Retirement

Can I Use My Roth IRA as an Emergency Fund?

Thinking about withdrawing your Roth IRA? Maybe it’s for a new home, unexpected expenses, or you’re just curious about accessing your retirement savings. The good news is, yes, you can withdraw money from your Roth IRA—but there are some important rules and timing to consider. Let’s break it down so you can understand when and how to make the most of your Roth IRA without getting hit with penalties or taxes.

❓ Can I Withdraw or Use My Roth IRA as an Emergency Fund?

A: Yes, a qualified distribution that occurs at least 5 years after the year you made the ROTH contribution, you an take money out for either:

1️⃣ You’re over the age of 59 ½,
2️⃣ Distribution is related to your disability (defined in I.R.C. § 72)
3️⃣ Money is paid to a beneficiary or estate on or after your death, or
4️⃣ Taken for a qualified special purpose, including for a first-time homebuyer expense up to $10,000.

You can qualify as a first-time homebuyer even if you’ve owned a home in the past. As far as the Internal Revenue Service (IRS) is concerned, you’re a first-time homebuyer if, “you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse also must meet this no-ownership requirement.”

Ready to make smart moves with your retirement savings?

Before you make any Roth IRA withdrawals, let’s ensure you’re maximizing every tax benefit. Schedule a chat with us today, and we’ll guide you through your options. Your future self will thank you!

2024 Tax Tips for IRA Owners

There are plenty of opportunities—and a few pitfalls—for individual retirement account (IRA) owners. While you don’t want to fall into a tax trap, you should definitely take advantage of these IRA tax tips and smart strategies available for 2024.

Individual Retirement Account Varieties: Traditional and Roth IRAs come in two varieties: Traditional and Roth. The Traditional IRA generally provides a tax deduction for contributions, tax-deferred growth, and taxable distributions upon withdrawal. On the other hand, Roth IRAs don’t offer an immediate tax deduction, but your distributions in retirement are tax-free.

This leaves IRA owners with an important decision, one that has long-term consequences. If you can contribute without needing the tax deduction, a Roth IRA might be the better choice in many cases. However, be aware that high-income earners face restrictions on contributions to both types of IRAs.

💡 Potential Pitfalls with IRAs

Here are some common pitfalls that can trip up IRA owners:

📌 Early withdrawals – The government designed IRAs as retirement savings vehicles, so tapping into your account before age 59½ often comes with a 10% early withdrawal penalty on the taxable amount. However, there are certain exceptions to this penalty.
📌 Excess contributions – The tax code sets annual limits for IRA contributions. Exceeding those limits results in a 6% excise tax penalty on the excess amount, which continues until the over-contribution is corrected.
📌 Multiple rollovers – While you can take possession of IRA funds for up to 60 days during a rollover, only one rollover is allowed per 12-month period. Exceeding this results in the additional rollover being treated as a taxable distribution—and an excess contribution if it’s redeposited into another IRA.
📌 No Traditional IRA contributions after age 70½ – Once you hit age 70½, you’re no longer allowed to contribute to a Traditional IRA, though Roth IRAs don’t have this restriction.
📌 Failing to take a required minimum distribution (RMD) – Traditional IRA owners must begin taking RMDs at age 73 (previously 70½). If you fail to do so, you’ll face a steep penalty equal to 50% of the RMD amount. Roth IRAs are exempt from RMDs while the account owner is alive.
📌 Late contributions – You can still make IRA contributions for the prior year until the tax filing deadline (April 15). This is helpful if you’re unsure whether you could afford a contribution before the year ended.
📌 Backdoor Roth IRA – High-income earners may not be able to contribute directly to a Roth IRA, but there’s a workaround known as the backdoor Roth. This involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. Be cautious of the tax implications, as the IRS treats all IRAs as one when calculating conversion taxes.

💸Saver’s Credit

For low- to moderate-income taxpayers, the Saver’s Credit can help offset the first \$2,000 contributed to an IRA or other retirement accounts. This credit is available on top of any other tax benefits from contributing, but it has limited availability. Reach out to learn more about whether you qualify.

📩 IRA-to-Charity Direct Transfers

If you’re 70½ or older, you’re required to take RMDs from your IRA. You can take advantage of a special provision that allows direct transfers of up to $100,000 per year from your IRA to a qualified charity. This not only satisfies your RMD but can also lower your taxable income, helping you benefit even if you don’t itemize deductions.

Maximize Your IRA Tax Benefits

IRA owners face plenty of decisions and potential pitfalls, but with the right guidance, you can turn these to your advantage. Whether you’re planning for your RMDs, looking into a backdoor Roth IRA strategy, or simply trying to avoid common missteps, having a proactive approach to your IRA can save you a lot of tax headaches.

Ready to take control of your IRA tax strategy? Reach out today, and let’s plan your path to a secure retirement. We’re here to help you navigate the complexities with ease.

Retirement accounts: Which is right for you?

Did you know one of the smartest ways to reduce your taxable income is by investing in your retirement? Retirement savings not only prepare you for the future but can also help you keep more of your hard-earned money today.

For business owners, contributing to your retirement plan is a double win – it helps reduce taxable income and builds personal wealth. However, if your business employs W2 staff, keep in mind that certain IRS/ERISA rules may affect your ability to contribute.

Fortunately, if you qualify, there are several retirement plans that can offer significant tax benefits:

📌 SEP IRA

If you’re self-employed, you can contribute up to 25% of your earnings, with a maximum of $66,000 for 2024. SEP IRAs are flexible, and you don’t need to worry about a year-end deadline.

You can set one up just before filing your taxes for the previous year, making it a great last-minute tax-saving move.

📌 Solo 401(k)

If you’re the only employee in your business, the Solo 401(k) is a perfect choice. Contributions can be made until December 31, and if you’ve elected S-Corp status, be sure to run the contributions through payroll.

The beauty of a Solo 401(k) is that it allows you to contribute up to \$23,000 (for 2024) into a Roth 401(k) as an employee deferral – perfect for those wanting to maximize Roth contributions. Plus, your business can match up to 100% of the employee deferral amount and contribute profit-sharing, totaling up to 25% of your salary. If your spouse is involved in the business, you can double the household contributions, creating additional tax savings while padding your retirement.

📌 Defined-Benefit Pension Plan

For those needing huge tax savings, the defined-benefit pension plan, also known as a cash-balance plan, is king. Combine it with a 401(k) profit-sharing plan, and your business could sock away a few hundred thousand dollars per year. However, defined benefit pension plans are the most complicated of the business retirement plans to set up because the plan design is complex, time-consuming, has costs involved, and generally requires a five-year contribution commitment. A defined benefit plan is worth setting up for higher-income business owners willing and able to max out contributions to both their 401(k) and defined benefit plans, as contribution limits can be in the six figures annually depending on the business owner’s age and W2 income.

Ready to supercharge your retirement savings?

Whether you’re self-employed or running a business, choosing the right retirement accounts is essential. Don’t let tax-saving opportunities slip away – talk to us today and see how we can help you save more for retirement while lowering your tax bill this year.

You deserve to retire with peace of mind, and we’re here to guide you every step of the way.

Take Advantage of Roth 401(k) IRA Plans

Contributing to a Roth 401(k) or Roth IRA is a sound investment option. Roth accounts allow for retirement savings that provide significant, long-term tax advantages. Before committing to a retirement option, weigh the pros and cons and consider what is right for your particular financial goals.

The main difference between a Roth and traditional retirement plan lies in when you pay taxes on the income contributed to your account. With a traditional 401(k)/IRA, you contribute pre-tax dollars now and pay taxes when you withdraw the income later. A Roth plan allows you to do the opposite. Your current contributions are made with after-tax dollars. Then there are no tax implications when you make withdrawals during retirement.

Benefits of Roth Plans vs. Taxable Accounts

When you choose a Roth plan instead of a standard taxable 401(k)/IRA, the real value is in looking at how the plan is used. You will get the same investment options with a Roth or standard plan, but a Roth 401(k)/IRA typically provides liability protection. While taxable accounts are not exempt from bankruptcy protection and lawsuits, Roth 401(k)/IRA accounts are generally protected.

There is also no need for tax reporting, since Roth plans do not require annual reporting. With other taxable accounts, you need to pay income tax annually. A Roth plan is handled differently. Both accumulated income and qualified distributions are tax free.

Benefits of Roth Plans vs. Tax-Deferred Retirement Accounts

With a Roth 401(k)/IRA, you experience greater tax savings than you would with a tax-deferred retirement account. The long-term level of tax-free growth makes these plans particularly popular, since paying taxes on their proceeds in the future is not required. If they have strong growth, it will basically set you up to receive tax-free money in retirement.

There is also no age limit to make Roth contributions, as long as you are still earning income. Also, you will not have to take required minimum distributions. Roth plans can continue to grow if the owner of the plan does not want to withdraw money.

Benefits of Roth Plans for Estate Planning

For estate planning, the Roth 401(k)/IRA has some notable benefits. With tax-free distributions, there is no income tax incurred on a Roth plan’s distributions. Additionally, the Roth 401(k)/IRA offers an opportunity for tax-free growth for beneficiaries, who only have to take minimum required distributions. They can leave the lump sum to grow, if they wish. Bypassing probate is also a valuable benefit, as most Roth plans simply pass to the beneficiary.

Backdoor Roth IRA Option

If your annual income is above the IRS Roth cap, you can plan for retirement using a “backdoor” Roth IRA. This unofficial, IRS-approved approach can be complicated but well worth the effort. There are a few ways to contribute to a backdoor Roth IRA, including:

Contributing to an established IRA and rolling the funds to a Roth IRA account. Or, passing existing money from a traditional IRA to a Roth account.
Converting your entire traditional IRA account into a Roth IRA account.
Making after-tax contributions to a traditional 401(k). Then rolling it over to a Roth IRA.

Going with one of those methods doesn’t mean you’re exempt from paying taxes—you will still owe taxes on the entire amount transferred to your Roth IRA.

Choosing a Roth 401(k)/IRA option makes sense, especially in the long term. With a Roth account, you can maximize your savings and capitalize on a retirement strategy that gives you a strong financial future.

Insogna CPA is experienced and well-equipped to deliver a seamless retirement planning experience to its clients. For more information on building wealth and creating a comfortable future for yourself, contact our team of licensed CPAs.

Can I take money from my ROTH IRA?

A: Yes, a qualified distribution that occurs at least 5 years after the year you made the ROTH contribution, you an take money out for either:

You’re over the age of 59 ½,
Distribution is related to your disability (defined in I.R.C. § 72)
Money is paid to a beneficiary or estate on or after your death, or
Taken for a qualified special purpose, including for a first-time homebuyer expense up to $10,000

A. You can qualify as a first-time homebuyer even if you’ve owned a home in the past. As far as the Internal Revenue Service (IRS) is concerned, you’re a first-time homebuyer if, “you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse also must meet this no-ownership requirement.”

Making Two IRA Rollovers in One Year Can Be Costly

Article Highlights:

One Rollover per Year Rule
Exceptions
Tax Consequences
Disqualified Rollover
Early Withdrawal Penalty

Tax law permits you to take a distribution from your IRA account, and as long as you return the distribution to your IRA within 60 days, there are no tax ramifications. However, many taxpayers overlook that you are only allowed to do that once in a 12-month period, and violating this rule can have some nasty and unexpected tax ramifications.

The one-year period is measured based on the date a distribution is received. If the second distribution is received before the same date one year later, it is a disqualified rollover.

Example – Jack takes a distribution from his IRA on June 30 of year one and subsequently rolls over the distribution (puts the funds back into the IRA) within the 60-day rollover period. Jack must wait until June 30 of year two before another distribution is eligible for a rollover. Any additional distributions taken during the one-year waiting period would be taxable.

Example – A taxpayer received a distribution from his IRA with Chase bank in February, which he immediately rolled into a new IRA with Wells Fargo. Then, in May, he took a distribution from the Wells Fargo IRA and rolled it back into the IRA at Wells within 60 days. Even though he rolled the exact amount back into the same institution within 60 days, the distribution from Chase had started the running of the one-year waiting period. Thus, his second distribution was in violation of the one-year waiting period and was a taxable distribution. The redeposit of what he thought was a rollover was actually a contribution to the IRA.

Like everything taxes, there are exceptions to the one-year rule, including the following:

Direct Transfers – As long as IRA funds are transferred directly between trustees, the transaction is not considered a rollover. A taxpayer can make as many direct transfers in a year as he or she wants; in fact, utilizing direct transfers is the preferred way to move funds from one IRA to another because it eliminates certain tax-return reporting issues.

Roth Conversions – Traditional IRA to Roth IRA conversions are not considered rollovers for purposes of the one-year rule.
Distributions to and from Qualified Plans – Since the one-year rule only applies to IRA-to-IRA rollovers, rollovers to and from other types of retirement plans are not governed by the one-year rule. However, SEPS and SIMPLE plans are treated as an IRA for purposes of the one-year waiting period.
Failed Financial Institutions – An IRA distribution made from a failed financial institution by the Federal Deposit Insurance Corporation is generally disregarded for purposes of applying the one-rollover-per-year limitation.

Tax Consequences – When the one-year rule is violated, any distribution after the first made within the one-year waiting period will not be treated as a rollover, with the following tax consequences:

Traditional IRA – In the case of a traditional IRA, the entire distribution will be taxable, and if the taxpayer is under age 59½ at the time of the distribution, the 10% early distribution penalty will apply to the taxable portion.
Roth IRA – In the case of a Roth IRA that is a:o Non-Qualified Distribution – A non-qualified distribution is one where the Roth IRA has not met the five-year aging requirements. Five-year aging generally means the Roth IRA has been in existence for a continuous period of five years, although the first and last years do not need to be full years. A distribution from a Roth IRA that has not met the five-year aging requirements would be a non-qualified distribution, and the earnings would be taxable. Of course, the original contributions are never taxable based on a specific distribution sequence: contributions, then conversions from traditional IRAs or rollovers from qualified plans (first the part that was taxed when the funds went into the Roth and then the nontaxable part), and lastly earnings. A 10% early distribution penalty applies to any amount attributable to the part of the conversion or rollover amount that had to be included in income at the time of the conversion or rollover (the recapture amount).

Qualified Distribution – No tax or penalty applies if a distribution from a Roth IRA is a “qualified distribution,” which is a distribution made after the five-year aging period is met if the taxpayer:

– Is age 59½ or older,
– Is disabled,
– Is deceased, or
– Qualifies for the first-time homebuyer exception (maximum $10,000).

Disqualified Rollover – An additional problem arises because the disqualified rollover amount will be treated as an IRA contribution, subject to the normal annual contribution and AGI limitations. Tax law includes a penalty when someone contributes more than is allowed (excess contribution). Thus, an excess contribution (except for on the year of the distribution) would be subject, annually, to a 6% excess contribution penalty.

There are a couple of possible remedies available for a disqualified rollover:

Corrective Distribution – The excess contribution and the interest attributable to it can be withdrawn by the extended due date of the return for the year the distribution was made, thus undoing the rollover. The distribution that resulted in a disqualified rollover will be subject to tax, as outlined earlier, depending upon whether it was a traditional or Roth IRA. The earnings attributable to withdrawn funds are taxable. However, the annual 6% excess contribution penalty is avoided.
Contributions in Future Years – The excess contribution could be left in the IRA and can be treated as an IRA contribution for a later year. However, until the excess contribution is fully absorbed as eligible future contributions, the annual 6% excess contribution penalty will apply.

Early Withdrawal Penalty – If the disallowed rollover occurs before reaching age 59½, an early distribution penalty of 10% of the taxable amount will apply and is in addition to the normal tax.

Although there are a number of exceptions to the under-age-59½ early distribution penalty, the following might be used to avoid or mitigate an early withdrawal penalty associated with a disqualified rollover:

Contributions Returned before the Due Date – If the taxpayer already made an IRA contribution for the tax year, the amount of that contribution can be withdrawn tax-free by the extended due date of the tax return, provided:

1. The taxpayer did not take a deduction for the contributions withdrawn, and
2. The taxpayer also withdraws any interest or other income earned on the contributions, and
3. The taxpayer includes in income, for the year during which the withdrawal was made, any earnings on the contributions withdrawn.

Medical Insurance Exception – The amount that is exempt from the penalty is the amount the taxpayer paid during the year for medical insurance for the taxpayer and his or her spouse and dependents. To qualify for this exception, the taxpayer must have:

1. Lost his/her job,
2. Received unemployment compensation for 12 consecutive weeks,
3. Made IRA withdrawals during the year he/she received unemployment or in the following year, and
4. Made the withdrawals no later than 60 days after being reemployed.

Higher Education Expense Exception – The part not subject to the penalty is generally the amount that is not more than the qualified higher education expenses for the taxpayer and his or her spouse, children, or grandchildren for the year at an eligible educational institution.

Bottom line, make sure you don’t have more than one IRA rollover in a year. However, if you inadvertently do, please call this office as soon as you realize the error so we can determine what actions can be taken to mitigate the resulting taxes and penalties.