Day: May 3, 2016

Early Retirement Distributions

Tax E Man
Tax Consultation, Preparation, Representation

 

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Baldwin NY Tax Preparation service Pat Tax Inc. and Patrick White, Enrolled Agent .  Please feel free to contact us with any questions or  concerns.

Early Retirement

Early Retirement Distributions

A taxpayer may choose, or be forced into choosing, early retirement. A retirement before age 59½ creates income challenges for the retiree. The retiree is not yet eligible to receive retirement benefits from Social Security. The retiree may or may not have a monthly pension to generate income.

 
In many situations, the retiree will need to generate income from his or her assets. Often, the retiree has most of his or her assets in a retirement plan through a 401(k) plan at his or her employer or in an individual retirement arrangement (IRA). Withdrawals of earnings and pre-tax contributions are subject to ordinary income tax. In addition, taxpayers may be subject to the 10% early withdrawal penalty tax on distributions taken before the taxpayer reaches age 59½.

 

 Read Early Retirement Distributions 2016 Here

Tax Summary

  • Withdrawals of earnings and pre-tax contributions from an IRA are subject to ordinary  income tax.
  • Unless an exception applies, taxable withdrawals from an IRA prior to age 59½ are subject to a 10% early withdrawal penalty.
  • Taxpayers who take a series of substantially equal periodic payments from an IRA are not subject to the 10% additional tax.

Tax Planning Strategy

One strategy to generate income from retirement accounts for taxpayers under age 59½ is to take periodic distributions from those accounts. If structured properly, the 10% additional tax will not be assessed on the distributions. Taxpayers can take distributions from various retirement accounts such as 401(k) plans, 403(b) plans, and IRAs.

 

Read Early Retirement Distributions 2016 Here

 

Any accounting, business or tax advice contained in the Tax E Man Blog or  www.PatTax.net, including attachments, links and enclosures, are not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax related penalties.

If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Pat Tax, Inc. . Please feel free to contact us with any questions or concerns.

 

“Empowering clients through education, a stress free transaction and an excellent service experience.”

Saving For Retirement

Tax E Man
Tax Consultation, Preparation, Representation

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Baldwin NY Tax Preparation service Pat Tax Inc. and Patrick White, Enrolled Agent .  Please feel free to contact us with any questions or  concerns.

 

DSCN1202

 

Traditional IRA

A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. Any individual can set up a traditional IRA if he or she receives taxable compensation during the year and is not age 70½ by the end of the year. An individual can have a traditional IRA even if covered by
an employer-sponsored retirement plan. However, the deductible amount of contributions to a traditional IRA may be phased out.

  • Contribution limit. Contributions to IRAs are limited to the lesser of the individual’s compensation (or spouse’s compensation under a spousal IRA), or $5,500 ($6,500 age 50 or older).
  • spousal IRA. If both spouses have compensation, each can set up a separate IRA. Spouses cannot participate in the same IRA. If Married Filing Jointly, and
    one spouse’s compensation is less than the contribution limit, the lower-income spouse can use the compensation of the other spouse to qualify.
  • SEP IRA. A SEP is a traditional IRA with different per year contribution limits. An employer (or self employed individual) makes deductible contributions to a traditional IRA on behalf of the employee (or self-employed individual). Distributions are generally subject to the same rules that apply to traditional
    IRAs.

 Read 2016 Saving for Retirement Here

DSCN2466

Prohibited Transactions Involving IRAs

Penalties apply when IRA funds are used in prohibited transactions. A prohibited transaction is any improper use of traditional IRA funds by the participant, the beneficiary, or a disqualified person. The following are examples of prohibited transactions.

  • Borrowing money from an IRA.
  • Selling property to an IRA.
  • Receiving unreasonable compensation for managing an IRA.
  • Using an IRA as security for a loan.
  • Buying property for personal use (present or future) with IRA funds.

 

Read 2016 Saving for Retirement Here

 

Any accounting, business or tax advice contained in the Tax E Man Blog or  www.PatTax.net, including attachments, links and enclosures, are not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax related penalties.

If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Pat Tax, Inc. . Please feel free to contact us with any questions or concerns.

 

“Empowering clients through education, a stress free transaction and an excellent service experience.”

Saving For College

Tax E Man
Tax Consultation, Preparation, Representation

 

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Baldwin NY Tax Preparation service Pat Tax Inc. and Patrick White, Enrolled Agent .  Please feel free to contact us with any questions or  concerns.

 

Custodial Accounts (UTMA/UGMA)
Assets in a custodial account belong to the minor. A custodian, usually an adult relative,  controls the assets until the minor reaches the age set by state law (21 in most states).
Assets in a custodial account can be used to pay for education expenses for the minor.

Savings Bond Interest Exclusion
Exclusion Rules

Interest from qualified savings bonds redeemed by the taxpayer can be excluded from income if:

  • The taxpayer paid qualified education expenses during the year for the taxpayer, spouse, or a dependent claimed on the taxpayer’s return.
  • Filing status is not Married Filing Separate.
  • If proceeds from the redemption (interest and principal) are more than adjusted qualified education expenses, only a percentage of the interest is excludable.
    Example: Marty redeemed qualified bonds for $10,000, including accrued interest of $5,500. He paid $8,000 of qualified education expenses during the year. His excludable interest is:

    $ 5,500 Interest X $8,000 Qualified Expenses/$10,000 Redemption Proceeds=$4,400 Tax Free Interest

Income Limit
The exclusion is limited by adjusted gross income. Check with your tax preparer for income limitations.

 

 Read 2016 Saving for College Here

 

Qualified Savings Bonds

  • Series EE bonds issued after 1989 and Series I bonds.
  • Issued to a person who was age 24 before the bond’s issue date. The issue date is the first day of the month in which the bond was purchased (for example, a bond purchased on May 25 has a May 1 issue date). The issue date is printed on the front of the bond.
  • Issued in the name of the taxpayer and/or spouse. There can be no other co-owners, including the taxpayer’s child. The bond can have a pay‑on-death (POD) beneficiary, including a child.

Qualified Education Expenses

  • Tuition and fees required for enrollment or attendance at an eligible educational institution. Qualified expenses do not include courses involving sports, games, or hobbies, unless part of the student’s degree program.
  • Contributions to a qualified tuition program.
  • Contributions to a Coverdell education savings account.

Qualified Tuition Plans (529 Plans) & Educational Savings Accounts (ESAs)

QTP and ESA Tax Benefits
Contributions to a QTP or ESA are not deductible. Earnings accumulate tax free. Distributions are not taxable if less than the beneficiary’s adjusted qualified education
expenses in the year of distribution. Contributors can contribute to both a QTP and an ESA in the same year for the same designated beneficiary.

Read 2016 Saving for College Here

Any accounting, business or tax advice contained in the Tax E Man Blog or  www.PatTax.net, including attachments, links and enclosures, are not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax related penalties.

If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Pat Tax, Inc. . Please feel free to contact us with any questions or concerns.

 

“Empowering clients through education, a stress free transaction and an excellent service experience.”