Roth IRA's and your CPASubmitted by Financial Planning Solutions, LLC on February 14th, 2019
I really love Roth IRA's as an investment vehicle for a few reasons.
- Roth IRA's provides a means for one to save toward retirement on a tax free basis.
- Roth IRA's do not require one to take Required Minimum Distributions
- Roth IRA's allow access to money without any tax or penalty implications (under the right circumstances)
There are a couple of limitations where one cannot contribute to these amazing long term savings accounts.
- One does not have earned income. You must have at least what you are contributing each year in earned income or your spouse needs to have earned that income
- You can earn too much and not be eligible. For 2019, there are phase outs if one's Modified Adjusted Gross Income (MAGI) exceeds 122k if filing single or 193k if filing married jointly.
Okay, let's say you make it over those two hurdles. What does your CPA have to do with Roth IRA's?
Well, on the surface, it appears not much since the Roth grows tax free and comes out tax free (under certain conditions) there is no upfront tax deduction like a traditional IRA.
So, the Roth IRA contributions are actually not entered anywhere on your tax return. Unlike traditional IRA's, if one meets the deductibility rules, the contribution gets entered on the front page of the 1040.
Here are a few reasons why it is important for your CPA to know you made these Roth IRA contributions:
Your CPA does a lot more than just take the reams of info you give them and enter it into their tax prep software. They are asking questions and making some projections based on current tax law on strategies you may be able to take advantage of. And by the way, their tax software is very comprehensive. Unlike the cheap or free versions you may see advertised, their software factors in a multitude of scenarios.
Roth IRA's is one of those. By entering your nondeductible Roth IRA contribution into their software it allows them to:
- Keep track of your contributions
Why? Well, the rules surrounding Roth's say that if one has their account open for at least five years and is at least 59 1/2 , they can take some or all of the money out tax free.
But what if one doesn't meet those two rules? That is where having these contributions entered into the software can save you money.
Let's say you open a brand new Roth IRA account on January 1st of 2019 when you are 35 years old. You contribute $6,000. Then a week later your car's transmission dies and the mechanic tells you it will be $3,000 to fix it.
Well, first off, the Roth IRA (any retirement account for that matter) should be earmarked for retirement. Not transmissions, vacations, big screen TV's, etc.
Those that have read my blogs in the past know how I feel about one having an emergency fund. Money set aside in an account that is easily accessible for these types of "life stuff".
Okay, but let's say you didn't sign up for my class on emergency funds and funded a Roth IRA and you just need the money.
Even though you aren't 59 ½ and the Roth account is less than five years old, you can take your $6,000 back, even the next day without taxes or penalties! How great is that?
But what if you took the money out a year after and your $6,000 has grown to $6,500? You could then only remove the $6,000 you put in and not the $500 in growth without incurring taxes and a penalty. If you met the over 59 ½ and five year old account rule, you could withdraw the whole $6,500. No tax. No penalty.
By having your CPA enter these contributions into the software, it allows your CPA to keep track of what are contributions (also known as "basis" in the tax and IRS world)
- Can you even qualify to make a contribution in the first place?
We have had clients over the years make a contribution early in the year to only then realize toward year end that their Modified Adjusted Gross Income (MAGI) was too high to be eligible. (Some got a raise or bonus for example) We then needed to take that money out of the Roth IRA. These return of contributions and/or earnings need to be done on a timely basis as well.
- Retirement Savers Tax Credit
If one has lower income but has funds to contribute to a Roth, it can be even better as they can be eligible for a credit. By entering these Roth Contributions into the software, your CPA can determine if you are eligible for this credit of up to $1,000.
If you have any questions on Roth IRA's (or anything else for that matter, give us a call.
We are here to help.
All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.