IRA & ROTH IRA – ROLLOVER TAX-EXEMPT FUNDS
TRADITIONAL IRA
If you have a Traditional IRA, 100% of your tax-deductible contributions and earnings growth will be taxed as ordinary income by the state and federal government when you begin taking distributions. You could freeze and stop making yearly contributions to your Traditional IRA and reallocate those funds to pay premiums for a whole life or Indexed Universal life policy. So, when you start taking cash from the policy that money will be tax-free thereby reducing your income tax liability.
ROTH IRA
Opening and contributing to a Roth IRA requires earned income of at least the amount of your contribution. A married couple both working earning income within the maximum published (AGI) limits can each contribute the maximum allowable amount. For a non-working spouse if you are a married couple and have an adjustable gross income at or below that published (AGI) limit, you can deduct the same portion as a working spouse.
COMPELLING REASONS TO START A ROTH IRA
One, non-deductible contributions grow tax-free. Two, withdrawals are tax-free in later years subject to certain rules. Three, a Roth IRA is not subject to (RMD’s) required minimum distributions like a Traditional IRA. To qualify for tax-free and penalty free withdrawals of earnings, a Roth IRA must be in place for at least five tax years, and the distributions must take place after age 59½. However, distributions may be taken due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Also, your contributions (not earnings) can be accessed at any time without penalty. And under current Federal and California State income tax laws and meeting the above guidelines: distributions come out both federal and state income tax-free. (source: Just Answer Tax 12-12-22). With SECURE ACT II for 2023 and beyond there are new RMD rules that apply.
ROLLOVER MY RETIREMENT ACCOUNT FROM EMPLOYER PLAN
You can roll-over any of the following plan types to an IRA: A traditional IRA, an employer qualified retirement plans such as a defined contribution plan, 401(k), qualified trust, deferred compensation plan 457 plan or a 403(b) plan.
Rollover 401(k) or other Defined Contribution Plan to a Traditional IRA then transfer to a Roth IRA, however, it requires you to open and fund a Traditional IRA first then transfer funds to a Roth-IRA. Steps: request a trustee-to-trustee transfer from your 401(k) directly into your Traditional IRA that you set up. Next, You can convert as much as you like from a traditional IRA to a Roth IRA, although it’s sometimes wise to spread these transfers out for tax purposes.
Note: If you do an indirect rollover, this means your plan administrator sends you the money, and you take the step of depositing it into the new account — the plan administrator may withhold 20% from your check to pay taxes on the distribution.
To get that money back, you must deposit the complete account balance including whatever was withheld for taxes — within 60 days of the date you received the distribution. (The exception to this is if you want to open a Roth IRA, which will require taxes paid on the distribution, unless your money was in a Roth 401(k).)
If your employer plan has a Roth option and you contribute to it, you may be able to roll over those assets into an individual Roth IRA without being taxed, however, certain rules apply check with your tax professional or contact us.
TAX EXEMPT MUNICIPAL BONDS AND BOND FUNDS
Investors can find some income tax benefits through federal and state Tax-free bonds or Tax-exempt bond funds. Municipal Bonds are exempt from federal tax, though you might have to pay state and local taxes. However, some states allow qualified municipal bonds to be tax-exempt. A California resident tax payor is generally exempt from paying state tax on municipal bonds issued in California. Therefore, they could have both a federal and state tax exemption. (caution: if you receive Social Security benefits and receive dividends from Tax-exempt Municipal Bonds or bond fund, it may count as income in calculating your Social Security income threshold)
HARVESTING TAX LOSSES OF CAPITAL GAINS
There is a specific provision in the tax code that could help individuals save a greater amount of money through tax-loss harvesting, check with your tax professional or us.
Tax-loss harvesting allows individuals to reduce their capital gains tax by offsetting the appreciation of securities in a taxable portfolio (not for Traditional IRA) on a dollar-for-dollar basis with losses elsewhere in the portfolio.