Monthly Archives: November 2017

The Backdoor Roth IRA

back-door-rothChoices when contemplating a contribution to an IRA account:
There are two different options available for individuals who want to contribute to an IRA account, the Traditional IRA and the Roth IRA.

I tend to favor the traditional IRA because contributions are deductible now, and my focus as a tax advisor is finding ways to reduce my client’s taxes this year. Later on though, when the money is eventually withdrawn, you have to pay taxes on all of your pre-tax contributions as well as the earnings that accumulated in the account over the years.

The Roth IRA on the other hand, does not allow for a deduction as contributions are made, but later on when the money is withdrawn, all of it comes out tax free including the investment earnings.

So you can see that both options have their advantages. Figuring out which option will work out best in the long run involves considering quite a number of factors including being able to predict what tax bracket you will likely be in after retirement.

For those who decide that the Roth IRA would be a better choice for them:
There are rules regarding who is eligible to contribute to either type of IRA. You have to have “earned income” to be eligible and whether or not you are covered by a retirement plan at work can affect your eligibility for either IRA option. For the Roth IRA there is also an income limitation that might come into play.

For 2017, if you are single, you can only make a partial Roth contribution once your AGI is $118,000 or more, and no contribution at all if your AGI is over $133,000. For a married couple only a partial contribution is allowed once your combined AGI reaches $186,000, and no contribution at all once your AGI reaches $196,000.

So what if you find yourself ineligible because your income is too high?

A way around the problem through the backdoor!
Traditional IRA accounts allow individuals to make non-deductible contributions regardless of one’s income. We don’t see many people choosing to do that but here’s a strategy where that option becomes quite useful.

You can make a non-deductible contribution to a new or existing traditional IRA account. Then a short while later, you can instruct the custodian of your IRA to convert that amount into a Roth IRA account. This strategy would work out quite nicely for those with very small traditional IRA accounts and have most or all of their retirement money sitting in a 401(k) plan at work. In this scenario there will be little to no tax on this conversion.

For those that do have traditional IRA accounts with substantial amounts in them, there may be an opportunity to transfer (or “hide”) those IRA accounts by rolling them into your employer’s plan before implementing this backdoor strategy.

I recommend that you consult with your tax advisor before actually making any moves.

The writer, Donald Karlewicz CPA CGMA is a partner with GKG CPA’s serving clients throughout the tri-state area. Contact DKarlewicz@GKGCPA.com for further information on this topic.

Stricter Enforcement of Reporting Health Care Coverage on Your Tax Return

Health Overhaul EmployeesThis upcoming tax filing season the Internal Revenue Service will no longer accept electronically filed tax returns if the return doesn’t properly report the health care coverage requirements of the Affordable Care Act. The IRS will not accept an electronically filed tax return until you indicate whether, you, your spouse and your dependents had health care coverage, or, had an exemption for health care coverage or indicate that you will make a shared responsibility payment. In addition, the Internal Revenue Service has made it clear that taxpayers that file paper returns and do not address the health care coverage requirements may find their returns suspended until all reporting is complete. This could significantly delay any refund  to which you might be entitled.

The IRS stated “To avoid refund and processing delays when filing 2017 tax returns in 2018, taxpayers should indicate whether they and everyone on their return had coverage, qualified for an exemption from the coverage requirement or are making an individual shared responsibility payment,” the IRS advised. “This process reflects the requirements of the Affordable Care Act and the IRS’s obligation to administer the health care law.”

This is important because in 2017 President Trump did try several times to repeal the Affordable Care Act. Since those repeals failed, the IRS will take the next steps of enforcement as described in the previous paragraphs.

The IRS has not held up the processing of tax returns in the past few years because of not properly reporting the health care coverage information, but it did hold up refunds from being issued until the information was provided. Once the information was provided, if a share responsibility payment was found to be due, the IRS would then adjust the return and a refund may have been reduced or a demand for payment issued. This stricter enforcement for 2017 tax returns means that if all the health care requirements are not addressed when filing your return, your returns will not even be accepted by the IRS.

It is important when filing your 2017 income tax returns that you obtain reporting Forms 1095-A from your business or personal health insurance provider and provide those forms to your income tax preparer along with your other income tax support so your return can be completed in its entirety.

Wayne L. Martin, CPA, CGMA

Long-Term Care Insurance…Too Often Overlooked

iu-1We insure our home, cars, life, and potential disability, but why do we overlook long-term care? We all know we need it, but we also really don’t want to think about it and discuss it. Why so few insure themselves against something that can wipe-out everything they have worked their entire lives to accumulate is a question that elicits various responses.

The very rich probably don’t need long-term care Insurance, and the poor can’t afford it and will be forced to rely on Medicaid. Those of us that don’t fit into either of these categories must look at long-term care insurance as part of our retirement planning strategy. The younger and healthier you are when you buy the policy, the cheaper the policy, and the better it will be, so don’t procrastinate.

With the national median cost of a private room at a nursing home now at $102,900, and that cost being even higher in the New York Metro area, it doesn’t take long to burn through your assets.

Even though long-term care insurance premiums continue to rise and benefits get reduced, it is still something that we all should consider. None of us can predict whether we or our spouse will incur a long-term medical illness or a catastrophic medical event in our lifetimes, but knowing we have a long-term care policy as part of our retirement planning can certainly provide us with peace of mind.

Scott R. Goldstein, CPA