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3 Tax Plans to Make Sooner Than Later

Sort out your retirement accounts, estate tax planning


It’s April 15, tax day, and while a few of you might still be rushing to the post office, hopefully most of you have already finished with tax season, and without much hassle.

Whatever your status, it’ll be all over by tomorrow. And while 2013 taxes might be the last thing you’ll want to think about on April 16, there’s a few things you’re better off remembering and taking care of sooner rather than later. Here are three examples:

Retirement Contributions

401k and traditional IRA plans are the best way to build up a nest egg because they have tax benefits designed to both encourage participation and accumulate money. Both programs allow you to put in money or other assets into an account (or accounts) that can grow tax-free until you take funds out. Just keep in mind they operate under different rules.

  • You can put up to $17,500 in a 401k plan during the year, and if you are 50 1/2 years old, you can put in an additional $5,500 “catch-up” for a maximum of $23,000. If your employer has a matching plan, even if it isn’t for 100% of your contribution, even better! The total contribution between you and your employer cannot exceed $51,000 or 100% of your earned income. Another benefit here is that the contributions are taken from your paycheck on a pre-tax basis, so you won’t have to pay payroll taxes on them.
  • Contributions to a traditional or Roth IRA are $5,500, but once again, if you are 50 or older, you can add an additional $1,000 for a total of $6,500. In certain circumstances, the contribution to a traditional IRA provides a direct tax deduction.

Retirement Distributions

Distributions from those retirement accounts are equally important in tax planning for the coming year. Whether you are simply old enough to have to take those distributions under current tax law, or if you need to borrow or take money out for any other reasons, you should understand the rules — and penalties.

You can start taking traditional and Roth IRA distributions penalty-free at age 59 1/2; distributions prior to age 59 1/2 are subject to a 10% penalty, with some exceptions allowed. Unless you fall into these exceptions, it’s best to plan on not taking money out of a traditional IRA.

The IRS requires you to take IRA distributions by the April following the calendar year you turn 70 1/2, then every year thereafter, on or before December of that year. If you don’t take the minimum required distribution, you may owe an excise tax on a portion of the required distribution. And note, these RMDs are taxed as ordinary income for the tax year in which you take them.

Since Roth IRAs are taxed when you make contributions, distributions are treated somewhat differently, primarily depending on several factors, including when the withdrawal is made and for what purpose. “Normal” withdrawals that fall under any of these four rules are not subject to taxation:

  1. Made on or after the date you become age 59 1/2;
  2. Made to your beneficiary, or to your estate, after you die;
  3. Made to you after you become disabled within the definition of the IRS code;
  4. Used to pay for qualified first-time homebuyer expenses.

With regard to your 401k plan, any distributions are taxed as ordinary income.

Estate Tax Planning

If there was ever a complicated area for retirement tax planning, this one might win the gold medal.

While you definitely should hire a tax or financial planner to help on this front, there’s one easy action you can take to minimize your estate value — thus reducing the taxable estate for heirs — while doing something nice for someone … in fact, anyone.

The Internal Revenue Service annual exclusion for gifts now stands at $14,000 from any one individual without having to worry about a gift tax. Parents can combine their gifting so that any individual — say, a child — can receive up to $28,000 tax-free and without counting toward your individual $5.12 million lifetime gift-tax exclusion.

Marc Bastow is an Assistant Editor at

Article printed from InvestorPlace Media,

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