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How IRA Owners Can Prepare for Tax Day 2019

An Alarm Clock

  |  By Justin Farian, CISP®

The books have closed on 2018, and we’ve entered a New Year. But that doesn’t mean there aren’t steps that IRA owners can still take to potentially limit their tax bill and prepare for 2019 Tax Day.

Here are some tips and actions to consider as Tax Day 2019 approaches:

  1. Consider opening a Traditional IRA: If you aren’t an IRA owner yet, check with your tax advisor to see if becoming one might help you save on taxes. If you are eligible to open a Traditional IRA and you make a contribution to your new retirement account by Tax Day, your contribution may count as a tax deduction and lower your taxable income.
  2. Take your Required Minimum Distribution (RMD): Investors who own a traditional, SIMPLE or SEP IRA are required to remove a portion of assets from their IRAs each year, and this is referred to as a Required Minimum Distribution (RMD). If you turned 70½ in 2018, you need to take your first RMD by April 1, 2019. In subsequent years, your RMDs must be taken by December 31.

There may be significant penalties for not taking your IRA RMD during the right timeframe. If you fail to take an RMD or you withdraw less than the required amount, you may incur a 50% excess accumulation tax. That is in addition to the regular income tax you owe on the distribution.

  1. Keep your IRA assets in good standing: It's important to ensure your IRA assets are in good standing to avoid any potential unexpected taxable events. For instance, if your custodian shows that a note in your account has passed its maturity date, they may require you to distribute the note, which could create a taxable event. The IRS also requires that IRA assets are valued on an annual basis, even if the value of the asset hasn't changed in the past year.*

Make sure your IRA custodian has your most recent contact information and can always quickly reach you if needed.

  1. Establish a Solo 401(k) plan for your business: This step won’t help you save on taxes by Tax Day 2019, but, if you are a sole proprietor, a business formed as a partnership, or small business owner without employees eligible to participate in your company retirement account, it may help you cut your tax bill for Tax Day 2020. Solo 401(k)s are similar to 401(k) plans for individuals that allow you to contribute funds on a pre-tax basis and benefit from growing those funds tax-deferred.

The deadline to establish a Solo 401(k) plan is December 31, 2019, if you want to make a 2019 employee deferral contribution (employer contributions may be made up to company’s tax filing deadline – plus extensions).

  1. Find out if a Roth IRA conversion is right for you: Converting from a Traditional IRA to a Roth IRA will not lower your taxes by Tax Day 2019, but it may help IRA owners who are looking to reduce their future tax burden.

In a Traditional IRA, contributions are typically made with pre-tax dollars, but you may pay taxes on future withdrawals. And, as we noted above, Traditional IRAs are subject to required minimum distributions (RMDs). But in a Roth IRA, contributions are made with post-tax dollars while future qualified withdrawals may be tax-free. Also, Roth IRAs aren't subject to RMDs. Given this, some Traditional IRA investors choose to convert to a Roth IRA to save on the tax bill they may face in retirement.

If you choose to convert to a Roth, you will pay taxes on the amount you convert, but your earnings may grow tax-free. Before making a Roth conversion, you should consult with a tax professional who can walk you through the pros and cons of the decision to convert. 

When it comes to which of these tips or actions you decide to address to save on taxes, it is best to consult with a tax or financial professional who can help you determine what makes the most sense for your financial future.

*Please refer to IRS instructions in IRS Form 5498 for more information.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.