A Well-Planned Retirement — Free From Financial Worry

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A well-planned retirement is a comfortable and happy retirement. Living out your golden years without financial worries is the goal, and Mazur & Associates has some advice on how to get yourself there.  Most people miss out on the potential tax benefits from funding a qualified retirement plan.  Don’t worry though, it is not too late to reduce your 2017 tax liability if you take action before April 17, 2018.

Before you start strategizing, it is important to understand the basic differences in some of the most common retirement accounts.

Employer Types
• 401(k): This type of retirement plan is sponsored by an employer.  As a worker, you can save and invest a piece of your salary before taxes are withheld and drops your taxable income by the amount you contribute.  You will pay the income taxes on contributions and earnings upon withdrawal from the account.  You can contribute up to $18,000 this year, and for those aged 50 or older you can take advantage of the catch-up contribution, which allows an additional $6,000, bringing the total yearly contribution to $24,000. If you have a SIMPLE 401(k), you can contribute up to $12,500 and $15,500 if you are over 50 years old.

• 403(b): Also known as a tax-sheltered annuity plan, these plans are usually used by employees of educational institutions or non-profit organizations.  This plan is similar to a 401(k). You make pre-tax contributions, the funds grow tax free, and taxes are paid upon withdrawal.  Contribution limits, including catch-ups, are the same as 401(k) plans.

Individual Types
• Individual Retirement Account (IRA): An IRA can be opened by anyone who has earned income.  There are two types of IRA plans:  traditional and Roth. With both your funds grow tax free.  For 2017, you can contribute the maximum $5,500 to either IRA ($6,500 if you are age 50 or older by the end of last year) and this contribution must be made by the tax filing deadline:  April 17, 2018. For traditional IRA’s you must start withdrawing money from the account by age 70½.  If you withdraw from an IRA account before reaching age 59½ you may also be assessed a 10% premature distribution penalty (there are exceptions, such as first-time homebuyer, college tuition for you or any of your dependents, etc.). If you have a traditional IRA and are active in your retirement plan, there are ranges of phase outs based on your filing status. For the 2017 tax year there exists a phase out range of $186,000-$196,000 for a married individual who is not an active participant in a retirement plan at work and files a joint return with a spouse who is an active participant. If your income exceeds this range then your contribution to a traditional IRA is non-deductible.

There are special rules for contributions to ROTH IRAs. With a Roth IRA, you get no tax deduction when you contribute and you can leave the money in the account for as long as you want. Roth IRA distributions will generally be tax free and will not be added to your income in the year of withdrawal. If you are filing as single or as the head of the household, your range is $62,000-$72,000. If you are married filing jointly or single status/qualifying widow/widower, your range is $99,000-119,000. If you are married filing single your range is $0-$10,000. If you have a Roth IRA plan and are filing as single or as the head of the household, your range is $118,000-$133,000. If you are married filing jointly or as single status/qualifying widow/widower, your range is $186,000-$196,000. Married filing single has the same range as a traditional IRA plan with that filing status. You cannot contribute to a Roth IRA if your income is above those levels.

If you already have a traditional IRA, you may want to consider converting it to a Roth IRA this year since 2017 is the last year this recharacterization is permitted (The Tax Cuts and Jobs Act legislation prohibits conversations to ROTH IRAs beginning with tax year 2018). Taxpayers are taxed on the amount exchanged as ordinary income but investments made after that and future earnings in the ROTH account will be free of tax. Traditional 401(k), 403 (b) or 457 plans that include after-tax contributions generally roll over these after-tax amounts to a Roth IRA with no tax consequences. Rollover to a SIMPLE 401(k) is also possible. If you are considering this, you should immediately schedule a meeting with us, before you take any action, to prevent any unintended circumstances, including a surprise tax bill!

Choosing among the various retirement plans can be confusing and that is where our savvy tax guidance comes into play.  We at Mazur and Associates Certified Public Accountants and Business Advisors, PC possess the knowledge and expertise to assist you in this area.  We will counsel you on how to save income tax on your 2017 tax returns while at the same time increasing your financial security upon retirement.  Call us today at (732) 936-1230 to schedule an in-person tax consultation with one of our seasoned CPA staff!

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