As we approach the end of 2013 and begin thinking about 2014, it is time to reflect on our retirement planning and take some action steps to have a better tax result now and a more secure retirement later.  Some of the issues you should consider include:

 

1)         If you have traditional IRAs or other pre-tax accounts and are at least age 70 1/2, do not forget to take your Required Minimum Distribution (RMD).  It is best not to wait until the last few days of the year, because this is an extremely busy time period for custodians and if there is any problem with your paperwork you may miss your deadline.  The penalty for failing to take an RMD is 50% of what you should have taken, so this is something you want to avoid.  Even if you have illiquid assets such as real estate in your account you still must take your RMD if you are subject to this requirement.  It is possible to take a distribution of assets other than cash from your IRA to satisfy your RMD, but this does require an updated valuation of the asset, proper paperwork, and generally more time to process than just taking a distribution of cash.  If you inherit an IRA, you generally must take an RMD each year regardless of your age or the type of account (including from a Roth IRA), beginning in the year following the date of death of the original account owner, unless you distribute the entire account within 5 years.  Fortunately there is never a penalty for death distributions.  Be sure and check with your tax professional or custodian for the amount of your RMD and any other information you may need well before the end of the year.

 

2)         Consider your options for your business income retirement account.  For your self-employment income, you generally have three choices of retirement accounts.  The easiest one to set up and maintain is the SEP IRA, where you can put up to 25% of any wages you pay yourself if you have a corporation or up to 20% of your net earnings from self-employment, up to a maximum of $51,000 for 2013.  Fortunately, you may both form and fund a SEP IRA until the tax filing deadline of the employer, including extensions.  The second choice you have is a SIMPLE IRA, assuming you have less than 100 employees.  You can defer wages of up to $12,000 for 2013 plus an additional $2,500 if you are age 50 or older by the end of 2013.  Additionally, the employer will fund 3% of your wages or earnings into the account.  Unfortunately, for 2013 you needed to establish the SIMPLE plan by October 1st, but you can begin planning for 2014 if this is your choice of plans.  Finally, you can choose to have your own 401(k) plan for your business income.  Salary or earnings deferral can be as much as $17,500 for 2013, plus an additional $5,500 if you reach age 50 by the end of the year for a total deferral of up to $23,000.  The employer then can add a profit sharing contribution of up to 25% of wages or up to 20% of net earnings from self-employment into the plan, for a total contribution of up to $51,000 for 2013 or $56,500 for participants who are age 50 or older.  Best of all, the salary deferral can either be deducted if deferred into a traditional 401(k) or can be deposited after-tax into a Roth 401(k), regardless of income level.  A 401(k) plan for your business or self-employment income must be set up by December 31.  Remember that with each of these plans you must cover eligible employees, so it is especially important to consult with your tax professional when deciding which type of plan is right for your business.

 

3)         Consider doing a Roth conversion by the end of the year.  Especially if you are having a lower income year, converting to a Roth IRA may be a great strategy.  Anyone, regardless of age or income level, qualifies to convert a pre-tax account such as a traditional IRA, a SEP IRA, a SIMPLE IRA (provided you have participated for at least two years), or a former employer’s qualified plan into a Roth IRA.  The amount of your conversion is added to your taxable income for the year, and to count for 2013 the conversion must be done by December 31.  There are many considerations for deciding whether or not a Roth conversion is right for your personal situation, so a consultation with your tax advisor is very wise.  One of the key considerations is what you are going to invest in with the Roth IRA after you do the conversion.  If you have a great real estate deal, for example, a Roth conversion can be the right answer regardless of your age or income level.  Generally you are better off doing a Roth conversion as early as possible during the year.  If you decide by your extended tax filing deadline that you cannot afford the taxes or the investment does not do as well as you had hoped, you can always recharacterize the conversion back to a traditional IRA along with the net income attributable to the conversion amount, and there will be no negative tax consequences at all.

 

4)         Consider using your year-end bonus to fund the balance of 2013 contributions and/or to fund 2014 contributions early.  Although you do have until April 15, 2014 to fund your Roth or traditional IRA for 2013, the earlier contributions are made, the more money you can make in the accounts tax free.  You can contribute up to $5,500 into a traditional or Roth IRA for 2013, or $6,500 if you are age 50 or older by the end of the year.  No holiday season gift can ever match the joy of a more secure financial future for yourself and your children.  Pay your retirement contributions first, and then use the balance of your money for less important purchases.  If you contribute money into a Roth IRA, you can always withdraw your contributions (but not your profits) at any time at any age for any reason without any penalty, so it is a safe way to save money.  You are not likely to miss it once it is in your Roth IRA, and it is generally protected from creditors as well.

 

5)         Get a High Deductible Health Plan (HDHP) in place by December 1 to fund your HSA for 2013.  In order to qualify for a Health Savings Account, you must have a HDHP in place by December 1 to qualify for a contribution.  The contribution can be made up to April 15, 2014 for 2013.  If you have individual coverage, you can contribute up to $3,250 for 2013, and if you have family coverage you can contribute up to $6,450 for 2013.  If you are age 55 or older by the end of 2013 you can add $1,000 to the contribution limit.  An HSA is great because it is the only account in which you get to both deduct your contributions regardless of your income level and pay no taxes on distributions for qualified medical expenses.

 

6)         Give the gift of education as a holiday season gift.  A Coverdell Education Savings Account (ESA) is used to save for qualified education expenses from kindergarten through college.  Although you get no tax deduction for making a contribution of up to $2,000 per child per year, the account grows tax free, and distributions to pay for qualified education expenses are tax free. Even if the beneficiary of the ESA ends up not going to college, the account can be used for tutoring or other expenses through high school and can be switched over to a related family member if the original beneficiary does not use all of the money by age 30. Toys and Teddy bears give a limited amount of joy for a short period of time, but the gift of education will change your children or grandchildren’s entire lives for the better.

 

It is not possible to cover all of the details of each type of account in a short article, but hopefully this gives you some things to discuss with your tax advisor before the end of the year.  For tax advice you should always contact your CPA or other tax advisor, because he or she will have a more complete picture of your financial situation.

 

Take advantage of the many FREE educational materials provided by Quest IRA, Inc. on our website at www.QuestIRA.com, and plan on attending as many of the live events as possible to network with other self-directed IRA clients.  Our events schedule may be found at www.questira.com/events/. You can also call our offices toll-free at 800-320-5950 or 855-FUN-IRAS (855-386-4727) and ask to speak to one of our highly trained IRA Specialists.  Happy holidays!

 

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Quest IRA, Inc. (www.QuestIRA.com), a self-directed IRA third party administrator with offices in Houston, Dallas, and Austin, Texas, and in Mason, Michigan. He may be reached by email at Quincy@QuestIRA.com. Nothing in this article is intended as tax, legal or investment advice.

 

© Copyright 2013 H. Quincy Long. All rights reserved.