Grossbach Zaino & Associates, CPA's, PC

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Withdrawing Money from Your Retirement Accounts

You’ve worked, you’ve saved, and now you’re ready to start enjoying some of the money you’ve set aside for your retirement years. Planning ahead can help you make the most of your savings.

Weigh Your Options

If you participate in a traditional pension plan, you’ll generally have at least two payment choices: to collect benefits over your lifetime only or to collect a reduced monthly “joint and survivor” benefit for your life and the life of your spouse. Make this choice carefully.

While the simple lifetime benefit pays a larger sum each month, benefits stop at your death, potentially leaving your surviving spouse with insufficient income. With either option, the pension benefits you receive generally will have to be included in your income for tax purposes, so you will want to base your planning on projections of your income net of taxes.

401(k) plans and most other retirement savings plans sponsored by employers typically allow participants to withdraw their vested account balances in a lump sum at retirement. Your plan may provide additional payout options as well. As with a traditional pension, the money distributed from the plan is taxable to you in the year you receive it, except to the extent the distribution is attributable to after-tax contributions or is a qualified distribution from a designated Roth 401(k), 403(b), or 457 account.

Consider a Rollover

You can continue to defer taxes on an eligible distribution from a tax-deferred retirement savings plan by rolling the distribution over into an individual retirement account (IRA). A properly executed IRA rollover delays taxes on your savings and on IRA investment earnings until you take money out of the IRA.

Usually, the longer you can defer taxes, the better. In certain situations, however, it can make more sense to receive a plan distribution, even though you’ll have to pay taxes on the distribution that year.

For example, if a lump sum distribution will include appreciated company stock, taking the distribution may be your best alternative because you’ll be taxed only on the stock’s cost, not its appreciated value. Then, if you realize a gain on a subsequent sale of the stock, you’ll pay taxes on the gain at a favorable capital gains tax rate. Rolling the stock into an IRA means you’ll lose the benefit of the lower capital gains rate because all IRA distributions are taxed at your ordinary tax rate.

Take All Required Distributions

After you reach age 70½, you will have to begin taking annual required minimum distributions (RMDs) from your IRA. (This rule does not apply to a Roth IRA.) If you are retired and still have money in an employer-sponsored qualified plan when you reach age 70½, you’ll also have to start taking annual minimum distributions from that plan. If you continue to work for the plan sponsor after age 70½, minimum distributions do not have to be taken while you are still employed unless you are a 5% owner.

Failure to take a required minimum distribution can be costly. The IRS can assess a 50% excise tax on the amount of the shortfall. So, for example, a missed distribution of $10,000 could cost a forgetful taxpayer a $5,000 penalty.

Taxes may play a significant role in your retirement income planning. We’d be happy to review your situation with you.

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How Mutual Fund Investments Are Taxed

Do you invest in mutual funds? Unless you hold your investment in a tax-deferred account, you’ll want to consider taxes when you look at a fund’s returns. After all, it’s not what your fund earns but what you keep that counts.


Distributions of Fund Income

Mutual funds are required to distribute almost all of their income — including realized capital gains, dividends, and interest — to their shareholders each year. The tax bite from these distributions reduces the fund’s total return to the investor.


Capital gains. The tax rate on long-term capital gains is capped at 20% for individual investors in the 39.6% tax bracket and 15% for most other investors.* However, if a fund sells a security at a gain before meeting the more-than-one-year holding period for long-term capital gain treatment, the gain is considered short term and is taxable to you when distributed at your regular tax rate. Regular individual tax rates range as high as 39.6%.


Dividends. The tax rates on qualifying dividends mirror the long-term capital gains rates. These rates apply to qualifying dividends a mutual fund receives on stocks in its portfolio and distributes to shareholders. Dividends that don’t qualify for a favorable rate are taxable to you at your regular tax rate.

Interest. Distributions of interest a fund earns on bonds, certificates of deposit, and other interest-bearing investments are generally taxable to you at your regular tax rate. However, interest you receive from a municipal bond fund is generally exempt from federal income taxes (and possible state taxes as well).


Note that a 3.8% investment income surtax may also apply to your capital gains, dividends, and interest from mutual fund investments if your income exceeds a tax law threshold. And you must pay taxes on taxable fund distributions whether or not you reinvest the distributions in additional shares of the fund.


Sales of Fund Shares

When you sell shares in a mutual fund, you’ll typically have a gain or loss to report on your tax return. If the securities in the fund’s portfolio have gone up in value during the period the fund has owned them, this appreciation is reflected in the share price. Similarly, if the value of the fund’s holdings has dropped, the share price will reflect the loss in value.


Your gain or loss on a sale of fund shares is figured by comparing the amount you realize on the sale to your cost basis in the shares you sold. If you sell all the shares you own, figuring your taxes is easy. You just add up all the investments you’ve made, including reinvested dividends and other distributions, and compare that amount to the net sale proceeds to determine whether you have a gain or loss. However, if you don’t sell all your shares at once, you must use an IRS-approved method for figuring your cost basis.


Taxes can have a significant effect on your mutual fund returns. Be sure to consider them in evaluating your investments.



* A 0% capital gains rate applies to long-term gains that would otherwise be taxed at 10% or 15% if it were ordinary income.

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Workin’ for a Livin’

Tax breaks can be a boon to the self-employed. If you own your own business — or are thinking about it — here are some tax deductions you may be eligible to claim.


Self-employment (SE) tax. When you’re self-employed, you have to pay SE taxes on your earnings instead of the Social Security and Medicare taxes that employees and employers pay. You’ll be able to deduct a portion of your SE taxes.


Health insurance. If you’re not eligible for coverage under a plan offered by your spouse’s employer, you can deduct the costs of health, dental, and long-term care insurance premiums paid for yourself, your spouse, and your dependent children. (Requirements apply.)


Office at home. You can deduct a percentage (usually based on square footage) of your mortgage or rent, utilities, property taxes, homeowners insurance, and home maintenance costs. Alternatively, you may use the “safe harbor” method, which allows a deduction of $5 per square foot (up to 300 square feet). But be careful — you must use the space regularly and exclusively for business to claim the deduction.


Thinking about retirement. Deductions for contributions to a tax-deferred retirement plan, such as a SEP-IRA, SIMPLE IRA, Keogh plan, or solo 401(k) plan, will reduce your current tax bill.


Talk and surf. You can deduct phone, fax, and Internet expenses directly related to your business.


Vehicle use. The cost of driving a car for business is deductible. You can use either the IRS standard mileage rate or your actual expenses to compute your deduction.


Interest. Interest on business loans and business purchases charged to a credit card is deductible.


Food, fun, and travel. You can generally deduct 50% of the cost of business meals and entertainment if you meet certain tax law requirements. Other business travel expenses, such as lodging, are 100% deductible.


Make sure you keep good records, and follow the advice of your tax advisor.

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Withdrawing from Your IRA Without Penalty

You didn’t think you’d have a problem keeping your savings in your traditional IRA until you reached age 59½. Unfortunately, though, you need to take money out of your account now. You’ll have to pay income taxes on your early withdrawal, but what about the additional 10% penalty tax? Can it be avoided?

The federal tax law does let taxpayers off the 10% penalty hook in certain situations.

  • Higher education. You may withdraw money from your IRA without penalty for the payment of tuition and other eligible higher education expenses. The student can be you, your spouse, your child, or your grandchild.
  • Withdrawals for the payment of medical expenses in excess of 10% of your adjusted gross income* may be penalty free (other restrictions apply), as may withdrawals for the payment of medical insurance premiums after you’ve received unemployment compensation for at least 12 weeks.
  • Withdrawals on account of your disability (inability to engage in any substantial gainful activity) are penalty free.
  • “First-time” home buyer. You may withdraw up to $10,000 (lifetime cap) for the acquisition of a first home. The buyer can be you, your spouse, your child, or your grandchild, and the term “first” is interpreted loosely — as long as two years have elapsed since the buyer (and spouse) last owned a principal residence, the new home is considered a first home.
  • If you are a reservist ordered or called to active duty after September 11, 2001, withdrawals during the period beginning on the date of the order or call to active duty and ending at the close of your active duty period may be penalty free.
  • IRS levy. The penalty doesn’t apply to withdrawals on account of an IRS tax levy on your IRA.
  • Periodic payments. Taking a series of substantially equal periodic (at least annual) payments based on life expectancy will avoid the penalty.



* 7.5% of adjusted gross income if age 65 or over.