roth ira

Retirement Plan Review

Westchester NY accountant Paul Herman has all the answers to your personal finance questions! Your retirement plan savings (e.g., qualified plans and IRAs) are important to your financial well-being for many reasons. You can accumulate income without currently paying tax, and the power of compounding pretax dollars makes a retirement plan one of the most powerful investment vehicles available.

Now this looks like our kind of retirement!

When you reach retirement age, your retirement plan assets may be a significant portion of your overall savings. Therefore, it is important to do everything you can to get the most out of one of the best investment opportunities you have. Listed below is information to consider when conducting a review of your retirement plans.

Generally, when you begin to withdraw funds from your retirement plans, you will be subject to tax on the distributions. If you made after-tax contributions to your plan, a portion of each distribution will be tax-free. Also, special rules apply to Roth IRAs that make them particularly beneficial. If distributions begin prematurely (generally before age 59 1/2), you may be hit with a 10% penalty tax, but exceptions are available.

When you reach age 70 1/2 (or in some cases, retire), you must start withdrawing a minimum amount from your traditional IRAs and qualified plans each year. Severe penalties can result if required minimum distributions are not made on a timely basis. However, distributions from Roth IRAs are not required during your lifetime.

At the time of your death, the beneficiary designation in effect will determine not only who gets the retirement plan assets, but also how quickly your account must be paid out to your beneficiary and, therefore, how quickly the benefits of tax deferral are lost. Beneficiary designation adjustments may be necessary as family and beneficiary conditions change (e.g., divorce).

Your retirement plan savings may be critical for you and your dependents’ future well-being. With proper planning, you can maximize tax-deferred earnings, avoid penalty taxes, choose a desired beneficiary, and minimize the amount your heirs are required to withdraw (and pay taxes on) after your death.

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

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IRA Contributions

Westchester NY accountant Paul Herman has all the answers to all your personal finance questions!

One popular tax savings outlet available to taxpayers today is the Individual Retirement Account, more commonly referred to as an IRA.

Keep your nest egg secure with these quick tips!

There are several options you have when deciding which type of IRA account to enter into. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on whether you€” or your spouse, if filing jointly are covered by an employer’s pension plan and how much total income you have. Conversely, you cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Generally, you can contribute a percentage of your earnings for the current year or a larger, €œcatch-up€ if you are age 50 or older. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these annual amounts (currently $5,500 for 2013, or $6,500 if you are age 50 or older).

You can file your tax return claiming a traditional IRA deduction before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions. If you haven’t contributed funds to an Individual Retirement Account (IRA) for last tax year, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15 due date for filing your tax return for last year, not including extensions.

Be sure to tell the IRA trustee that the contribution is for last year. Otherwise, the trustee may report the contribution as being for this year, when they get your funds.

If you report a contribution to a traditional IRA on your return, but fail to contribute by the deadline, you must file an amended tax return by using Form 1040X, Amended U.S. Individual Income Tax Return. You must add the amount you deducted to your income on the amended return and pay the additional tax accordingly.

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Chappaqua NY, Harrison NY, Scarsdale NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

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Our 2013 Annual Year-End Tax Planning Letter


 Our 2013 Annual Year-End Tax Planning Letter. 

The clock is ticking on your chances to take 

advantage of great tax savings opportunities!

Tax planning and tips from scarsdale cpa


 Fall, 2013 

To our clients and friends, 

It’s that time of year when we think about spending, spending for the holidays. But I’d like you to also think about savings. That is, thinking about ways to lower your tax bill. I believe ignoring your taxes until next year could be an expensive mistake. I’d like to suggest that you have us (or your preparer if you are not a client of our office) prepare an estimate now of your current year’s tax liability and then review strategies to see if there are ways to keep extra money in your pocket for the holidays and beyond.

We’re going to provide you with lots of food for thought in this letter. 

As I sit down to write this year’s annual tax letter, I am turning nostalgic. I long for the “good old days”. My wife and I were talking at dinner recently about the good old days. We tried to come up with a list of things that are better today than they were back “in the day”. Our list was short, technology, television, phones, automobiles, medical care to name a few things. Unfortunately, one item not on the list was the tax laws. 

The passage very late last year of The American Taxpayer Relief Act of 2012 makes 2012 seem like the good old days! I would have named the new law something else, but they didn’t ask me.

In addition, The Affordable Care Act (“Obamacare”) is kicking in, in full force along with its’ increased taxes on interest, dividends and capital gains (depending on your level of income).

Some of our clients will see little change in their taxes this year as many of the law changes kick in above specified income thresholds. But “There are many, many high-income taxpayers now who are finding themselves facing tax rates in excess of 50%,” said Suzanne Shier, a tax strategist and Director of Wealth Planning at Chicago-based Northern Trust Corp. “That really gets their attention.” Ours too!

So . . . this year-end it makes a great deal of sense to review strategies to reduce your taxes. At this point, you likely have a fairly complete picture of your 2013 income from sources such as salary, retirement plan distributions, and dividends. The total of those, combined with other predictable income items, provides a good starting point for tax planning. Doing nothing could leave you paying significantly more in taxes and is a lousy tax planning strategy. Year-end tax planning is very important this year. At a minimum you should know what to expect on your 2013 tax return which may look quite different than past years’ returns.

I encourage you to make 2013 year-end tax planning a priority and we are here to help and guide you through the process! 

Although we’ve done our best to keep this year’s annual letter as short as possible, it is again considerably lengthier than then we would have liked. As a result, we have divided this year’s letter into two letters of which this is the first. The second letter contains twenty-one strategies for tax reduction.

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Let’s start with income thresholds. Starting in 2013, individual taxpayers with incomes under $200,000 and married taxpayers with incomes under $400,000 will feel minimal impact under the new laws. Keep reading though as there are still opportunities to reduce taxes. Above these levels, your taxes are likely going up and maybe significantly.

Increase in Top Tax Rate. Beginning in 2013, a new top tax rate of 39.6% takes effect. This rate applies to taxable income in excess of $450,000 (joint returns and surviving spouses), $425,000 (heads of household), $400,000 (single taxpayers other than head of household and surviving spouse), and $225,000 (married filing separately).

Increased Tax Rate on Certain Capital Gains and Dividends. While the favorable tax rates in effect before 2013 for capital gains and dividend income were generally made permanent by the American Taxpayer Relief Act of 2012, a new 20% rate has been added for high incomers. Thus, rates of 0%, 15%, and 20% apply to capital gain and dividend income, depending on your tax bracket. These rates apply for alternative minimum tax purposes also.

New Taxes in 2013. There are a couple of new taxes that take effect in 2013: a 3.8% tax on net investment income above a threshold amount, and a .9% additional tax on wages and self-employment income above a threshold amount. For both taxes, the threshold amount is $200,000 ($250,000 if married filing jointly or $125,000 for married filing separately). Net investment income includes most rental income and net gain attributable to the disposition of property other than property held in a trade or business (i.e. capital gains).

Increased Threshold for Deducting Medical Expenses. Medical and dental expenses that exceed a certain percentage of your adjusted gross income (AGI) are deductible. For years before 2013, that percentage was 7.5%. For 2013 and later years, the deduction floor is increased to 10%. So not only are your health insurance premiums likely to be higher, you now cannot deduct as much of your out-of-pockets medical costs as previously. However, for tax years through 2016, the floor is 7.5% if you or your spouse has reached age 65 before the end of that year. Reduction in Personal Exemptions and Itemized Deductions for High-Income Taxpayers There is a reduction in personal exemptions and itemized deductions for taxpayers with adjusted gross income over $250,000 (single people other than head of household and surviving spouse), $300,000 (joint returns), $275,000 (head of household), and $150,000 (married filing separately), which will have the effect of increasing taxes and tax rates on affected taxpayers. We need to consider whether these new taxes affect you and, if so, whether you have paid a sufficient amount of taxes through withholdings and estimated tax payments so as to avoid any underpayment or late payment penalties.

Alternative Minimum Tax. If you are subject to the alternative minimum tax (AMT), some of your deductions may be worthless. Thus, if we anticipate that you will be subject to the AMT, we need to consider the timing of deductible expenses that may be limited under AMT.

What does this mean? Well for many wealthy taxpayers, the rate on long-term capital gains and qualified dividends now can be as much as 25%, including the new surtax and limits on deductions. That’s a 67% increase from the 15% rate in 2012. The tax rate on other investment income such as royalties, interest and rents can exceed 43%.

There is a lot to cover and any one strategy can save you lots. So here we go. 

Tax Rates: 

For 2013, the amount of income needed to reach into a bracket has increased slightly.

This table shows the tax rate that applies on income up to the amount shown. Incomes above the amounts shown in the 35% column are taxed at a rate of 39.6%. 

10% 15% 25% 28% 33% 35%
2013 Joint Federal Tax Brackets 17,850 72,500 146,400 223,050 398,350 450,000
2013 Single Fed’l Tax Brackets 8,925 36,250 87,850 183,250 398,350 400,000
2013 AMT Tax Rates 26% 28%
Applies to AMT income over 80,800 260,300
2013 NY Joint Tax Brackets 4.50% 5.25% 5.90% 6.85% 7.85% 8.97%
Applies to taxable income over 16,000 23,000 26,000 40,000 300,000 500,000
2013 NJ Joint Tax Brackets 1.40% 1.75% 3.50% 5.53% 6.37% 8.97%
Applies to taxable income over 0 20,000 50,000 70,000 80,000 500,000
2013 CT Joint Tax Brackets 3.0% 5.0% 6.5% CTSingle brackets are
Applies to taxable income over Zero 20,000 1,000,000 half of joint brackets

Top Marginal Tax Rates for 2013

Connecticut  6.70%
New Jersey  8.97%
New York  8.82%
New York City  3.648%
California  13.3% 

A Unique Strategy for Your Situation 

In this environment where change is the new normal, we need to consider all options. So let’s see if we can save you some tax dollars and guide you to avoid missteps that could increase your taxes. Each year at this time we give you a number of strategies to consider. Your personal tax situation is

unique to you. Taking advantage of even one or two of these planning strategies could save you real money.

What to do between now and December 31, 2013. 

But first a word from our sponsor, the AMT!

The alternative minimum tax (AMT) 

If you are ensnared in the AMT, remember that many deductions normally allowed, ARE NOT allowed for the AMT calculation…personal exemptions, the standard deduction, state and city income taxes and real estate taxes.

So . . . taxpayers who have significant deductions, such as those who live in states that have relatively high personal income tax rates and high real estate taxes like New York, are a likely victim for the clutches of the AMT. There are other deductions that could trigger the AMT too, such as exercising incentive stock options, taking numerous personal exemptions for a large family, experiencing significant deductible medical expenses, or large miscellaneous itemized expenses (such as employee business expenses).

The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum. By reducing regular tax liability through deductions, deferral and overall rate reductions, the alternative minimum tax liability exposure is increased. Since many of the strategies that are used for reducing your regular taxes will backfire when it comes to the AMT, you really need to know your exposure to the AMT.

If in fact you are in the AMT, the irony is that unlike the basic strategy (discussed below) of postponing income, you may want to actually accelerate income into 2013 since the AMT tax rate is in fact lower. Yes, this is a bit confusing! All planning is highly personalized and unique to each individual and must consider multiple years to be truly effective.

So what to do now? 

Although there are serious tax reform proposals being discussed by Congress, as of now tax rates are not scheduled to increase in 2014. The following are some of the strategies you should review before year end to see if they make sense in your situation. The focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.

These are the usual and most common strategies:

Deferring Income into 2014Options for deferring income include: (1) if you are due a year-end bonus, asking your employer to pay the bonus in January 2014; (2) if you are considering selling assets that will generate a gain, postponing the sale until 2014; (3) delaying the exercise of any stock options you may have; (4) if you are selling property, considering an installment sale; (5) consider parking investments in deferred annuities; (6) establishing an IRA, if you are within certain income requirements; and (7) if your employer has a 401(k) plan, consider putting the maximum salary allowed into it before year end.

Accelerating Deductions into 2013. Usually we want to accelerate what deductions we can into the current year to offset the higher income this year. This would also be an appropriate strategy if we anticipate lower income next year.

Options include: 

(1) consider prepaying your property taxes in December; (2) consider making your January mortgage payment in December; (3) if you owe state income taxes, consider making up any shortfall in December rather than waiting until your return is due; (4) since medical expenses are deductible only to the extent they exceed 10% (7.5% if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into one year may help overcome this threshold; (5) making any large charitable contributions in 2013, rather than 2014; (6) selling some or all of your loss stocks; and (7) if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.

Generally we want to delay recognizing income to defer the payment of additional taxes. However,

depending on your projected income, it may make sense to accelerate income into 2013 and delay deductions.

Accelerating Income into 2013. Besides harvesting gains from your investment portfolio, other options for accelerating income include:

(1) if you own a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year; (2) taking IRA distributions this year rather than next year; (3) selling stocks or other assets with taxable gains this year; (4) if you are self-employed with receivables on hand, trying to get clients or customers to pay before year end; and (5) settling lawsuits or insurance claims that will generate income this year.

Deferring Deductions into 2014. If you anticipate a substantial increase in taxable income, we may want to explore deferring deductions into 2014 by looking at the following: (1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments, until next year; and (2) postponing the sale of any loss-generating property.

Among the services we provide . . . is a tax projection and planning analysis. We gather current year tax information from our clients and use it to project their taxes for the current year. We then determine what strategies we may be able to implement to reduce their 2013 and 2014 taxes.

Gifting Strategies to Maintain Family Wealth 

Anyone is permitted to make gifts of up to $14,000 per year to an unlimited number of people without having to pay gift taxes. Married couples can make combined gifts of up to $28,000. A married couple wishing to make gifts to two married children and four grandchildren can make gifts of up to $224,000 per year ($28,000 to each child, grandchild and child’s spouse) without paying any gift taxes. This is a simple way to reduce the size of one’s future taxable estate. There are a number of other ways to reduce your taxable estate. Please contact us for further insight.

Above and beyond the annual gift exclusion of $14,000, the federal applicable exemption amount for gifts during a lifetime is $5,250,000. This is by far the highest it has ever been. Wealthy individuals, who have both the means and desire to do so, might plan on making the gifts up to the exclusion amount. This amount could be reduced in the future. As every estate and financial planning expert will tell you, making lifetime gifts is a simple and effective estate tax minimization strategy. Giving away assets at no gift tax cost will allow both the present value and its appreciation to forever escape the Federal estate tax.

Retirement Plan Distributions 

Taxpayers receiving retirement plan distributions should note that while such distributions are not subject to the 3.8% surtax, they could raise your adjusted gross income over the $200,000 threshold, making all other unearned income fair game for the tax. One possible solution would be to convert your IRA to a Roth IRA. You will recognize income now, but future Roth distributions will be tax free.

Roth Conversions 

High-income taxpayers with traditional IRAs or rollover IRAs have an opportunity, first available in 2010, to roll over their IRAs into a Roth IRA. Many of you reading this may want to consider this. Over time it could save you and your heirs big taxes. However, it does not make sense in all cases and needs to be analyzed carefully.

For those who previously chose not to convert to a Roth, keep in mind that the Obamacare surtax applies primarily to investment income, not IRA distributions.

Distributions from traditional and rollover IRAs are generally taxable when received. Contributions to Roth IRAs are non-deductible when made, but all principal and earnings will be distributed tax free. Therefore, Roth IRAs may be preferable to traditional IRAs.

When you convert to a Roth IRA, you must pay tax on the converted amount in the year of conversion. 

There’s another important point on this. The government gives you a do over, called re-characterization. You are allowed to change your mind if the value of your now Roth IRA goes down and you don’t want to pay taxes on the old higher value. You can put it back to a regular IRA like nothing ever happened. And what makes this even better is that the government gives you until you file your tax return for that year. So in a perfect world, if you convert on January 2, 2014 and you extend your 2014 tax return, you would actually have until October 15, 2015, to look back, see how it is doing and perhaps re-characterize it. But if you had converted your traditional IRA to a Roth on December 15, 2014, you only have a ten-month window to evaluate its performance. It’s still worth considering.

Last point on this, issues related to transferring wealth to succeeding generations also come into play here and should be considered. There is a lot to think about when it comes to whether or not to convert an IRA to a Roth IRA. Reasons for us to chat!

Expiring Energy-Related Tax Credit 

There is an expiring energy-related tax credit that may be worth looking at. The residential energy credit is available only through the end of 2013. If you are contemplating energy improvements to your home, you may want to accelerate the improvements into 2013. The credit is 10% of the amounts paid or incurred for qualified energy efficiency improvements installed during the tax year and the amount of residential energy property expenditures paid or incurred during the tax year, up to a maximum credit of $500.

Changes enacted in the past few years: For 2013, taxpayers in the lowest two tax brackets will pay zero tax on capital gains and qualifying dividends.

Among the services we provide . . . 

is personal financial recordkeeping. We track your income and expenses and provide comprehensive reports so you’ll know where your money is coming from and where it’s going. We reconcile your bank, credit card and brokerage accounts to monthly statements. Reports show your net worth changes! If you’d like, we can even pay your bills for you. This service is also great for an elderly or disabled relative. 

Some other late-year moves to save 2013 taxes: 

• If self-employed, hold off sending bills to your customers until January or if you want to accelerate income, send bills out ASAP.

• Apply now for a social security number for any children born in 2013 as you’ll need to put the number on your tax return (complete IRS Form SS-5).

• Increase your basis in S corporations or partnerships to make deduction of 2013 operating losses possible.

• If adopting a child in 2013, take advantage of the tax credit for up to $12,970 of qualified expenses, subject to phase outs.

• Use credit cards to prepay deductible expenses.

• Increase withholdings to eliminate or reduce estimated tax penalties.

• One of the biggest deductions available to all businesses, and one that will be dramatically reduced in 2014, is the Section 179 expensing election. This is the last year for expensing up to $500,000 of Section 179 property. The maximum amounts drops to $25,000 next year!

• Keep in mind deductible mileage rates: for unreimbursed business travel – 56.5 cents per mile; for medical and moving – 24 cents per mile; for charitable activities – 14 cents per mile. A log of such travel should be maintained in order to take a mileage deduction.

If you would like to discuss any topic concerning your specific situation, please give us a call. As always we are available to help you with any tax, accounting, bookkeeping, investment, insurance or estate planning needs. But don’t wait until mid-December! If you are not a client of our office and wish to consider implementing any of these strategies, or just want to talk about your particular situation, please call us for a free consultation.


Paul S. Herman, CPA

Circular 230 Disclosure: Any U.S. federal tax advice included in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein. Any suggestions contained herein are general, and do not take into account an individual’s specific circumstance or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Recipients who are not clients of this office should consult their applicable professional advisors prior to acting on the information set forth herein.

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Roth IRA Conversions

Scarsdale CPA Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

Just because you qualify to make contributions to a Roth IRA does not mean you are also entitled to convert your plain-vanilla IRA into a Roth. Unfortunately, the income limit for conversions is slightly lower – $100,000 of modified adjusted gross income for both joint filers and singles – than the income limits for contributions. However, if you qualify to convert, there are situations where you should.

Find out from Scarsdale CPA Paul Herman if a Roth IRA conversion is right for you

Converting your Roth IRA to a traditional IRA may be a good step for your retirement planning.

Besides allowing tax-free and penalty-free withdrawals of contributions, the Roth IRA enables most savers to amass a greater nest egg because withdrawals from earnings during retirement are tax-free (as long as you are over 59 1/2 and have had the account for at least five years). Should you convert? In most cases, the answer is yes. But there are some things to carefully consider before making a final decision:

Do You Have the Money to Pay the Taxes on the Conversion?

When you convert your regular IRA to a Roth, you will have to pay tax on any earnings and pretax contributions. This, in lieu of paying taxes upon later withdrawals from the Roth account. You should not withdraw from your IRA to pay the conversion tax, however. If you do so before age 59 1/2, you will generally owe a 10% penalty on that amount. Plus you will permanently give up the opportunity for tax-free Roth IRA compounding of that amount. Do not think that you can avoid the conversion tax by just rolling over an amount equal to your after-tax (nondeductible) contributions. Each dollar you roll over from a regular IRA is considered a “blended” dollar. Therefore, a percentage of the amount rolled over into the Roth account will be taxed no matter what (except in the unlikely event that your IRAs are worth less than the amount of your after-tax contributions).

Will the Rollover Disqualify You for Important Tax Benefits?

The conversion income could push you into a higher tax bracket and disqualify you from other tax benefits such as the dependent child and college tuition tax credits.

How Much Time Do You Have Until Retirement?

Generally, the older you are, the less sense it makes to convert a traditional IRA to a Roth. You’ll have less time to make up for what you lost in taxes on the conversion.

Do You Plan to Leave All of Your IRA to Your Heirs?

One case in which it makes sense for an older traditional IRA holder to transfer funds to a Roth IRA is when he or she is planning to leave the money to heirs. Why? First, unlike traditional IRAs, Roths require no minimum withdrawals during the life of the IRA owner. If the surviving spouse inherits the Roth account, he or she need not take any minimum withdrawals either. With a regular IRA, you must begin taking taxable withdrawals from that account no later than the year after you turn 70 1/2. So you lose out on the chance for that money to continue to compound without paying taxes. That can mean a lot less money for your heirs. Secondly, conversion to a Roth will reduce your taxable estate by the amount of income tax you pay to convert. This can reduce estate taxes for your heirs.

Will Your Income Tax Bracket Drop After Retirement?

The clearest case in which converting from a regular tax-deductible IRA to a Roth IRA does not make sense is when you expect to drop into a much lower income tax bracket after you retire (say, from 25% to 15%). Why? You will have to pay income tax on the conversion at your current high rate. Instead, let the money compound in your regular IRA and pay taxes at your lower rate in retirement. However, if your tax rate is only expected to drop a few points after retirement (for example, from 28% to 25%), conversion is probably still the right maneuver.

Our Westchester accounting firm is here for all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

Roth IRAs for Kids

If you have a child who works, consider encouraging the child to use some of the earnings for Roth IRA contributions. All that is required to make a Roth IRA contribution is having some earned income for the year. Age is irrelevant. Specifically, your child can contribute the lesser of: (1) earned income or (2) $5,000.

By making Roth IRA contributions for just a few years now, your child can potentially accumulate quite a bit of money by retirement age.

Tips from Scarsdale CPA Paul Herman on Saving for Retirement

The earlier the better when it comes to starting a Roth IRA.

Realistically, however, most kids will not be willing to contribute the $5,000 annual maximum even when they have enough earnings to do so. Be satisfied if you can convince your child to contribute at least a meaningful amount each year. Remember, if you are so inclined, you can make the Roth IRA contribution for your child.

Here’s what can happen. If your 15-year-old contributes $1,000 to a Roth IRA each year for four years starting now, in 45 years when your child is 60 years old, the Roth IRA would be worth about $33,000 if it earns a 5% annual return or $114,000 if it earns an 8% return. If your child contributes $1,500 for each of the four years, after 45 years the Roth IRA would be worth about $50,000 if it earns 5% or about $171,000 if it earns 8%. If the child contributes $2,500 for each of the four years, after 45 years the Roth IRA would be worth about $84,000 if it earns 5% or a whopping $285,000 if it earns 8%. You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your child approaches retirement age.

For a child, contributing to a Roth IRA is usually a much better idea than contributing to a traditional IRA for several reasons. The child can withdraw all or part of the annual Roth contributions-without any federal income tax or penalty-to pay for college or for any other reason. (However, Roth earnings generally cannot be withdrawn tax-free before age 59 1/2.) In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be reported as income on his or her tax returns.

Even though a child can withdraw Roth IRA contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the account balance as possible untouched until retirement age in order to accumulate a larger federal-income-tax-free sum.

What about tax deductions for traditional IRA contributions? Isn’t that an advantage compared to Roth IRAs? Good questions. There are no write-offs for Roth IRA contributions, but your child probably will not get any meaningful write-offs from contributing to a traditional IRA either. Any additional income will probably be taxed at very low rates. Unless your child has enough taxable income to owe a significant amount of tax (not very likely), the advantage of being able to deduct traditional IRA contributions is mostly or entirely worthless. Since that is the only advantage a traditional IRA has over a Roth IRA, the Roth option almost always comes out on top for kids.

By encouraging kids with earned income to make Roth IRA contributions, you’re introducing the ideas of saving money and investing for the future. Plus, there are tax advantages. It’s never too soon for children to learn about taxes and how to legally minimize or avoid them. Finally, if you can hire your child as an employee of your business, some additional tax advantages may be available.

Westchester CPA Paul Herman is here to answer all of your personal finance questions. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.


Roth IRA Contributions


Advice from a Westchester tax preparation firm on your Roth IRA

Creating a Roth IRA can help secure your financial future.

Tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

Confused about whether you can contribute to a Roth IRA? The IRS suggests checking these simple rules:

  1. Income
    To contribute to a Roth IRA, you must have compensation (e.g., wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than:

    • $176,000: Married Filing Jointly.
    • $0-$10,000: Married Filing Separately (and you lived with your spouse at any time during the year).
    • $120,000: Single, Head of Household, or Married Filing Separately (and you did not live with your spouse during the year).
  2. Age
    There is no age limitation for Roth IRA contributions. Unlike traditional IRAs, you can be any age and still qualify to contribute to a Roth IRA.
  3. Contribution Limits
    In general, if your only IRA is a Roth IRA, the maximum current year contribution limit is the lesser of your taxable compensation or $5,000 ($6,000 for those age 50 or over).The maximum contribution limit phases out if your modified adjusted gross income is within these limits:

    • $167,000-$176,000: Married Filing Jointly
    • $0-$10,000:  Married Filing Separately (and you lived with your spouse at any time during the year)
    • $105,000-$120,000: Single, Head of Household, or Married Filing Separately (and you did not live with your spouse)
  4. Contributions to Spousal Roth IRA
    You can make contributions to a Roth IRA for your spouse provided you meet the income requirements.

Our Westchester CPA firm is your one-stop shop to planning your retirement. Herman & Company, Certified Public Accountants & Consultants proudly serves businesses and individuals inWestchester County, NY, Armonk, NY, Bedford, NY, Bedford Hills, NY, Chappaqua, NY, Harrison, NY, Katonah, NY, Larchmont, NY, Mt. Kisco, NY, Rye Brook, NY, Pound Ridge, NY, Purchase, NY, Rye, NY, Scarsdale, NY, White Plains, NY and Greenwich, CT.

Retirement Contribution and Other Limitations for 2013

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Westchester tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

The IRS has announced cost-of-living adjustments affecting the dollar limitations for retirement plans, deductions, and other items. Several of the limitations are higher for 2013 because the increase in the cost-of-living index met the statutory threshold. However, some limitations did not meet that threshold and remain unchanged from 2012.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased from $17,000 in 2012 to $17,500 in 2013. The catch-up contribution limit for those age 50 and over remains unchanged at $5,500.

The contribution limit for both Roth and traditional IRAs has increased $500 from 2012. You can contribute up to $5,500 ($6,500 if you are age 50 or older by year-end) to your IRA in 2013 if certain conditions are met (i.e., sufficient earned income). For married couples, the combined contribution limits are $11,000 ($5,500 each) and $13,000 ($6,500 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income.

Keep in mind that contributions to traditional IRAs may be tax-deductible, subject to specific limitations that increase for 2013. When you establish and contribute to a Roth IRA, contributions are not deductible, but withdrawals are tax-free when specific requirements are satisfied. In addition, there are no mandatory distribution rules at age 70 1/2 with a Roth IRA, and you can continue to make contributions past age 70 1/2 if you meet the earned income requirement.

The 2013 limitation for SIMPLE retirement accounts increased $500 to $12,000. However, the SIMPLE catch-up contribution for those age 50 by year-end is unchanged from 2012 at $2,500.

The 2013 contribution limit for profit-sharing, SEP, and money purchase pension plans is the lesser of (1) 25% of the employee’s compensation-limited to $255,000, an increase of $5,000 from 2012 or (2) $51,000, an increase of $1,000 from 2012.

The social security wage base, for computing the social security tax (OASDI), increases to $113,700 in 2013, up from $110,100 for 2012. The additional $3,600 for 2013 represents an increase of 3.3% in the wage base.

Finally, the annual exclusion for gifts increased by $1,000 and is $14,000 in 2013.

Please contact Westchester tax preparation firm Herman & Company CPA’s if you have any questions!

Tax Saving Techniques

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Westchester tax preparation firm Herman & Company CPA’s has all the answers to your personal finance questions

The following are some generally recognized financial planning tools that may help you reduce your tax bill.

Charitable Giving – Instead of selling your appreciated long-term securities, donate the stock instead and avoid paying tax on the unrealized gain while still getting a charitable tax deduction for the full fair market value.

Health Savings Accounts (HSAs) – If you have a high deductible medical plan you can open an HSA and make tax deductible contributions to your account to pay for medical expenses. Unlike flexible spending arrangements (FSAs), the contributions can carry over for medical expenses in future years.

ROTH IRAs – Contributions to a ROTH IRA are not tax deductible but the qualified distributions, including earnings are tax-free.

Municipal Bonds – Interest earned on these types of investments is tax-exempt.

Own a home – most of the cost of this type of investment is financed and the interest (on mortgages up to $1,000,000) is tax deductible. When the property is sold, individuals may exclude up to $250,000 ($500,000 if married jointly) of the gain.

Retirement Plans – Participate in your employer sponsored retirement plan, especially if there is a matching component. You will receive a current tax deduction and the tax-deferred compounding can add up to a large retirement savings.

Please contact the Westchester tax preparers here at Herman & Company CPA’s for more information!

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.