Hot Tips for The New Tax Year Part 7

Roth IRAs – A Roth IRA permits a taxpayer to make nondeductible contributions to a specially
designated IRA. The distributions from this IRA would be nontaxable provided the funds stay in the
IRA for a period of at least 5 years. Contributions can be made at any age, even if the taxpayer is
over 70½. Contributions are subject to the normal IRA limitations of $6,000 per taxpayer (7,000 if
age 50 or older at the end of 2019) less amounts contributed to the normal IRAs. The contribution
limits are further reduced if the taxpayer’s modified AGI exceeds $122,000 and is phased out
completely at $137,000 ($193,000 – $203,000 if MFJ and $0 – $10,000 if MFS and lived with spouse
any time during the year). Under most circumstances, regular IRAs may be rolled over into Roth
IRAs. Such a rollover requires the taxpayer to include in income the value of the rolled over IRA
less any basis the taxpayer may have. The taxable amount is not subject to the 10% penalty for early
distribution.

Traditional IRAs – 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. Contributions provide for
current year tax deductions but may be subject to phaseout rules. Withdrawals are taxable when
distributed. Contributions are subject to normal IRA limitations of $6,000 per taxpayer (7,000 if age
50 or older at the end of 2019). If an individual is covered by an employer retirement plan or through
self-employment, the deduction for an IRA contribution decreases (phases out) when their Modified
Adjusted Gross Income (MAGI) is $103,000 – $123,000 (MFJ), $64,000 – $74,000 (S, HOH),
$0 – $10,000 (MFS). If the individual is not covered, but the spouse is, the non-covered participant’s
deduction is phased out when MAGI is $193,000 – $203,000 (MFJ), $0 – $10,000 (MFS). If a
taxpayer cannot deduct all or a portion of an allowable IRA contribution, the taxpayer can choose to
make a nondeductible contribution.

Simplified Employee Pension (SEP) – A SEP is a written employer plan that allows the
employer to make deductible contributions into an individual retirement arrangement on behalf of the
employee (SEP IRA). For this purpose, a self-employed individual can contribute to his or her own
SEP. The SEP IRA is owned and controlled by each employee or self-employed individual. The
employer makes contributions to the financial institution where the employee maintains his or her
SEP. As an IRA, the employee is always fully vested in the account and has complete freedom to
move the funds or withdraw the funds at any time. The allowed annual contribution to a SEP IRA is
limited to the lesser of $56,000 (for 2019), $57,000 (for 2020) or 25% of the participant’s
compensation (20% of net self-employment income after one-half SE tax deduction).

SIMPLE IRAs – A SIMPLE IRA allows employees to choose the financial institution that will
serve as trustee. The employee also has the right to roll over or transfer funds in a SIMPLE IRA to
another financial institution at any time without having to first meet any vesting requirements. As an
IRA, the SIMPLE plan does not have vesting rules. Participants are always 100% vested in the plan,
including employer matching contributions. Employers can set up a SIMPLE IRA for employees if
they have 100 or fewer employees who received $5,000 or more in compensation from the employer
in the preceding year. A self-employed individual is treated as both an employee and the employer
of his or her business. Compensation equals net earnings from self-employment before subtracting
any contributions made to the SIMPLE IRA. During the 60-day period before the beginning of any
year, and during the 60-day period before the employee is eligible, the employee can choose the
amount to defer from wages into the SIMPLE IRA, expressed either as a percentage of compensation
or a specific dollar amount. The election to defer wages can be canceled at any time during the year.
Contributions cannot exceed $13,000 in 2019 or $13,500 in 2020. If permitted by the SIMPLE IRA
plan, participants who are age 50 or over at the end of the calendar year can also make catch-up
contributions in the amount of $3,000. Distributions are generally treated the same as distributions
from any other IRA, except for the 2-year rule. Funds in a SIMPLE IRA must remain in a SIMPLE
IRA for at least two years from the date the employee first participated in the employer’s SIMPLE
plan before they can be rolled over into any other type of retirement plan (including traditional
IRAs). However, rollovers are permitted from one SIMPLE IRA to another SIMPLE IRA during the
2-year period. The 2-year period begins on the first day on which contributions made by the
employer are deposited into the employee’s SIMPLE IRA. The 10% early withdrawal penalty that
applies to other retirement plans and IRAs also applies to SIMPLE IRAs. However, the 10% penalty
is increased to 25% if the early withdrawal occurs during the initial 2-year period.

Penalty on Early Distribution of an IRA/Pension. Are you considering cashing in your
IRA or pension? Unless you are over 59½ or meet the qualifications for penalty exceptions, you will
be subject to a 10% penalty on distributions from an IRA or pension. This is in addition to your
regular tax liability. You may want to consider “rolling” the IRA or pension into another plan. Ask
the holder of your IRA or company’s benefit person for details.

Check back each week for more tax tips from Tax & Accounting Plus