—and asking whether it offers a unique opportunity to convert hefty amounts of traditional IRA money to a Roth IRA.
FEDERAL RESERVE Chair Jerome Powell appeared before Congress late last month and spoke in serious terms about the country’s debt situation. It’s worth understanding what Powell said—and how that might impact your investments.
Powell’s message: “The U.S. federal government is on an unsustainable fiscal path.” Specifically, “debt as a percentage of GDP is growing, and now growing sharply, and that is unsustainable by definition.”
Powell’s remarks mirrored those of the Congressional Budget Office (CBO).
THE INTERNAL REVENUE Code doesn’t authorize much relief for investors when they suffer capital losses that exceed their gains. It allows taxpayers each year to offset the excess against as much as $3,000 of their ordinary income from sources like salaries, pensions and withdrawals from IRAs.
What about the unused losses? The law lets investors carry forward such losses and claim them in an identical way on their tax returns in subsequent years, until they’re used up.
IF YOU’RE GOING TO form one new financial habit this year, make it good recordkeeping. A system that’s easy to follow will improve your financial life both today and for years to come. With all of the annual investment statements and tax documents you’re about to get, this is a great time to start.
Whenever I go to my mailbox, I’m on the receiving end of countless advertisements, credit card offers, insurance notices and more.
GOT A VACATION home? There’s an overlooked tax break if you rent it out—but a potential tax hit if you sell.
First, the tax break: Long-standing rules allow homeowners to completely sidestep taxes on rental income—provided they meet a key requirement: They rent out their cottage or condo for less than 15 days during the year.
That can be a great tax break for those who own dwellings near annual events where rents soar for short periods.
WORKERS TODAY HAVE income taxes and Social Security taxes withheld from their paychecks. But it didn’t always work that way: The withholding system experienced a difficult birth—in the middle of the Second World War.
The wide-ranging 1943 tax act included a provision that authorized withholding. But President Franklin Roosevelt thought the legislation too complicated, so he vetoed it, saying, “The American taxpayer had been promised of late that tax laws and returns will be drastically simplified.
YOUR INVESTMENT holdings might include an asset that’s dropped in value since you bought it. Still, you have great hopes for the investment: While you’d like to sell and get the tax loss, you really hate to part with your old friend. Should you instead sell it to your spouse or your child?
You can usually claim losses on investments when you sell them. But IRS code section 267 generally disallows deductions for losses on sales to certain family members and other related parties.
I BEGAN WORKING for my father at age 12. He and his brothers run a sign manufacturing business that was co-founded in 1947 by my grandfather. The first few years, I cleaned pickup trucks, swept floors and took out the trash. When I got my driver’s license in high school, I started running errands for the business—better known as a gopher. As a finance major in college, I was able to work my way into the office,
