Biden’s “American Families Tax Plan” Proposal and How It Could Affect You

Contributed by: Josh Bitel, CFP®

Ever since President Joe Biden has taken office, there has been much talk about how the tax landscape may change. On September 13th, Democrats on the House Ways and Means Committee released their new tax proposals. While the outcome may differ from the proposals listed below, we always want to keep you informed on proposed changes. Highlights are summarized below.

 New Top Ordinary Income Tax and Capital Gains Rate

Perhaps the most talked about piece of the proposal is the return of the 39.6% income tax bracket. This rate was previously in place from 2013-2017 but reduced to 37% with the Tax Cuts And Jobs Act of 2017. However, this new proposal does not simply replace the 37% bracket with the 39.6%. Instead, it reduces the amount of income a taxpayer can have before being placed in that top bracket. Single taxpayers making over $400,000 or married couples making over $450,000 will be in the new top bracket under this proposal.

 Along with ordinary income tax brackets, top capital gains tax brackets may also change. The major difference between this change and the ordinary income tax change is that (if approved) this will go into effect immediately and impact all capital gains from that point forward. In contrast, the ordinary income tax brackets won’t change until 2022. See the chart below for proposed capital gains tax changes.

Proposed Capital Gains Tax Changes

Changes to Roth IRA Strategies

 This one may hurt more for advisors. If enacted, this part of the proposal prohibits converting after-tax dollars held in retirement accounts to Roth IRAs. In other words, the “backdoor Roth IRA” and the “Mega backdoor Roth IRA” would be left in the dust.

 Another proposed change would go a bit further. In 2032, Roth CONVERSIONS for high-income earners would be prohibited. Any single person earning over $400,000, or married couples earning over $450,000, would be impacted by this rule.

These are just a few of the many changes proposed by Democrats on the House Ways and Means Committee. Of course, the actual bill may look drastically different than the proposals listed in this blog. Planners here at The Center will be sure to stay on top of any changes and keep you informed as they come out.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Tick, Tock: Impact of the New Tax Law on Alimony and Divorce

Contributed by: Jacki Roessler, CDFA®

Getting divorced in 2018 and planning to pay or receive alimony?  You may not realize it, but there’s a tax “timer” hanging over your head and the buzzer is set to go off.

Current Law  

Based on current tax law, the payer of alimony may deduct the full amount from their taxable income which, in turn requires the recipient to treat it as taxable income.

How does this work in the real world?

Suppose Harry pays Sally $5,000 per month in alimony. Sally doesn’t get to keep  $5,000 because it’s treated as taxable income to her.  Based on her tax bracket, her actual monthly net is $3,750. Conversely, since Harry is in a higher tax bracket than Sally, when he writes a check to Sally for $5,000, the deduction translates to an out-of-pocket cost to him of $3,000.

What about the difference between the $3,750 that Sally nets and the $3,000 that it costs Harry? Uncle Sam has been footing the bill on the $750 differential in tax revenue. That is exactly what this new regulation is structured to eliminate.  

The New Tax Law and Alimony

The new tax law does away with the tax deduction for alimony. Of course, alimony also won’t be treated as taxable income to the recipient. The new law goes into effect for divorce cases finalized (not filed) with the Court after December 31, 2018. Cases finalized by December 31, 2018 will be grandfathered into the old tax law.

Why divorcing couples (especially the recipient of alimony) should care about the tax law change

In practical terms, taxable alimony shifts income from a high tax bracket to a lower one.  Some have argued that it gives divorced couples an unfair financial advantage not available to married couples. However, for the past 75 years, the tax deduction has made alimony a valuable negotiation tool used by attorneys across the country to help settle divorce cases. In fact, it’s often one of the only ways to help provide a fair (or) equal resolution during a difficult financial time for both parties.

When is the timer set to go off?

Although divorce attorneys and their clients may think they have until year-end before they need to worry about the changes, many states have a mandatory cooling off period once the case has been filed with the Court. Michigan, for example, has a 60 day waiting period; however for couples with minor children, the waiting period is typically extended to 180 days. Therefore, depending on where you live and if you have minor children, you may only have until the end of June 2018 to file and take advantage of tax deductible alimony.

As always, every case is different. Consult with a tax preparer, attorney and/or divorce financial professional to help you understand how the tax law changes may affect your divorce.

Jacki Roessler, CDFA® is a Divorce Financial Planner at Center for Financial Planning, Inc.®

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jacki Roessler, CDFA®, Divorce Financial Planner and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. The hypothetical example above is for illustration purposes only.

All about AMT: What it is and how it Might Apply to you

Contributed by: Matt Trujillo, CFP®

AMT.  It is one of those IRS acronyms that have a very bad reputation. Most people definitely seem to want to avoid it at all costs – but should they? Let’s find out what is really behind AMT—what it is, if it applies to you, and if it is really as bad as people think it is (or if there are some planning opportunities that might not be so bad).

What is AMT?

It’s a parallel tax code that is calculated alongside the “normal” marginal federal tax code to make sure tax payers are paying their “fair share.”

How does it work?

AMT excludes a lot of deductions that are common to a lot of Americans such as the mortgage interest deduction and state/local tax deduction. Essentially, you are given a flat exemption figure and once you exceed that exemption figure each dollar becomes taxable. For joint filers the AMT exemption is $83,800, each dollar after this is taxed at 26%.

Who does it apply to?

It can apply to anyone who files a federal tax return, but we typically find clients between $159,000 & $494,000 of taxable income most often subject to AMT.

What can you do about it?

If you find yourself in AMT you should really sit down and look at current vs. future income projections. If your income is projected to continue to increase, then AMT could actually present a planning opportunity.  If you think about it logically the alternative minimum tax is 26% and many of our clients find themselves in the 33%-39.6% marginal rates at some point in their working careers. So a 26% tax rate, when you expect to pay much higher, could potentially be a good deal.

In order to take advantage of the AMT rate you will actually need to reduce deductions and accelerate income. Having your financial planner coordinate with your CPA is a critical aspect to do this well in order to find a balance in how much to reduce deductions and how much additional income to accelerate.

Here are some ways to accelerate income:

• Receivables: If you're self-employed, bear in mind that your income isn't taxable until you receive it, if you're using the cash method of accounting. Therefore, you should collect accounts receivable in the current year.
• Year-end bonus: If you're employed and are eligible for a year-end bonus, make sure you receive it before the New Year arrives.
• Restricted stock: If your employer compensates you with restricted stock, it usually isn't taxable until there is no possibility that you'll have to forfeit the stock. However, you may file a statement with the IRS within 30 days of receiving the stock, allowing you to treat the stock as vested so that you can include the value of the stock in your income now.
• ROTH Conversions: Moving some money out your traditional IRA into a ROTH IRA can be a great way to accelerate income and convert some money at a 26% tax rate and withdraw it when you are potentially in a higher tax rate down the road.
• IRA or retirement plan distributions: You may be able to increase your income in the current year by taking any planned distributions from your traditional IRA or retirement plan this year instead of next year. (If you aren't yet 59½, however, you may be assessed at a 10% premature distribution tax unless you meet an exception.)
• Installment notes: If you sold property and are receiving installment payments for it, you may cause the remaining installment payments to be included in income during the current year in one of three ways: (1) have the debtor pay off the note this year, (2) use the installment note as collateral for a loan, or (3) sell the note to a third party.
• Dividends: If possible, arrange to receive dividends before the year's end. 
• Lawsuits, insurance claims, etc.: If you're embroiled in a dispute that could result in the receipt of taxable income, you can accelerate the income by settling the dispute before next year. 
• Capital gains: If you have assets that would result in a capital gain if sold, consider selling them this year in order to accelerate income.
• EE bonds: If you have U.S. government Series EE savings bonds (may also be called Patriot bonds) and you've elected to defer taxes until the bonds are redeemed, cash them in this year.

Here are several ways to postpone deductions:

• Bunching deductions in the following year: Try to time your expenses to create deductions in the following year. For instance:
  • Schedule nonemergency visits to your dentist and doctor for the following year
  • Avoid prepaying property taxes and interest that is due the following year
  • Postpone charitable gifts until next year
  • Hold off on paying miscellaneous expenses (e.g., professional dues) until next year
• Minimizing depreciation deductions: Minimize your depreciation deductions by electing a straight-line depreciation method and forgoing the Section 179 expense election.

AMT can be very tricky to understand and navigate effectively. Be sure to work with a team of qualified professionals, including your financial planner, if you plan on delving into this complex area of financial planning. Like always, if you have questions regarding AMT and your options, give us a call!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Matthew Trujillo and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Dividends are not guaranteed and must be authorized by the company's board of directors. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Investor Access: How the Raymond James Online System Allows Easy Access to your Tax Documents

Contributed by: Jennifer Hackmann

If you are not currently enrolled in the free, secure, online Raymond James Investor Access portal, then now would be the perfect time to jump on board. It’s a great tool offered by Raymond James that will allow you to access your tax documents online, as opposed to waiting for hard copies in the mail. Tax season can be frustrating enough, so as an added convenience Raymond James now allows you the option to receive your tax documents electronically – this is a new feature that just started with this 2015 tax year. Tax documents are available in PDF format, so you will be able to print and/or save them to your computer.

There are many additional features to the Investor Access system that will help make tax time much less of a headache, including:

• The ability to access your documents quicker; as soon as they become available.
• Option to export your 1099 tax information to an Excel format
• Raymond James has partnerships with TaxACT, TurboTax, and H&R Block, which provides clients with additional information and instructions for downloading your tax information.
• Information regarding Required Minimum Distributions.
• A Guide to your Consolidated Tax Statement.

Login in to your Investor Access today to check-out all of these features and if you are not currently enrolled, please click on the Investor Access Tab on our website to get started.

Jennifer Hackmann, RP® is a Registered Paraplanner℠ at Center for Financial Planning, Inc.

Important Information for Tax Season 2014

As you prepare for the 2014 tax season, here is some information that you may find beneficial.

Our team is available to assist you with your tax reporting needs. Please don’t hesitate to reach out with questions. We are also happy to coordinate with your CPA or tax preparer on your behalf if you make this request.

2014 Raymond James Form 1099 mailing schedule

• 2/17- Mailing of original Form 1099s

• 3/2 - Begin mailing delayed and amended Form 1099s

• 3/16 - Final mailing of any remaining delayed original Form 1099s

Please note the exceptions immediately below:

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows us to extend the mailing date until March 16, 2014 for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts; as well as holding company depositary receipts

• Processing of Original Issue Discount and Mortgage Backed bonds

• Cost basis adjustments

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax advisor about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2014.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax advisor about the requirements to re-file based on your individual tax circumstances.

Additional information can be found at http://www.raymondjames.com/taxreporting.htm.

We hope you find this additional information helpful. Please call us if you have any questions or concerns during tax season.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Is the Saver’s Credit one of the IRS’ best-kept secrets?

Saving money is tough.  There are so many ways in life to spend money and you can easily find excuses for not contributing to a 401k or an IRA.  But what if someone gave you money at the end of the year as a “reward” for doing the smart thing and saving for retirement?  Would that entice you to begin saving?  Enter what’s known as the “Saver’s Credit” to help you do just that!

What is the Saver’s Credit?

The Retirement Savings Contributions Credit (aka the Saver’s Credit) was enacted in 2001 as part of President Bush’s tax cuts, however, many folks are simply not aware it exists.  The Saver’s Credit applies to contributions made to qualified retirement plans (401k, 403b, 457) or to a Roth IRA or Traditional IRA.  To qualify for the credit, adjusted gross income (AGI) must be below $60,000 for married couples or $30,000 for single filers.  The maximum credit available is $1,000 and is a non-refundable credit. For more details check out the IRS website.

A Tax Credit vs. A Tax Deduction

A tax credit is typically more beneficial than a tax deduction, especially for those with income within the required parameters.  For example, if you’re in the 15% tax bracket and received a $1,000 tax deduction, the true tax reduction would be about $150 ($1,000 x 15%).  A tax credit, on the other hand, is a dollar for dollar reduction of tax liability.  For example, if you received the $1,000 maximum “Saver’s Credit” and your total tax liability on the year was $3,000; you would only owe $2,000 in tax. 

How do I claim the Saver’s Credit?

If you fit the AGI parameters, you need to complete form 8800.  Make sure your tax professional or tax software program is generating this form for you to make sure you are taking advantage of the credit.  Many tax software programs that offer free services are for very simple returns (1040EZ), so always be sure that the type of return you are purchasing will, in fact, allow you to take the deductions and credits that are applicable to your situation.

Who can take advantage of this tax credit?

Personally, I see this as a great opportunity for recent college graduates who are entering the work force and have “retirement savings” as number 24 on their “top 25 ways to use my paycheck”.  Many are starting off earning an income that falls within the range to take advantage of the credit and are just simply not aware that this incentive exists to save for retirement.  This is also a great opportunity for parents or grandparents to consider gifting to the young adult so they can take advantage of the credit if they simply cannot afford to make any type of retirement contribution currently.  One stipulation the parent or grandparent may put on the gift is that any added tax refund from the credit needs to be re-deposited into a retirement account.  It’s a great way to begin good savings habits that will hopefully last a lifetime!

Need more information on how to put this tax credit to work for you? Please contact me and we’ll take a look at your personal case to see if the Saver’s Credit is an option.

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Consult a tax professional for any tax matters. C14-023683

Tips to Help Avoid a Tax Audit

Nothing gets the blood pumping like a notice from the IRS letting you know you’re in for a tax audit.  According to Kipplinger Magazine, there are signs some tax payers are more susceptible to audits than others. 

Here are some red flags for the IRS:

1. High income: Incomes over $200,000 are 26% more likely to be audited, as well as one in nine persons earning over $1 million dollars.

2. Failing to report all taxable income:  Tax payers forget the IRS gets copies of all 1099’s and a mismatch sends a red flag.

3. Taking large charitable deductions:  Be sure you know the rules regarding various kinds of charitable gifts and you can document not only the amounts given but the charities as well.

4. Business write-offs: Deducting business meals, travel and other expenses.  Again, there are guidelines on what you may and may not deduct—be sure to follow them.

5. Claiming 100% business use of vehicle:  Very few workers use their car for business all the time.

6. Taking alimony deductions:  These deductions can only be taken when made part of a separation or divorce decree---not arbitrarily.

7. Running a small business:  The IRS is well aware there are many opportunities for tax deductions but again the rules are precise—follow them.

8. Failing to report a foreign bank account:  New rules have gone into effect in 2014. Foreign bank accounts will require registrations and will be reported to the IRS.

9. Engaging in currency transactions:  Cash deposits and withdrawals over $10,000 are reported—be ready to explain.

10. Taking higher than average deductions:  The IRS has estimated percentages of deductions they deem “average” for various income levels.  If your deductions fall outside these estimates, be ready to explain.

If you have any of the above deductions, have detailed documentation on the what, when and why of your deductions.  Good record keeping can help make the audit go away as easily as it was announced.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. C14-022520

Tax Update: Borrowing from Retirement to Buy a Home

There may come a time in your life when you simply need some money. As a general rule, taking money from an IRA, 401k, or other retirement plan for “non-retirement” purposes is ill advised.  However, there can be some exceptions.  Perhaps you bought a home without selling your current one and need funds to bridge the closing dates.  The IRS allows you to withdraw funds from an IRA and avoid income taxes and a 10% penalty (if under age 59.5) by rolling the money back into the IRA within 60 days.  This can be done once every 12 months. The gray area had been whether the 12-month rollover applies to each separate IRA or to all of your IRAs. In February 2014 a court ruling stated that this rule applies on an aggregate basis for all of your IRAs.  Therefore, the strategy can still be used, but proper planning will be even more important in order to make sure the transaction is nontaxable.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. C14-011297

Avoiding Double Taxation of IRA Contributions

In my previous blogI described some of the rules surrounding making and deducting IRA contributions.   If you are over the IRS income thresholds, you can still make the IRA contribution, you just won’t be able to deduct it on your taxes – the contribution would be made with after-tax dollars.  This is where tax form 8606 comes into play. 

What is Tax Form 8606?

You are required to file Form 8606 when you make a non-deductible IRA contribution; this tax form will document the contribution amount for the current year.  It must also be filed with your taxes when you withdraw funds from an IRA in which non-deductible contributions were made.  If you don’t file this important tax form, when you go to withdraw funds you’ll face tax consequences. Any amount you contributed that did not receive a tax deduction (after-tax dollar contributions) will be treated as if it did, in fact, receive a tax-deduction and you will be taxed AGAIN on the money.  If you do file form 8606 properly, when you go to take a distribution, a portion will be taxable (any earnings) and a portion will not (return of original after-tax contribution). 

Is your head spinning yet?  Things get confusing quickly and mistakes can happen VERY easily when making non-deductible IRA contributions. Those mistakes could potentially result in double taxation of contributions that could cost investors substantial amounts of money over the course of their retirement.   Not many people want to deal with tracking contributions over the course of a career and will elect to not make non-deductible IRA contributions because of the potential administrative nightmare it can create.  

Non-deductible IRA Alternatives

So what else is there if you have additional funds to invest beyond maxing out a company retirement plan?  If your income is within the IRS limits, you could consider contributing to a Roth IRA.  As with a non-deductible IRA, contributions are made with after-tax dollars. However, all withdrawals, including earnings are not taxable if a qualified distribution occurs.  If income is too high for Roth contributions, you still might be able to contribute by utilizing the “back door” conversion strategy.  If you are phased out from the Roth because of your high income (a good problem to have!) and you don’t fit the mold for a Roth conversion, you could consider opening a taxable brokerage account. Those funds would not grow tax-deferred, but withdrawals would not be included in ordinary income like an IRA because you never received a tax deduction on the contributions.   

As you can see, there are many subtle nuances of different types of retirement and investment accounts.  Your planner can help you identify which accounts make the most sense for you based on your current and projected financial situation.  Working with someone you trust thoroughly to help you make these decisions is imperative and is something we deeply care about at The Center.

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. As Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional. C14-009867

Why You Can’t Always Take a Tax Deduction on an IRA

On deadline day for filing your taxes, you may be considering making last-minute Traditional IRA contribution.  Most people contribute to an IRA to 1) save for retirement and 2) take a tax deduction on the contribution to hopefully lower one’s overall tax bill.  Many people, however, are not aware that there is a good chance that the IRA contribution they are intending to make or have made in the past, does not allow for a tax deduction. This happens if you are above IRS adjusted gross income (AGI) thresholds.  Eligibility to deduct depends on income and whether or not you are covered under an employer sponsored retirement plan, such as 401k or 403b.

Married Filing Jointly

Both spouses are covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $96,000

Only one spouse is covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $181,000

Neither spouse is covered under an employer sponsored retirement plan at work

• No income limit to be able to fully deduct an IRA contribution

Single

Individual is covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $60,000

Individual is not covered under an employer sponsored retirement plan at work

• No income limit to be able to fully deduct an IRA contribution

There’s a reason the IRS limits the amount that can be deducted by someone who is covered under an employer retirement plan. The IRS tries to prohibit investors who are in higher tax brackets from sheltering “too much” income that won’t be taxed until funds are ultimately withdrawn upon retirement. 

You must also have earned income equal to or greater than the IRA contribution being made during the year in which the contribution will be coded.  For example, for someone to be eligible to make a full IRA contribution, their earned income from work throughout the year must be greater than or equal to $5,500, if under the age of 50, or $6,500 if over the age of 50.  Another important note – Social Security, pension benefits, IRA distributions, dividends, interest, etc. are NOT considered earned income items.  The IRS prevents retirees from contributing to qualified retirement accounts that grow tax-deferred unless they are working. 

In my next blog post, I’ll discuss ins and outs of contributing and withdrawing funds from an IRA where non-deductible contributions were made…this is where things can tricky.  Stay tuned. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. C14-009199