Retirement Tax Planning
reliable way to reduce the impact of higher
tax rates, surtaxes, phaseouts and so
on is to make tax deductible contributions
to retirement plans. In 2014, the maximum
salary (and tax) deferral for 401(k) and
similar plans is $17,500, or $23,000 if
you are 50 or older. If you are not maximizing
such contributions already, consider increasing
the amount by year-end.
owners, professionals, and self-employed
individuals may be able to make even larger
deductible contributions to retirement
plans. Often, the deadline to create such
a plan for the year is December 31, even
though the actual contributions may be
deferred for several months. Our office
can help you determine which type of plan
would be best for you and your employees.
The end of the year is often a good time
to convert a traditional IRA to a Roth
IRA. All Roth IRA distributions are tax-free
after five years, if you are at least
age 59^. What's more, the five year clock
starts on January 1 of the conversion
year. Thus, a December 2014 conversion
will have a January 1, 2014, start date
for this purpose and reach the five-year
mark on January 1, 2019, just over four
years from now.
downside of a Roth IRA conversion is that
you must pay income tax on all pretax
dollars you move from your traditional
IRA to a Roth IRA. Converting can be extremely
1: Diane Carson is a single taxpayer
with $150,000 of taxable income in 2014,
before any Roth IRA conversion. If Diane
converts her traditional IRA, which contains
$250,000 in pretax dollars, to a Roth
IRA, she will report $400,000 of taxable
income on her tax return. The added income
will be taxed mostly at a 33% rate so
Diane will owe more than $80,000 in tax
on the conversion.
this example, Diane has an excellent idea
of what her taxable income will be for
2014. Her $150,000 of taxable income puts
her in the 28% tax bracket, which goes
up to $186,350 for single filers this
year. Thus, Diane decides to convert $35,000
of her Roth IRA in 2014. She'll owe $9,800
in tax on the conversion (28% of $35,000),
which she can pay with non-IRA funds.
Over time, a series of such partial conversions
can build up Diane's Roth IRA so that
it can become a valuable source of tax-free
though, that Diane's taxable income varies
from year to year. In that case, she might
do a much larger Roth IRA conversion.
A conversion in 2014 can be recharacterized
(reversed) back to a traditional IRA,
in whole or in part, until October 15,
2: Diane converts $100,000 of her
traditional IRA to a Roth IRA in 2014.
When she has her tax return prepared in
April 2015, Diane learns that her taxable
income would be $166,350, without any
income from the Roth IRA conversion.
mentioned, the 28% tax bracket for a single
filer goes up to $186,350 in 2014. Therefore,
Diane can add $20,000 to her taxable income
for the year, still taxed at 28%. Diane
recharacterizes enough of her Roth IRA
conversion to leave her with a $20,000
Roth IRA conversion, in the 28% bracket.
She can repeat this process every year,
building up her Roth IRA at a relatively
low tax cost.
Source: November 2014 AICPA Client