Tax Issues With Your Retirement Account

Monday, April 30, 2012, 2:00 AM | 1 Comment

The tax season is over for most Americans. Some may have filed for automatic extension in which case they would be given a 6-month time-period that they must file their tax return. If they owe the IRS money, they will be charged interest on the weeks and months that they delayed filing.

If the IRS owes them money, then they are Okay but there is no interest paid to taxpayers for the time-period that they delayed filing.

Here are some options what you can do with your retirement savings:

  1. Be Your Own Bank

    One benefit of your 401(k) retirement plan is the ability to borrow money from your plan. When you have a serious short-term need for cash, a loan from your 401(k) is a quick, cost-effective way of borrowing, and it generally does not create a taxable event.

    A loan from your 401(k) can be easier to obtain than a regular loan because there is no actual lender and no examination of your credit rating. Also, the interest you pay on the loan are added back to your 401(k), so you are paying yourself the interest.

    However, a loan from your 401(k) plan may not always be your best option. When you repay the loan, you are using after-tax dollars, and then money will be taxed again when you withdraw from your 401(k) plan after retirement.

    The amount you can borrow from your 401(k) plan is often limited to 50% of your vested account balance. Also, you should plan to stay at your job as long as you have the loan because most plans require the loan to be repaid immediately if you quit your job.

    Quitting your job without repayment of the loan will make the balance of the loan a taxable distribution.

  2. Don’t Forget To Rollover

    Putting money into a retirement plan can be a real financial advantage, but taking money out of a retirement plan before you are age 59 1/2 can be a real financial disaster.

    If you take money out of a retirement plan early, there is a 10% penalty on the income in addition to the normal tax you pay on the distribution.

    If you are changing jobs and your employer asks if you are going to rollover your account or take the money, take the rollover. Most of the time you can roll the fund directly to your new employer’s plan.

    A bank, savings and loan, or brokerage, could also assist you with setting up an IRA account for your rollover. Generally, you will have 60 days after you receive the distribution to complete the rollover.

    In most cases a direct rollover from one plan to the other is the best way to handle the situation.

  3. IRA Contribution and Deduction Limits

    The contribution limit to a traditional or Roth IRA for 2012 is now at $5,000.

    If you reach age 50 before 2012, this limit is increased to $6,000.

    Individuals who are covered by a retirement plan at work may only make deductible IRA contributions if their income is under certain thresholds.

    For 2012, that threshold is $68,000 if single and $112,000 if married filing jointly or qualifying widow(er).

  4. Maximum for Retirement Plan Contributions

    For 2012, the maximum amount that may be contributed to a qualified retirement plan is $17,000 ($22,500 if you are age 50 or over).

    For SIMPLE IRA plans, the limit is $11,500 ($14,000 if you are age 50 or over).

  5. Social Security Maximum

    The maximum amount of wages or self-employment earnings that will be subject to the social security tax will be $110,100 in 2012, an increase of $3,300 over the last two year’s maximum.

  6. Minimize Income To Avoid Taxable Social Security

    A portion of your social security benefits were taxable this year. One method to avoid having your social security benefits become taxable is to defer income to other years so your benefits may not be taxable.

    For example, you may be able to put off a stock sale by a few weeks into the next year and avoid additional tax on your social security benefits.

  7. Social Security Benefits (SSB)

    A portion of your social security benefits were taxable this year. This additional income could require you to pay quarterly estimated tax payments in order to avoid the underpayment penalty which is assessed for not paying in enough of your taxes throughout the year.

    One often overlooked alternative to making quarterly estimated tax payments is having the Social Security Administration (SSA) withhold taxes from your benefits.

    Then the money will be set aside a little at a time to pay the additional tax and you do not have to worry about making the four quarterly estimated tax payments on time

    You can elect to have 7%, 10%, 15% or 25% of your social security benefits withheld. If interested, you will need to file Form W-4V which you can download from the IRS website, or pick up at the local IRS or SSA Office

In a Nutshell
If you withdraw funds from your plan, the double whammy of the tax and the penalty can really hurt on April 15th and leave you wondering if what was left after taxes was really worth keeping the money after all.

During the current year, you have options to modify and adjust your retirement account.

Source: TaxACT

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