Research Paper on Roth IRA Contribution

Introduction

The client and his wife are both 62 and 63 years old. In this case, they are above the 50 years, making them eligible to contribute $6500, $1000 more for the traditional ROTH contribution. However, they decided to file a joint tax return. In these cases, the couple stands a chance of saving more as the joint tax files for a married couple, the income phase-out range for the married couple is $101,000 to $121000. In this case, the couple's joint gross income for the year is $300,000 and they expect little changes to the amount. As such, they have reached the phase-out ranges and in this case, a special formula will be established to determine the total amount contributable by the couple. This will lead to them contributing more in the ROTH as made possible by the 401k savings plan, in turn making them save more in a long-term perspective.

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The ROTH 401-k is set such that an employee is only taxed the amount he currently contributes to the scheme. In this case, the amount the client decides to contribute is taxed. When the client decides to contribute a specific amount, that is the amount he can forego. The amount contributed is multiplied by the current tax rate and then paid as tax. The remaining amount is then contributed to the ROTH 401-k. that amount is then taken as a contribution to the traditional 401-k scheme since the employer contributions are not allowed to go into a Roth 401(k). in turn, a single contribution has been divided into two contribution accounts, which grow at a specific annual rate for the specified years. At the end of the agreed period, the client will then liquidate the two accounts as lump sums, thereby maximizing the savings in the ROTH scheme.

Another advantage of the Roth 401-k is that the client (who is 62-year-old) will not be taxed his amount in the scheme. This is because the client has passed the 59 year mark and therefore eligible for tax exemption. This is not the same case with the traditional 401-k as the entire balance in such account is taxed irrespective of the age.

ACC 315: Withdrawing IRA

In the US, early withdrawal from the individual retirement account is subjected to ten percent penalty. The client is age 56. In this case, if he withdraws the amount at the age, the ten percent penalty will automatically apply. One of the methods that the client can consider is to do a back-roll over in which the amount in the IRA is rolled over to the 401k plan. In this case, the money in the IRA is not affected by the penalty rule especially if a person intends to retire at fifty-five. Therefore, the client should, at the beginning of the year, consider transferring the amount in the IRA to a 401-k retirement plan, and they make the contribution at the beginning of the year as a 401k contribution as opposed to the IRA contribution. In this case, the client will be able to withdraw his money at the 401k without incurring the early withdrawal penalties. However, the client has to check and ensure that his employer-sponsored 401k allows the reverse roll-over since currently, only 69% of the employers allow this function. Once the client is sure that the back roll-over is allowed, the client then has to make a deposit of the entire fund into a 401k account within sixty days. Then the roll-over should be reported accurately to the 1040 tax return, indicating a $0 taxable amount in the form and giving "Rollover" as the reason for the $0 taxable amount distribution.

Alternatively, the client can consider making the regular payment for the IRA for the next three-and-half years until he reaches the age of 59 and a half. In this case, the client will then legally avoid the ten percent early withdrawal penalty. However, the client must be aware that even at the age of 59 , he will still be exposed to the regular income tax on every withdrawal made as the income tax charges stop when a person reaches the age of seventy.

Another alternative to making the withdrawal without the ten percent charge is to withdraw the amount with the intention of paying for long-term medical charges that are not covered by insurance. In this case, the medical charges will also have to above ten percent of the client's total income.

In the same way, the client can plan to use the amount in the IRA to pay college fees, which also include the tuition fees as well as books and supplies purchased for the college learning of the client, his spouse or any other dependent. In this case, the amount withdrawn from the IRA will not be exposed to the ten percent early withdrawal charges. Additionally, the amount was withdrawn by the client to pay for room and board of a college-going spouse or dependent and the student is part-time or full-time will also not be subjected to the ten percent early withdrawal penalty. However, the client should also be aware that the IRA distributions are classified as taxable income when withdrawn for the educational purposes, thereby becoming disadvantageous to the client as it reduces his chances of qualifying for other financial aids.

The last method of avoiding the ten percent is to withdraw the IRA amount with the intention of buying or building a first home. In this case, the client must not have owned any home for the last two years prior to the withdrawal period. However, the maximum amount withdrawable from the IRA scheme is $10,000 for an individual and twenty thousand for a couple. In case the purchase of the home is canceled or delayed, the client will be expected to put the money back into the IRA account within the first one hundred and twenty days of the receipt of the sum or else the ten percent penalty will apply.

Having considered the above methods of avoiding the penalty, the best method is to apply the backward rollover of the IRA amount into an employer-supported saving scheme such as the 401-k. this will provide legal protection against both the income tax and the ten percent penalty. Being 56 years old, the client can also consider making payments for the next four years to reach the 59 year mark and withdraw his cash without the penalties.

Workbook Project

The Does family made an estimated quarterly PIT to the state of $100 each. However, the W-2s form shows that the amount withheld for state payment totaled to $3831.85. In this case, John had an overpayment of $3431.85 in taxes to the state, which should be deducted from the amount paid as taxes.

Cash donations are tax-free especially if one has receipts for them. In this case, the total contribution made by the family with receipts totaled to $12,328. The receipts were proof for the exemption from tax. With personal income rate of 6.2%, the Does family has undercharged a tax of $764.336, which is the exemption for the contributions made to charitable organizations. Even though John made a contribution without receipts, he could not claim the tax exemption since the amount contributed was more than $250. In this case, the tax paid should increase by (0.062*540) = $33.48.

The investment interest needs to be deducted from the individual taxes. In the year, John had a total investment interest of $147, which should be deducted from the gross income. In turn, the total income tax payable to the state should reduce by $8.82.

Supplies for Jane's classrooms, costs related to John obtaining a new job and safe deposit box are all personal expenses, which were already captured from the individual's gross taxable incomes. In this case, the taxes related to these amounts (totaling to $678) would not be subjected to individual tax deductions. As such, the total tax amount paid to the local government should further reduce by $42.032.

Investment publication, investment custodian fees and tax preparation fees for the year totaled to $897. This amount was less than 2% of the gross income for John which was $52341. In this case, the amount being less than 2% of the gross income in the year qualify for tax exemption. As such, the total tax payable to the state in the year should reduce by (0.062*$897) = $55.614.

John and Jane are married and their total annual gross income is more than $160,000. In this case, they can only claim a maximum of $4000. The total amount of fees paid to college totaled to $52595. In this case, the total amount of tax from the amount using a Personal tax rate of 6.2% is (6.2% * 52595) = $3,260.89. as such, the amount paid to the college is below the maximum of $4,000, thereby making it be tax deductible.

For the 2017 tax year, the law allowed a person to deduct interest of up to $100,000. In this case, the Does mortgage loan was less than $73,000 at any time. Therefore, the interest on the loan for that year was tax-deductible, hence reducing the tax by (0.062*25,000) = $1,557.5. the total tax deductible after the adjustment is $ 9113.546, whereas the total amount to be added is $33.48. However, the total amount of tax charged to John for the year was $ 18476.78. in this case, the total tax payable to the government at the end of the year has made all the adjustments should be $9396.714.

If the couple wants to maximize their contribution to the IRA, they should file a joint marriage tax returns. Then they should enroll for the ROTH contribution which will enable them to contribute more towards their IRA. With the ROTH, they should then ensure that their ROTH IRA contribution is further linked with an employer plan like the 401k savings plan.

Works Cited

IRS. "ROTH Comparison Chart." IRS, 2018. https://www.irs.gov/retirement-plans/roth-comparison-chart