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Seema Ramroop

FINANCE

ROTH: TO CONVERT OR NOT TO CONVERT – PART 2

By SEEMA RAMROOP

 

The Facts: Roth IRA vs. Traditional IRA

Roth

Traditional

·         Nondeductible contributions

·         Tax-deferred growth potential

·         Tax-free withdrawals*

·         Deductible or nondeductible contributions

·         Tax-deferred growth potential

·         Taxable withdrawals

·         Tax-free withdrawals during retirement
do not raise the tax bill on Social
Security benefits.

·         Taxable withdrawals in retirement can raise
the account owner’s tax bill on Social Security benefits.

·         No required minimum distributions
during account owner’s lifetime

·         Able to continue contributions
after age 70˝

·         Must begin taking required minimum distributions at age 70˝

·         Cannot contribute beyond age 70˝

·         Assets remaining in IRA pass
income-tax-free to heirs.*

·         Assets left to heirs will be taxable as ordinary income upon withdrawal.

 

* Contributions can be withdrawn tax-free at any time, and earnings can be withdrawn without income tax if the account has been in effect for five years and the owner is over age 59˝, has died, is disabled or is a qualified first-time home purchaser (maximum $10,000).

 

A few additional points to consider:

·         When you convert from a traditional IRA or employer-sponsored plan to a Roth IRA, you will incur certain tax liabilities. These include taxes on any pretax contributions plus taxes on any earnings or growth.

·         If you have pre-tax and after-tax funds in a traditional IRA, there are certain rules that determine how these funds can be converted. You tax adviser can help you determine which funds can be converted and the amount of taxes due on a conversion.

·         To help ease the tax burden, you can spread your tax payment across two years. So instead of paying all the taxes when you convert in 2010, you can include 50 percent of the income in 2011 and 50 percent of the income in 2012 at rates in effect in those years. This option is a one-time offer for 2010 conversions only.

·         It’s important to identify funds outside the IRA that can be used to pay the taxes due on the conversion to a Roth IRA. Tapping into the amount converted from a traditional IRA or employer-sponsored retirement plan to pay taxes will reduce the amount available in the Roth IRA to earn tax free income — and trigger a 10 percent penalty if you’re under age 59˝ (unless an exception to the penalty tax is available).

To help you decide whether a Roth conversion is a good idea, you should speak with your tax adviser.

 

Is a Roth right for you?

We have touched on some key benefits of converting to a Roth IRA, but for many individuals a Roth conversion may not be the best strategy. If one or more of the following apply to you, it might be best for you to avoid conversion or to only convert a portion of your retirement account:

·         You expect that your tax bracket will be the same, or lower, in retirement.  

·         You do not have funds available to pay the extra taxes from the conversion.

·         You only have a short time frame to take advantage of potential tax-free compounding before retiring.

·         You have projected income needs equal to or greater than the required minimum distributions of the IRA.

 

Get help making your decision

To help you understand how a Roth conversion will likely impact your financial scenario, ask your Morgan Stanley Smith Barney Financial Advisor to provide a personal Roth Conversion Illustration Report for you. This report explores your specific situation, factoring in such variables as the amount to be converted, the distribution year, your date of birth and where you are in the retirement planning cycle. Based on this input, the report shows the after-tax future value of an IRA balance, comparing the outcomes of a traditional IRA with those of a Roth IRA. You’ll also be able to see the wealth planning advantages of “stretching” a Roth IRA over multiple generations. Finally, as with all tax- related issues, you should also discuss your situation with your tax adviser.

Seema Ramroop, Financial Advisor at Morgan Stanley Smith Barney in Palm Harbor, can be reached at (727) 773-4629 or email seema.ramroop@morganstanley.com




Kamlesh Patel

ACCOUNTING

you might qualify for this new business credit

bY kamlesh h. patel, cpa

Is your business eligible for the new small employer health insurance credit? Here’s how to decide, by the numbers.

§ 25. One of the requirements for meeting the definition of “small employer” is that 25 or fewer “full-time equivalent employees” worked for you during the year.
What to do. To calculate full-time equivalent employees, you need the following two numbers:

(1) The total hours worked by all your employees during the year (excluding seasonal workers and family members), which you’ll divide by —

(2) 2080 (the maximum qualifying annual work hours, or 52 weeks x 40 hours per week).

Why bother with the special wording and the math? If some of your workers are on a part-time schedule, you could have more than 25 employees and still qualify for the credit.

§ $50,000. A second requirement for meeting the definition of small employer: Paying average annual wages of less than $50,000 to full-time equivalent employees.
What to do. Compute average annual wages by dividing total wages you paid during the year by the number of full-time equivalent employees. Wages paid to family members or to yourself are not included.

  50 percent. You have to pay at least half of the health insurance premiums for your employees. Note: Under a transitional rule available for 2010, you might qualify if you pay less than 50 percent of the premiums for certain employees, depending on the coverage.

Do the numbers look good so far? If so, here’s one more.

§ 35 percent. The maximum credit you can claim is 35 percent of qualifying health insurance premiums paid during 2010. You’ll take the credit on your 2010 federal income tax return, using it to reduce your income tax liability dollar for dollar.

The credit can be applied against regular income tax or the alternative minimum tax, and you can carry any excess to future years.                                   

taxes apply to children’s summer jobs

If your child takes a job in summer, you’ll want to know about the following tax issues.

For 2010, your child can earn as much as $5,700 and not pay a dime in federal income taxes. If your child’s earnings won’t exceed this amount, consider having the child claim “student – exempt” when completing the federal withholding allowance certificate (Form W-4). If this is the child’s only income and the total is below the $5,700 limit, he or she then won’t have to file a 2010 tax return. If the child makes a maximum deductible traditional IRA contribution for 2010 ($5,000), he or she can earn as much as $10,700 without incurring any federal income tax.

Don’t overlook the fact that there will still be withholding from your child’s paycheck for Social Security and Medicare taxes. But those payments are not income taxes, and they cannot be refunded to the child.

Realize also that as long as you provide more than half of your child’s support, you can continue to claim the child as an exemption on your tax return. Your child will lose his or her exemption, but that exemption deduction is typically more valuable to you than to your child.

If you own your own business, consider hiring your child for summer employment. Your business can deduct the wages you pay the child, as long as the wages are appropriate for the work performed. If your business is a sole proprietorship or family partnership, you are not required to withhold social security or Medicare taxes on your child’s wages if he or she is under 18 years of age.

Don’t overlook the benefits and opportunities for both you and your children when helping them to plan for taxes and their summer jobs.

tips on how to manage part-time employees

Part-time employees can play a valuable role in a small business. They can help you deal with variations in workload without having to hire a full-time employee. Because part-timers often look for a job that requires fewer hours, you can find a person with above-average skills for the position.

But part-timers can turn into a liability if not managed well. You could end up with poorly motivated workers who are unsure of their duties, unfamiliar with the company, and unsure who they report to. Here are a few tips to prevent this situation.

  Think before you hire. Know why you’re hiring. Decide exactly what you want the person to do, what hours you want the person to work, and who he or she will report to. The position may have well-defined duties, or it may involve filling in wherever needed. Decide on the pay level and what benefits you’ll offer.

  Communicate clearly with the part-timer. Explain the person’s duties and who his or her superior is. Be very clear on hours and benefits. The more flexibility you can offer, the easier it will be to recruit somebody and the happier the new worker is likely to be. Make sure you explain what job performance you expect.

  Communicate clearly with your full-time staff. Explain why you’re hiring a part-time person. Make it clear what that person will and won’t be expected to do. Designate who will manage and assign work to the part-timer. Otherwise you might find everyone trying to unload work on the new employee.

  Make the part-timer feel like part of the company. Provide introductory training on specific duties and on the company’s business and policies. Assign a mentor or “buddy” – someone the new person can turn to with everyday questions.

  Monitor part-timers’ progress. Don’t just forget about them after they’re hired. Provide feedback on their performance and recognition if they’re doing a good job.

With attention to these points, you can make hiring a part-time employee a winning decision for your company.

Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail kpaccounting@verizon.net or kpinsurance@verizon.net.



 
Amol Nirgudkar
 

HEALTH REFORM & HIRE ACT — TWO NEW LAWS — WHAT’S IN IT FOR YOU?

By AMOL NIRGUDKAR, CPA

2010 will mark the end of this decade. The decade will be remembered by many as Washington’s glory period for new tax legislation. There have been 24 new tax acts over the last 10 years that have overhauled our tax code and made it into one of the most complex treatises ever written. The pace of change and complexity of the regulations have befuddled Americans and many of them have gotten progressively intimidated by the enormity of modern tax compliance. Even tax attorneys and CPAs have spent countless hours in continuing education trying to understand each new law and apply it to the benefit of their clients.

The purpose of this article is to analyze two recent pieces of legislation that became law recently and discuss the impact on 2010 taxes.   

On March 18, 2010, the president signed into law the “Hiring Incentives to Restore Employment Act of 2010” (aka the HIRE Act). Its was stated in the title — to stimulate employment and make a dent in the 9.7 percent unemployment rate that is looming like a dark cloud on the United States economy. In hopes of encouraging employers to hire and retain unemployed workers, the HIRE act provides two basic tax breaks:  

1)      Payroll tax holiday — Exempts employers from paying employers share of the Social Security employment taxes on wages paid in 2010 on newly hired unemployed workers. The tax holiday applies to workers hired after Feb. 3, 2010 and before Jan. 1, 2011 provided the workers were unemployed for at least 60 days before hire date. The payroll tax paid by the employer on wages after March 19, 2010 will be exempt from the 6.2 percent Social Security tax for the remainder of the wages for 2010. 

2)      Retention incentive — As an additional incentive to retain the qualified unemployed workers, the act provides an additional $1,000 tax credit if the workers maintain employment for 52 consecutive weeks.   

In addition to the employment incentives, the HIRE act also extends Section 179 deduction until Dec. 31, 2010. Section 179 allows qualifying businesses to deduct up to $250,000 in qualified asset purchases in 2010.  

On March 23, 2010, the president also signed two controversial healthcare bills – Patient Protection and Affordable Care Act (aka Health Care Act) and the Health Care and Education Reconciliation Act (aka Reconciliation Act). Both acts aim to reform the current unsustainable health care system in the United States and offer affordable health coverage to all Americans.   

The centerpiece of the legislation is the mandate that requires most United States residents to obtain health insurance. There are a host of other provisions ranging from new penalties for not carrying health insurance, large employer mandates to offer coverage, voucher system for lower income employees, “simple” cafeteria options for small businesses, etc.   

Most of the mandate and other provisions go into effect in years 2014 and beyond. However, starting in 2010, small businesses that offer and pay for at least 50 percent of the health coverage for their employees get a tax credit equal to 35 percent of the premiums paid in 2010, 2011, 2012 and 2013. The credit increases to 50 percent for years beginning after 2013 for employer’s non-elective contributions towards employees’ health insurance premiums. Another provision of the health bill that affects 2010 is the new 10 percent tax on indoor tanning services.  

The fate of this health legislation in future years and its impact on Americans is hard to predict and many of the provisions could possibly change in the next few years. The November elections and the presidential election in 2012 could be contributing factors to future amendments. All of us can hope and wish that these new laws actually do make health care affordable to all Americans while maintaining quality of care.   

Amol Nirgudkar, CPA is the managing partner of Reliance Consulting LLC and a partner at Reliance Wealth & Trust Partners LLC and can be reached at (813) 931-7258 or via email at amol@reliancecpa.com  

 


 





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