Advantages of Roth Retirement Accounts – May 2012

The Shaw Atlas
May 15, 2012Welcome
Welcome to The Shaw Atlas, the monthly newsletter from Shaw & Associates, CPAs & Financial Advisors. We look forward to keeping you abreast of ever-changing tax codes, providing you with money saving accounting tips and illustrating proactive strategies to help you achieve the financial life you envision.

Newsletter contents:
Important Deadlines
Shaw & Associates Named Small Business of the Year
Do You Want Tax Free Retirement Income? – Advantages of Roth Retirement Accounts

Important Deadlines

2nd Estimate Tax Payment Due – June 15

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Shaw & Associates Named Chamber 2012 Small Business of the Year

We are humbled and honored to be named the Fort Collins Area Chamber of Commerce 2012 Small Business of the Year in the 1-10 employee category.

Small business is the backbone of the Northern Colorado economy and we would like to take this opportunity to recognize and honor ALL of the small businesses we work with on a daily basis. We salute the hard work and sacrifices you make to help your small business succeed. Your contributions to our community are great and we thank you for what you do!

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Do You Want A Tax Free Retirement Income? – Advantages of Roth Retirement Accounts
Dave Palm, Financial Advisor

What if I told you that you could withdraw money from your retirement funds tax free or that you could pass income to your kids without subjecting them to income taxes? Sound interesting? Believe it or not, this is both possible and legal with Roth retirement options.

Roth retirement accounts offer diversity and flexibility to your overall financial portfolio, and in certain circumstances, have a distinct advantage over traditional retirement investment options.

The Catch

Can I really avoid taxes in this way and stay out of jail? Yes, if you follow certain rules (and we are dealing with the IRS so of course there are rules), you have some very powerful options to save significant taxes in the future. Unlike traditional retirement plans, in which you receive a tax deduction in the current year, contributions to Roth accounts, such as Roth IRAs or Roth 401(k)s, do not receive an upfront tax deduction for retirement savings. In other words, you pay income taxes on the money you contribute into your retirement savings. However, if you follow the rules, your investment will grow, TAX FREE, and will not be taxed when you withdraw the money during retirement.

The Power of Tax Free Growth

Why is this so cool? Imagine you are 30 years old, in a 25% tax bracket, and you and your spouse contribute a combined $10,000 annually to a Roth IRA. Although you do not get a $2,500 tax benefit each year by deducting the IRA contribution, your $10,000 investment will grow tax-free and when you withdrawal those funds in retirement, you will not pay taxes on your withdrawal. If your investment grows an average of 7% per year over the next 35 years, the value of your account will be $1,382,368. Over 35 years, you will have deposited $350,000 of taxed contributions. The $1,032,368 of retirment income earned will never be taxed. The longer you have until retirement, the more powerful this option can be. Younger investors should take a serious look at Roth options.

The Future Looks Expensive

Does it make sense to pay taxes now and fund your Roth account or utilize a tax deduction by funding your traditional retirement account and pay taxes on withdrawals when you retire? Consider this. Our government is facing significant financial struggles such as large deficit spending, future shortfalls in Social Security, and increased cost of health care. Tax increases may very well be in our future. Today’s highest marginal federal tax rate is 35%, but in the 1950’s and 1960’s, that rate was as high as 90%; as recently as the 1980’s it was as high as 70%. Think how quickly your retirement savings would be depleted if you had to pay higher tax rates on your withdrawals.

Spread the Wealth to Your Kids

Roth IRA accounts are a great way to pass income to your children or other heirs without tax consequences. Roth accounts do not carry minimum distribution requirements based on age, meaning you are not forced to start taking withdrawals at age 70.5 as you are with traditional retirement accounts. Therefore, you can continue to let your Roth IRA grow as you age and when your children inherit this account, they can now receive distributions without paying income taxes, ever.

Bigger Impacts for Business Owners and Employees

Contributions to a Roth IRA are currently limited to $5,000 per year. Do you like the idea of contributing to a Roth but wish you could do more than $5,000 per year? Consider this. Since 2006 the Roth tax benefits have also been available inside many 401(k) plans. Using a Roth 401(k), you could potentially contribute up to $17,000 per year ($22,500 if you are over age 50) on top of the $5,000 you could contribute to your Roth IRA. 401(k)s are fairly easy and inexpensive to set up for small businesses, including sole-owner businesses. If you are an employee and this feature is not offered as part of your 401(k) at your work, talk to your manager about implementing it. We have a lot of knowledge in this area and are happy to discuss the options with business owners.

A Variety of Assets

If you are an investor that likes to expand your options, a Roth IRA allows you to invest in many types of assets. Stocks, bonds, mutual funds, investment ETFs, CDs, precious metals and even real estate can be held as part of the investment. This feature gives investors a wide range of investment choices and tremendous flexibility. The growth of these assets over time will remain tax free into retirement. However, there are regulations that you must follow when investing in alternative assets. Please consult with us if you are contemplating holding other assets within your Roth IRA.

Roth retirement accounts add diversity and flexibility to your retirement portfolio giving you options you may have not realized existed. If you would like to find out more about implementing these strategies into your long-term financial planning, give me a call.

The idea of tax free growth also extends into college savings, life insurance, and bonds. Stay tuned for future articles in these areas.

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Help! I Can’t Pay My Taxes – What To Do When You Owe More Than You Can Pay
Kevin Shaw, CPA, PFS, CEO

We ALL (yes, even me) dread having to deal with the IRS. In an ideal world, you have your tax return prepared each year and work with your accountant to stay within the rules, while reducing your tax burden as much as possible, and have the funds available to pay your tax burden.

Especially in these difficult economic times, more and more people are finding themselves in situations where they owe the IRS more money than they had anticipated. IRS rules can be extremely complex and can often lead to unexpected consequences. The question is what do you do if you cannot pay?

Perhaps you had to take an early distribution from a retirement plan to supplement lost wages. You thought that the retirement plan administrator had withheld enough taxes; however, when you had your tax return prepared, you were shocked that you owed much more than you had thought. Maybe you are collecting unemployment and did not realize that unemployment income is taxable and you had not prepared by withholding money to pay taxes. These are just two examples of hundreds of situations that can lead to unexpected tax consequences. What do you do now?

Even though you may think the IRS is heartless, they do have several options in place that are supposed to help the taxpayer when these situations arise. Which option is best for you? Here are several to consider.

Pay As Soon As You Can – Installment Plans

If you can accumulate the funds in a short period of time, consider these options.

  • If you can pay your tax bill within 120 days, you can contact the IRS and request a 120 day grace period.
  • If you cannot get the funds within the 120 day period, you could ask for an installment agreement. If you owe less than $50,000 this process is actually quite simple. You can submit an “Installment Agreement Request” with your tax return and, barring any unusual circumstances, the request is almost always granted.
  • If you owe more than $50,000 you can still request an installment agreement, but you must meet with an IRS agent to submit financial information. The IRS agent will evaluate whether they believe you have the resources to pay some or all of the amounts due and will therefore grant you an installment arrangement.
  • Keep in mind, if you exercise any of these options, you will still owe IRS penalties and interest on the on unpaid balance.

Offer In Compromise

You have all heard radio commercials for companies advertising to reduce your IRS dept to pennies on the dollar “guaranteed”. Although the guarantee may be over the top, they are referring to an IRS program called “Offer in Compromise”. The taxpayer makes an “offer” to the IRS to pay less than the full amount of taxes, penalties and interest due. As part of the offer, the taxpayer is required to submit financial information detailing all assets and liabilities as well as monthly income and expenses. Acceptance will generally occur if the IRS believes that it cannot get more from the taxpayer by having him/her liquidate certain assets, borrow funds against assets (for instance against the equity in a home), or implement a payment plan to pay the amounts due. If the “well is dry” they often accept the offer.

A Combination – Offer in Compromise Installment Agreement

As a part of the Offer in Compromise Program, taxpayers can offer to settle tax debt at less than the original amount owed using an installment agreement. This differs from the installment plan above, because in the end, the IRS will reduce the total amount due. The taxpayer submits similar documentation as above. If the IRS believes this is the best deal it can achieve and can collect the most amount possible, they will often accept they offer.

The most important thing to remember is that if you owe taxes that you cannot pay, you need to do something. The more proactive you are, the more likely the IRS is going to work with you on the issue. We realize how scary and unsettling this can be, so if you or someone you know is facing unpaid IRS debt, come in and meet with us right away. We have extensive experience in these situations and can assist you with the process.

 

Mark Your Calendars for a Business Educational Opportunity

On Wednesday, June 27, 2012 from 11:30 a.m. – 1:00 p.m. at The Drake Centre, Shaw & Associates will host “What You Don’t Know CAN Hurt You – Understanding & Analyzing Your Financial Statements”. If you often wonder if there is more you can be doing to understand the true profitability and success of your business, you are not alone. From the Balance Sheet to the Profit and Loss Statement, business owners will learn how to interpret the numbers to help make better financial decisions. Keep an eye out for detailed information.

 

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