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Submitted by: Amy Rose Herrick
Amy's skills combine Tax Planning, Income structuring, Cash Flow, Divorce Settlements, Debt configuration, Estate Plans, Portfolio Planning and Distribution Alternatives. She assisted an institutional investor base from '86-90, then focused her practice in '91 to the present for individuals and small business exclusively. Amy holds various professional licensing in several states. She has provided planning advice to multiple media outlets including Newsweek. Interviews are available.
Many adults are missing opportunities to preserve current or build future assets at tax filing time because they don’t know how to start building assets the efficient way.
There are tax credits for up to $1,000 a person ($2,000 for a couple) for funding retirement savings below certain taxable income thresholds. This is the equivalent of “free money” to those willing to save for their future using IRA’s or Roth IRA’s.
Sometimes the use of one tax strategy causes a domino effect to then qualify you for additional tax credits or higher deductions.
If you have it handy, go pull your 2008 1040 tax return to work along with this concept.
Before making any changes, this already retired couple working part time owed Federal income taxes of $2,014 for 2008. They owed the state and additional $600. Total pre-planning tax liability was $2,614.
This couple earned a total taxable income of $37,244 on line 22. On line 32 they decided to take some money they had sitting in savings and contribute it to IRA’s on both spouses to maximize tax advantages. Essentially, they still have the money, only the account titling has changed on the asset.
What was the result of this one change? The federal income tax liability became zero. Yes zero and they had every dime they had remitted returned as a refund! Why? Because they were now able to itemize medical deductions they could not before, over $6,000 less of their social security was taxable and they received $413 in retirement savings credits that paid the entire income tax bill otherwise due.
On the state income tax portion, the liability decreased from $600 to only $200 after funding the IRA’s.
In the end, by using assets wisely and seeking advice they reduced their income tax bill a total of $2,414 for just one year of filing.
Depending on your taxable income situation, funding a Roth IRA could still trigger savers credits.
This is one example of the magic of managing your money wisely.
I wish someone had told me this at 18 and I had listened. This type of pro-active planning can be implemented at any age. Now many years later, I understand the value of compounding and time on starting with even very small investments of as little as $250. Now one of my life goals is to educate our young people on how to build wealth wisely.
A key point is the fact that IRA’s earnings are not tax deductible, they are tax deferred and if you pull the funds before age 59 ½, you would incur a 10% penalty in addition to any Federal or State income taxes due on the full amount of the withdrawal. If you pull money from a Roth IRA early, the 10% penalty only applies to the earnings.
For those who have the ability to use a 401(k) plan, there could also be some additional “free money” with employer matching available. With the ease of payroll deduction, this helps make savings automatic. 401(k) plans are tax deferred, not tax free. Some employers use 401(k) Roth accounts which are tax free accumulations except for the matching contributions, which will be taxable some day. Ask your benefits clerk about this. Understand the vesting schedules.
If you think of a Roth IRA as the opportunity to pay tax on the little bit of seed invested now at a known tax rate, and an IRA as an opportunity to pay tax on the eventual harvest at unknown future tax rates, you grasp the basic taxing difference between the two accounts.
Parents, Grandparents Aunts and Uncles, if your family member does not have the income on hand to do this at tax filing time, consider giving them a short term loan help to fund an IRA or Roth IRA before filing deadlines and have them repay perhaps when their tax refunds are received. Encourage them to save by matching what they contribute by some formula or consider gifting the small full amount.
Let’s continue to build the wealth of our future generations wisely.
Reactive tax planning means you wait until the tax year is over and the next spring you figure out what you owe the IRS. This method costs you thousands of dollars over a lifetime. Pro-active tax planning lets you keep money invested you would have lost to taxes you never needed to pay if you would just do things slightly differently.
Author:
Amy Rose Herrick, ChFC, Investment Advisor Representative, Author & Agent
CPN Member
Amy Rose Herrick, ChFC, Investment Adviser Representative is a Registered Representative of and offers Securities and Investment Advisory Services through Woodbury Financial Services, Inc., Member FINRA, SIPC and Registered Investment Adviser branch office 4536 SE 37th Street Topeka, KS 66605-9141 785-379-0586
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