It’s that time of year. Tax season is among us yet again, and there are a few things to be aware of before you go through this process.
I always want to make sure my clients are maxing out their yearly contributions to their qualified plans, like their Roth IRAs and traditional IRAs. If you are not 50 years of age yet, your yearly contribution limit for these accounts is $6,000; if you are older than 50, the limit is $7,000. Luckily, for 2023 contributions and onward, the limit has increased by $500 for both limit amounts. The deadline for contributions is the same as Tax Day: April 18. Though Tax Day is in April, there are millions of people who file for an extension each year. An estimated 13.56 million people filed for an extension for 2021 taxes. To file for an extension, you can submit Form 4868 to request a six-month extension.
A Roth IRA conversion can be a good way to transfer assets from individual retirement plans, or an employee plan like a 401(k), into a Roth IRA. This can be beneficial because account owners can be eligible to make tax-free withdrawals after the account has been open for five years. One thing to keep in mind when deciding to a Roth IRA conversion is that the account owner must pay income tax on the money they convert first. A Roth IRA conversion might also be a good idea for someone who believes they may be in a higher tax bracket in the future because it could help them save money on taxes now rather than later.
If you are self-employed or have a small business, it is important to know that there is an individual retirement account you can open called a Simplified Employee Pension, or a SEP. For 2022, the IRS states that contributions from an employer can’t go above 25% of an employee’s salary, or over $61,000. That limit has been raised to $66,000 for tax year 2023 and onward. Another good factor of having a SEP IRA if you work for a small business is that contributions to the plan by your employer are immediately 100% vested.
This time of year has some people anxious about their finances. Though I am no tax expert or certified public accountant, I am here to help guide you through your questions and your financial plans. I believe everyone deserves to be more educated on their financial options.
The views depicted in this material are for informational purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 and a half, may be subject to an additional 10% IRS tax penalty.
This is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax-free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawals or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 and a half or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Jason LaBarge, financial advisor and president of LaBarge Financial
7 Riggs Avenue, Severna Park, MD 21146 · 443-647-4321 www.labargefinancial.com
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