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Consider Doing This Before You File Your Taxes

I can always tell that it's tax season by the increased flow of chocolate at work. I share office space with the accounting firm Burdette Smith & Bish, LLC, and extra treats help fuel these hard-working CPAs for the long hours leading up to April 15.

As you also start to think about filing taxes, I want to remind you that it's not too late to make a 2017 retirement contribution--up to $5,500, or $6,500 if you're 50 or older--to an Individual Retirement Account (IRA).
Anyone with earned income (i.e., salary or wages) is eligible to contribute to an IRA up to the annual limit (or the amount of your earned income if below the annual limit). You can make a 2017 IRA contribution up to the date that you file your 2017 taxes (with the latest date being April 17, 2018).

But I Thought I Wasn't Eligible for an IRA?

Often when people think of an IRA, they think of tax deductibility, or the ability to invest pre-tax money similar to a 401(k) plan. This is how a traditional IRA works. Higher-income wage earners may (correctly) believe that they are disqualified from enjoying the tax benefits of a traditional IRA because: 1) they or a spouse participate in an employer-sponsored retirement plan; and 2) they make too much money (see 2017 IRS income limits).

If this is your situation, consider the Roth IRA. In addition to being a useful, tax-advantaged savings vehicle, the Roth IRA offers some additional estate planning benefits.

The Roth IRA Option
Roth IRA contributions are made after taxes, and it does not matter if you already participate in an employer retirement savings plan. While you may not get a tax deduction up front, the funds in a Roth IRA grow tax-deferred and qualified withdrawals are not taxed.* This means all of the investment earnings over time are yours to keep tax free--especially good news for younger savers who have a lot of time for their investments to appreciate. But even those closer to retirement can benefit.

Unlike the traditional IRA, there is no requirement with the Roth IRA to take required minimum distributions (RMDs) starting at age 70½. If you work part time in retirement, you can also continue to fund a Roth IRA.
And if you end up not needing to use the funds yourself, you can leave them to a beneficiary--a powerful estate planning tool. While your beneficiary will be required to take distributions based on life expectancy, these will be tax free (and the rest of the inherited Roth will continue to grow tax deferred).

But wait a minute. Doesn't the Roth IRA also have income limits for eligibility? Yes, it does, but keep reading ...
Roth through the Back Door

The IRS does define income limits to qualify for a Roth IRA. But even if your adjusted gross income (AGI) is over the limit, the IRS allows a "back door" method for higher-income individuals to take advantage of the Roth IRA benefits.

It's actually quite simple. You first make an after-tax contribution to a traditional IRA, which has no income criteria for after-tax savings. Then you can immediately convert the account to a Roth IRA. Done.
Note: Be aware that if you use the back-door method to convert pre-tax contributions (or a mix of pre-tax and after-tax contributions) from a traditional IRA, you may need to pay taxes on the pre-tax portion and any earnings realized from those contributions prior to the conversion. Pre-tax funds may also be treated as income at the conversion, which can have potential implications for your tax bracket. Be sure that you understand the tax implications before deciding to do a conversion of any pre-tax contributions.

Roth IRAs Can Also Be for (Working) Kids
While you're thinking about saving for your own retirement, you may also want to think about helping a child or grandchild get a jump start on their savings. Just imagine what $5,500 invested today can turn into over 60+ years of compounded growth!
If a child has earned income (e.g., from babysitting, dog walking, or some other form of employment), you can open a custodial Roth IRA and fund it up to the total amount earned or the $5,500 limit, whichever amount is lower. You or another adult will be listed as the custodian, but the account will be in the child's name as the owner. As the custodian, you are responsible for documenting the child's income and demonstrating a reasonable wage rate (i.e., not $1,000 per hour).

If you choose to fund the Roth IRA for the child (as opposed to using his or her earned income), this is treated as a gift and the amount applies to your annual limit of $14,000 for 2017 and $15,000 for 2018.

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If you would like to make a 2017 IRA contribution, give us a call (you might want to give a heads up to your tax accountant as well). You will need to complete the contribution before you file your 2017 taxes. Be careful not to exceed the annual limit of $5,500 ($6,500 if you're over 50). The limit is per individual, and a penalty of 6% applies to excess contributions.
Now that's done, take a cue from the CPAs in my office and treat yourself with some chocolate. You deserve it.

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* Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.


Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Estes Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services. Burdette Smith & Bish, LLC is not affiliated with Raymond James or Estes Wealth Strategies.

Any opinions in this newsletter are those of Estes Wealth Strategies and John Estes and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

The information provided does not purport to be a comprehensive description of securities, markets, or other developments. This information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision, nor does it constitute a recommendation.

Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.


Estes Susan