Have you started to think about your taxes yet? I’m guessing the answer is yes, because our CPA’s have very full schedules right now. Although just thinking about your taxes won’t be enough, you actually have to take action and get them done.
Even though some people will wait until the very last minute, fines, penalties and even jail time is usually enough motivation to take action sometime before the April deadline.
Every year, we see people who make big mistakes when it comes to taxes and retirement money. Today, I’ll go over two of the mistakes or traps that people can fall into.
Let’s say you finally pulled the trigger and tell your boss you’re going to work on your golf game full time, the fish are biting, or the grandkids’ baseball team needs a coach. Perhaps you hear the Steppenwolf song, “Born to be Wild,” on the radio and it inspires you . . . head out on the highway, looking for adventure in whatever comes our way; but before you get too wild, you have to figure out what to do with that 401K at work.
This is likely to be the biggest check of your life and your financial security, so you better make a wise decision. This is the money that needs to last for the next 20 to 30 years, or even longer.
First, you will need to decide if you want to leave your money with your current employers plan (if they let you), roll it into your own IRA, or just take a cash payout. A cash payout is probably not the right choice, because you will pay full taxes on the entire amount.
If you’re working with a good financial planner, they should be able to give you a plan that will fit your retirement plans, and far better than the one you had at your employer.
The rollover to an IRA is tax free, but there is a catch. If you do it yourself, you only have 60 days to complete the transaction and roll the money into an IRA. Because there is the possibility that this might not be completed in 60 days, your employer is required to withhold 20 percent for federal taxes.
If you don’t get the money into an IRA within 60 days, the entire amount becomes taxable. A better solution might be to do a trustee-to-trustee transfer. This would still be tax free, and because you are not taking possession of the money, your employer would not have to withhold the 20 percent for taxes.
Another tax trap can be when you turn 70.5 years of age. This is called the Required Minimum Distribution, or RMD. Good old Uncle Sam wants you to pay taxes on the money before you have a chance to die.
They have discovered that they make more money in taxes if they tax the person before they die, and then tax the people who inherit the money, also. The amount of money that you have to take out starts out at about 3.6 percent and gets larger every year.
If you miscalculate the dollar amount that you have to take out, the government will nail you with a 50 percent penalty on the difference. In other words, if you should have taken a $2,000 RMD but only take $1,000, you will have an IRS penalty of $500. Retirement plans contain some of the most complicated rules in the 68,000-page tax code, so it would be a very good idea to make sure you work with competent advisors.
Here is your tax thought for the week If Congress can pay farmers not to raise crops, why can’t we pay Congress not to raise taxes?