WHEN REGULAR IS DEFINITELY BETTER THAN ROTH
Andrew D. Schwartz, CPA
winter, when my staff and I meet with our clients to review their tax
information, we get this question a lot, "Should I go with
the Roth version of my employer's 401(k) or 403(b) plan, or
should I stick with the traditional version?"
Taxpayers first had the
option of contributing money to a Roth account back in 1998. Remember,
when you contribute money to a Roth account, you elect to forego a current year
tax break in exchange for a promise from the government that distributions taken
from the Roth account down the road won't ever be taxed.
Through 2005, the only
access you had to these tax-free accounts was to contribute to a Roth IRA.
Many middle-income and high-income taxpayers never had the opportunity to
contribute to a Roth IRA, however, since their incomes exceeded the relatively
modest threshold based on their filing status. (The Roth IRA threshold for
2012 is $125k for single individuals and $183k for married couples.)
Congress liked that
people were giving up a current year tax break by opting to go with a Roth IRA instead
of to a Traditional IRA, so decided to expand this opportunity to 401(k) plans
and 403(b) plans. As we wrote in our
October 2005 Newsletter in an
article called The New Roth 401k and 403b, employers could begin to offer the
Roth version of these plans as of January 1, 2006.
What's the difference
between the Traditional and Roth versions of these popular retirement savings
plans? With the traditional 401(k) or 403(b) plan, the salary deferrals
you make reduce your taxable salary and grow tax deferred. You will then
owe income taxes on distributions taken from these accounts when you retire.
Let's say you earn
$200k, and you max out your 403(b) salary deferrals for $17k during the year. In this
case, your W-2 will report taxable wages of $183k in Box 1. Assuming you
are in the 33% federal tax bracket, the $17k you contribute into your 403(b)
plan saves you $6,667 in federal income taxes. That's a pretty good tax
break I would say.
What happens if you
instead decide to go with the Roth version of the 403(b) plan for your salary
deferrals? When you contribute money to a Roth account, you forego a
current year tax-break. Your W-2, therefore, will report the full $200k as
taxable wages in Box 1, instead of $183k that would be reported had you gone with the
Traditional 403b. The benefit of giving up this tax break is the tax-free
treatment of the compounded growth on the $17k of salary deferrals. In other
words, you won't owe any federal income taxes on the distributions taken from
this account when you retire.
When my clients ask me
for advice about the Roth 401k or 403b plan, I immediately look at Box 12 of
forms to see how much they contributed in salary deferrals during the prior
year. According to the instructions of the W-2 form, here are the relevant
codes that show up in Box 12 of the W-2 form:
Code D -
Elective deferrals to a section 401(k) cash or deferred arrangement. Also
includes deferrals under a SIMPLE retirement account that is part of a
section 401(k) arrangement.
Code E -
Elective deferrals under a section 403(b) salary reduction agreement
Code AA - Designated Roth contributions under a section 401(k) plan
Code BB - Designated Roth contributions under a section 403(b) plan
What I'm looking to see
is whether this client is maxing out their salary deferrals during the
year. If a client is contributing to the Roth version of the 401k and 403b
plan, and is falling short of the $17k max ($22.5k max if 50 or older), I
strongly suggest that they consider contributing only to the Traditional version
until they are able to max out their contributions.
In my opinion, socking
away as much money as possible each year into these tax-advantaged, creditor
protected accounts takes priority over worrying about saving taxes later.
Remember, if money is tight, you have the choice of contributing $10,333 into a
Roth 401k account, or taking advantage of the $6,667 tax break offered by
traditional 401k plans and putting away
the max of $17k into the Traditional 401k account.
I think a financial
planning twist on Alfred Lord Tennyson's poem about lost love sums this up best,
"Tis better to save and be taxed than never to have saved at all."
REFINANCE YOUR MORTGAGE ON A DEVALUED HOME THANKS TO HARP 2.0
at LYC Mortgage LLC
October 24, 2011, the Federal Housing Agency (FHA), together
with Freddie Mac and Fannie Mae, issued a press release
announcing a series of changes to the Home Affordable Refinance
Program (HARP). This program is designed for homeowners that
are current on their mortgage but have been unable to refinance
because of their reduced home value. Finally, this program
provides low risk borrowers the opportunity to capitalize on
today's record low mortgage rates.
known as HARP 2.0, this new program updates and removes many of
the previous regulations which kept good borrowers at bay. With
HARP 2.0, homeowners who lost value in their home (pushing their
loan-to-values over 80%) or who previously were obstructed from
refinancing because of mortgage-insurance coverage requirements
or condominium project approvals are now eligible for HARP
restrictions still surround HARP 2.0, this is likely the only
opportunity millions of homeowners living in devalued homes,
with good credit and a solid payment history, have at
refinancing their original mortgages. Also, with mortgage rates
making history in the past month for shattering all-time lows,
timing could not be more perfect. Unfortunately, this program
will only be around for a limited time as it’s scheduled to
expire in 2013.
To qualify for this program,
general eligibility requirements require that the current mortgage be a
conventional first lien owned or securitized by Freddie Mac or Fannie Mae and
has been owned by them prior to May 31, 2009. That would mean that your
mortgage had to be obtained prior to that date to qualify.
If this situation applies to you, the first step is to determine if your
mortgage is owned or securitized by Freddie Mac or Fannie Mae . If you are
unsure, you can check both Fannie Mae and Freddie Mac’s websites or you can call
their toll-free number for confirmation.
A short HARP
eligibly questionnaire is available by contacting
by email or phone (781-303-2620).
If your home has decreased in value, this might be your only option to refinance with mortgages at
today's historically low
rates. Don’t miss out.
This article was provided by Don Clark at LYC Mortgage LLC, headquartered in
Wellesley, MA. To contact Don Clark directly, please call 781-303-2620 or email
email@example.com. You should also
check out LYC's
licenses before contacting them.
EMPLOYEE VERSUS INDEPENDENT CONTRACTOR
Wondering if you should be
classified as an employee or an independent contractor? Or, do you have
someone working for you, and you're not sure how that person should be
classified? Well, believe it or not, the IRS has a form for that.
According to our friends at the IRS:
whether the person providing service is an employee or an independent
contractor, all information that provides evidence of the degree of control and
independence must be considered.
provide evidence of the degree of control and independence fall into three
- Does the company control or have the right to control what
the worker does and how the worker does his or her job?
- Are the business aspects of the worker’s job controlled by
the payer? (these include things like how worker is paid, whether expenses
are reimbursed, who provides tools/supplies, etc.)
Type of Relationship - Are there written contracts or employee type benefits
(i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship
continue and is the work performed a key aspect of the business?
weigh all these factors when determining whether a worker is an employee or
independent contractor. Some factors may indicate that the worker is an
employee, while other factors indicate that the worker is an independent
contractor. There is no “magic” or set number of factors that “makes” the worker
an employee or an independent contractor, and no one factor stands alone in
making this determination. Also, factors which are relevant in one situation may
not be relevant in another.
The keys are to
look at the entire relationship, consider the degree or extent of the right to
direct and control, and finally, to document each of the factors used in coming
up with the determination.
the three categories of evidence, if you are still unsure if a worker is an
employee or an independent contractor, the business can file
Determination of Worker Status for Purposes of Federal Employment Taxes and
Income Tax Withholding (PDF) with the IRS. The form may be filed by either
the business or the worker. The IRS will review the facts and circumstances and
officially determine the worker’s status.
Be aware that
it can take up to six months to get a determination, but a business that
continually hires the same types of workers to perform particular services may
want to consider filing the Form
Form SS-8 (PDF).
Plan B: Complete For Your
Instead of sending this form to the
IRS and then waiting six months to hear back, it's not uncommon for people to
complete the Form SS-8 as a way to facilitate a conversation between the
employer and the worker, and help both parties decide how to most
appropriately classify the worker.
If you feel that you should have
been paid as an employee versus a contractor, there is a second option available
to you. You can complete and attach a
to your federal tax return. You should be aware that submitting a Form
8919 with your taxes will most likely cause the IRS to contact your employer.
According to the instructions:
Purpose of form. Use Form 8919 to figure and report your share of the
uncollected social security and Medicare taxes due on your compensation if you
were an employee but were treated as an independent contractor by your employer.
By filing this form, your social security and Medicare taxes will be credited to
your social security record. For an explanation of the difference between an
independent contractor and an employee, see
Independent Contractor or Employee.
2011 & 2012 TAX FACTS
- For 2011, the standard deduction for a single individual is $5,800 and
for a married couple is $11,600. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
- For 2011, the personal exemption is $3,700.
Individuals will claim a personal deduction for themselves, their spouse, and
- The maximum earnings subject to social security taxes is $110,100
for 2012, up from $106,800 in 2011.
- The standard mileage rate is $.555 per business mile as of
July 1, 2011, up from $.51 per mile for the first six months of 2011.
- The maximum annual contribution into a 401(k) plan or a
403(b) plan is $17,000 in 2012, up from $16,500 in 2011. And if you'll be 50 or
older by December 31st, you can contribute an extra $5,500 into your 401(k) or
403(b) account that year.
- The maximum annual contribution to your IRA is $5,000 for 2012. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2013 to make your 2012 IRA