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Seizing the occasion of “National Small Business Week” in mid-May, the U.S. Department of the Treasury encouraged small business owners to learn more about making starter savings accounts, called myRAs, available to their employees.
The Treasury has provided more details on its website about the working of the myRA program that it will roll out later in 2014.
President Obama promised in his 2014 State of the Union address that he would take executive action to create myRAs that would be available through employers and backed by the U.S. government. MyRAs were described as being simple, safe and affordable starter savings accounts to help low- and moderate-income wage earners save for retirement.
On its website, the Treasury stated that in late 2014 it will begin offering the myRA program. Treasury highlighted these key features of myRAs:
➤ Employees may open an account with as little as $25.
➤ Account holders may add to savings through regular payroll direct deposit – $5 or more every payday.
➤ Account holders will pay no fees.
➤ MyRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees.
➤ MyRAs will not be limited to one employer – the account will be portable.
➤ MyRA contributions can be withdrawn tax-free.
➤ Earnings can be withdrawn tax-free after five years if the saver is at least age 59½.
➤ Account holders can build savings for 30 years or until their myRA reaches $15,000 – whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs.
As further explained in Treasury’s “myRA: Top Questions & Answers,” the myRA account will hold a new add-on Treasury security. As a result, savers will add to the value of a single security with each contribution they make, rather than buying additional securities. The security in the myRA account – like other U.S. savings bonds and Treasury securities – will be backed by the U.S. Treasury.
The retirement savings account will be a Roth IRA account and have the same tax treatment and follow the rules of Roth IRAs. The same tax advantages that apply to Roth IRAs will also apply to myRAs.
An individual who changes jobs can continue to add savings to an existing myRA account by setting up deposits through any employer that offers payroll direct deposit. An individual with multiple jobs will be able to use direct deposit from each paycheck to contribute to a single myRA. The deposits will be automatic every payday.
Employers will not be required to make myRA available to their employees.
Treasury said it will finalize procedures for rollovers to private-sector accounts (after the account is 30 years old or has reached its $15,000 maximum) when it launches myRAs later in 2014.
©2014 CPAmerica International
If you listened to the State of the Union address last month, you heard President Obama unveil a new type of retirement savings plan called “myRA.”
MyRA is a savings vehicle designed to serve people whose employers do not provide access to a retirement plan. The best estimate is that about half of all workers and
75 percent of all part-time workers are in this category.
Here are the details released to date:
➜ MyRAs will be backed by a security that looks and feels like a savings bond.
➜ The government will back them with the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federalemployees’ Thrift Savings Plan.
➜ Savers will be guaranteed that the value of their accounts will never go down.
➜ Savers will pay no fees on the accounts.
➜ Savers can open the accounts for as little as $25 and can make additionalcontributions in amounts as small as $5.
The myRA will use after-tax dollars, like a Roth IRA, and withdrawals under most circumstances will not be taxed. While it is funded by paycheck deductions, savers will be able to keep their accounts when they change jobs.
Although the program can begin without legislative approval, employers will not be required to participate. Congressional approval is required to force employers who do not have retirement accounts to set up payroll withholding procedures for myRA.
The myRA program has a $15,000 limit. After reaching that mark, savers will have to move their dollars to a Roth IRA.
Even if you qualify for myRA, you may wish to consider a Roth IRA as an alternative. Both Roth IRAs and myRAs are expected to have the same income limits on contributions.
If you decide to open a Roth IRA, you should shop for a custodian that charges no fees. You will not be subject to the savings limits, and you will not have to wait for your employer to agree to participate.
With a Roth IRA, you may not be able to set up an account with contributionthresholds as low as the $25/$5 amounts available with myRA. However, you can probably approximate the “safety of principal” aspect of myRA by investing exclusively in government bonds.
©2014 CPAmerica International
If you’re holding money in a traditional IRA, maybe it’s time for you to take another look at a Roth conversion.
Since the $100,000 income limitation was removed in 2010, you have no restriction on your ability to transfer funds from a traditional IRA to a Roth IRA – and no limit on the amount you can transfer.
You will have to pay tax currently on the amount of the transfer that would have been treated as a taxable distribution, if you had actually received the money. But the future benefits can be significant.
Future distributions, including profits, from the Roth account will escape tax entirely, provided you have had a Roth account in place for at least five years. Moreover, there is no required minimum distribution when you reach age 70½.
Statistics recently released by the IRS for 2010 – the latest year for which information is available – show that wealthier people are taking advantage of the Roth conversion opportunity in record numbers. Conversions increased more than nine times in 2010, rising to $64.8 billion from $6.8 billion in 2009, according to IRS data. That was the first year in which Roth conversions exceeded contributions.
The wealthiest Americans – those with estates large enough to be subject to the estate tax – receive an additional benefit. Any income taxes paid as a result of the conversion reduce future estate taxes. Without the conversion, the heirs will eventually pay the income taxes anyway, so the estate tax savings is a net benefit to the family.
A Roth conversion may not be for everyone, but you may wish to take a second look. If you convert in early 2014, you may not have to pay the resulting income taxes until April 15, 2015. That gives you more than a year to continue to use those tax dollars to enhance your retirement savings.
With the IRS relaxing the rules on in-plan Roth conversions, your 401(k) plan should also be considered as a conversion candidate if it offers a Roth account feature.
The IRS has provided new guidance on rollovers within a retirement plan to designated Roth accounts in the same plan – in-plan Roth rollovers.
For a Roth IRA, all contributions are after tax. No deduction is allowed. But amounts held in a Roth IRA that are withdrawn as a qualified distribution are not includable in income or subject to the 10-percent early withdrawal tax.
A qualified distribution is a distribution that is made:
Distributions from a Roth IRA that are not qualified distributions are includable in income to the extent attributable to earnings. They may also be subject to the 10-percent early withdrawal tax.
The 2012 Taxpayer Relief Act allows certain retirement plans to permit participants to elect in-plan Roth rollovers. The new Notice 2013-74 generally expands rules originally published in Notice 2010-84 to apply to all in-plan Roth rollovers, with some modifications.
For example, to be eligible for an in-plan Roth rollover, an amount must be vested. However, the rule that provides that an amount is not eligible for an in-plan Roth rollover unless it satisfies the rules for distribution under the tax code no longer applies.
The new notice provides that the following contributions and related earnings may now be rolled over to a designated Roth account in the same plan without regard to whether the amounts satisfy the conditions for distribution:
No withholding applies to an in-plan Roth rollover of an otherwise nondistributable amount. Further, no part of the rollover may be withheld for voluntary withholding. But an employee making an in-plan Roth rollover may need to increase his withholding or make estimated tax payments to avoid an underpayment penalty.
A plan amendment that provides for in-plan Roth rollovers of otherwise nondistributable amounts is a discretionary amendment. It must be adopted no later than the last day of the first plan year in which the amendment is effective.
However, to give plan sponsors sufficient time to adopt such an amendment and enable plan participants to make in-plan Roth rollovers of otherwise nondistributable amounts before the end of the 2013 plan year, the IRS is extending the deadline. Provided the amendment is effective as of the date the plan first operates in accordance with the amendment, the deadline is now the later of either:
©2014 CPAmerica International
With only a few days remaining in 2013, it is time to complete your year-end tax planning and make your New Year’s resolutions.
Here are planning points you might want to consider:
Gather your tax information and get it to your tax preparer early in the filing season. With all the tax changes that took place for 2013, you do not want to be unpleasantly surprised just before the due date by a higher amount of tax due.
©2013 CPAmerica International
You have until April 15, 2014, to make your 2013 IRA contributions, but there are five important points to consider prior to year-end:
Paid directly from your IRA (not an ongoing SEP or SIMPLE IRA);
You can use a qualified charitable distribution to satisfy the required minimum distribution for your IRA for the year. However, you cannot deduct this amount as a charitable contribution on your tax return. ■
The Tax Court determined in a recent case that, because an individual’s IRA owned the shares of his limited liability company, the payment of compensation to the individual for his services to the company was a prohibited transaction.
The prohibited transaction resulted in disqualification of the IRA and a deemed distribution of its assets.
In 2005, Terry Ellis organized a limited liability company (LLC), signing the operating agreement on behalf of the Terry Ellis IRA, an entity that did not yet exist. The IRA owned 98 percent of the membership units.
The LLC was formed to engage in the business of used car sales, with Ellis as the general manager. A month later, Ellis created the Terry Ellis IRA. He then transferred cash from his 401(k) account with a former employer to the IRA. The IRA transferred the funds to the LLC and received its membership units. The LLC elected to be treated as an association taxable as a corporation.
During 2005, the LLC paid Ellis $9,754 as compensation for his role as general manager and deducted that amount on its corporation tax return. Ellis’s 2005 return reported the $9,754 as taxable compensation. It also reported the distribution from the 401(k) account but did not report any portion of the distribution as taxable.
The IRS concluded that Ellis engaged in a prohibited transaction with his IRA either:
The Tax Court concluded that the formation of the LLC did not involve any prohibited transaction. However, the compensation that the LLC paid to Ellis was a prohibited transaction.
The court agreed with Ellis that, at the time of its formation, the LLC was not a disqualified person with respect to the IRA because, at that point in time, the LLC had no owners or ownership interests. However, the court said that, by paying the compensation, Ellis engaged in a prohibited transaction.
Ellis argued that the payment of compensation was not a prohibited transaction because the amounts paid to him by the LLC did not consist of plan income or assets of his IRA. He saw the compensation as merely the income or assets of a company in which his IRA had invested.
Given the facts in this case, the court concluded that the LLC and the IRA were substantially the same entity.
As a result of the prohibited transaction, the full amount that Ellis transferred to the IRA from his old 401(k) account was deemed distributed to him on Jan. 1, 2005. That amount was therefore includible in his gross income.
The court also found that Ellis was subject to the 10 percent additional tax that applies to early distributions from qualified retirement accounts. Finally, the court found that Ellis was liable for the 20 percent accuracy-related penalty (Terry L. Ellis v. Commissioner, TC Memo 2013-245, Oct. 29, 2013).
©2013 CPAmerica International
There are two types of IRAs that individuals can create themselves, with extremely different characteristics. One is a regular IRA, for which the contributions are deductible.
A regular IRA will put you ahead if you’re in a high tax bracket when you make the contributions and expect to be in a lower bracket when you retire and take the distributions. For instance, if you are single and your taxable income is greater than $183,250, this contribution of up to $5,500 isn’t taxed at 33%. Assuming you take the distribution after you’re 59 1/2 years old and withdraw this $5,500 when your taxable income is less than $36,250 you are only taxed at 15%. This yields a tax savings of 18%, or $990.
The other type of an IRA is a Roth. With a Roth IRA, you can contribute up to $5,500 per year after tax. After you reach 59.5, you can withdraw any amounts you wish tax free. 
This is advantageous if you, or your spouse, will have significant pension, investment or other types of income when you retire. The contributed amount and all the gains are tax free. I may be pessimistic, but I think that by the time I reach 59.5 the government will have raised tax rates to pay down the deficit. A Roth IRA will protect people from this scenario. It is also a useful retirement vehicle if you are in the 15% tax bracket, as I can’t envision taxes for a single person making over $15,000 a year ever getting below this tax rate.
Another reason that I am fond of a Roth IRA is that it isn’t subject to the same harsh early distribution penalties as a regular IRA. With a regular IRA, if somebody ever becomes destitute or needs money for emergencies they will be penalized 10%! (There are exceptions for medical insurance premiums for the unemployed, qualified higher education expenses and up to $10,000 for a first time home purchase).
This takes away the whole tax savings of a regular IRA as outlined above. I for one don’t like the idea of the government having a certain level of control over when I can take out my money. On the other hand a Roth IRA’s early distributions are only penalized above the contributed amounts. This means that the 10% penalty will only kick in after all the contributions are withdrawn first, the earnings are the only portion that could be penalized. So if I put in $50,000 over 10 years and that money has grown to $100,000, I could take out the $50,000 of contributions with no penalty and no tax. This I like as it gives me more control over my money in addition to not worrying about unknown future tax rates.
Another rule to keep in mind is that contributions can only be made if the taxpayer makes under a certain amount. For a Roth IRA, the $5,500 contribution limit is $110,000 in adjusted gross income for single people and $173,000 for married couples. 
For a regular IRA, and for active participants in an employer retirement plan, the contribution limit is $59,000 for single people and $95,000 for married people. People not involved in an employee retirement plan have no income limit in order to contribute to a regular IRA. So, especially if you’re invested in a 401k at work which has the same withdrawal characteristics as a regular IRA, put some money into a Roth IRA!
