Why aren’t you using your Roth 401(k)?

Robert Powell for MarketWatch writes:  Slightly less than 9% of workers who have an employer-sponsored Roth 401(k) plan at contributing money to that plan, according to a study published by the National Bureau of Economic Research, “Who Uses the Roth 401(k), and How Do They Use It?”

What’s more, Roth participation is more than twice as high among 401(k) participants who were hired after the Roth 401(k) was introduced in 2006 rather than among 401(k) participants who were hired before the Roth introduction, according to the authors of the study, John Beshears, James Choi, David Laibson and Brigitte Madrian.

By way of background, the Roth 401(k) is a retirement savings plan that represents a combination of features of the Roth IRA and a traditional 401(k) plan. This employer-sponsored investment savings account is funded with after-tax money, and after the investor reaches age 59½, withdrawals of any money from the account (including investment gains) are tax-free, according to Investopedia.

According to the study, Internal Revenue Service regulations stipulate that the combined before-tax plus Roth contributions in a calendar year cannot exceed a certain limit that is adjusted each year. For people younger than 50, this limit for 2013 is $17,500 in 2013; for workers 50 and older the limit is $23,000.

One reason why so few workers are contributing to Roth 401(k) has to do with the nature of humans, according to the study. “In essence, once an employee joins a 401(k) she becomes passive/inattentive, thereby reducing the likelihood of reacting to the introduction of a new Roth option,” the authors wrote. Read the paper.

So given that sort of inertia, and given the results of their study, we asked the authors how workers might approach the question of when and how to use a Roth 401(k). Here’s what they had to say.

Deciding whether to save in a Roth vs. a regular 401(k) savings account is not necessarily a straightforward decision because one type of account is not necessarily better than the other, said Madrian, a professor at Harvard Kennedy School.

“The primary difference between the two types of accounts is when you pay taxes,” she said. “With a Roth, you pay taxes on the income you save today but pay no taxes when you take money out of the account in retirement. With a regular 401(k), you pay no taxes on the income you save today and but you do pay taxes on the money you take out of the account in retirement.”

According to Madrian, the Roth is a more attractive savings vehicle if you think your tax rate is lower today than it will be when you retire. And the regular or traditional 401(k) is a more attractive savings vehicle if you think your tax rate is higher today than it will be in retirement, she said.

So what factors might sway you into preferring one vs. the other?

When to use a Roth 401(k)

“If you aren’t paying any federal income tax, you are not getting any tax benefit from saving in a regular 401(k),” said Madrian. “For you, a Roth 401(k) is a no-brainer.”

According to Madrian, employees who are likely to fall into this category: young employees who are just starting out and expect their income to grow over time, employees whose income is temporarily low perhaps due to an unemployment spell during the calendar year, and employees with a large number of exemptions and deductions that are unlikely to persist into retirement (for example, individuals with a lot of children, or a big mortgage).

When to use a traditional 401(k)

If, however, your tax rate is likely to fall in retirement, then a regular 401(k) makes more sense, Madrian said. “Saving in a regular 401(k) reduces your tax liability today when your tax rate is higher than it is likely to be in retirement,” she said. “This is more likely to be true for middle-income employees who expect Social Security to comprise a decent share their income in retirement.”

When to use both

And, if your tax rate is likely to be the same in retirement as it is today, then you fare the same with either type of account, said Madrian. “If you feel like your taxes could be either higher or lower in retirement, then a tax diversification strategy would be to contribute to both a Roth and a regular 401(k) account,” she said.

Note too, Madrian said, that if your employer offers a match, the matching contributions will be directed to a regular 401(k) account regardless of what you choose for your own contributions. “So even if you contribute to a Roth account, you have some tax diversification built in through the tax treatment of the employer match,” she said.

Madrian’s co-authors share this point of view. “If you are in a lower income tax bracket and are trying to decide whether to save in a regular before-tax 401(k) or a Roth 401(k), the good news is that many employers allow you to do both, and it’s not a bad idea to contribute to the two account types simultaneously,” said Beshears, a professor at Stanford University. “The reason is diversification.”

We invest, Beshears said, in stocks and bonds at the same time because sometimes one goes up while the other goes down, so buying both helps smooth out the bumps. “Similarly, contributing to a before-tax 401(k) is beneficial if your tax rate goes down (you pay taxes later), while contributing to a Roth 401(k) is beneficial if your tax rate goes up (you pay taxes now), so contributing to both helps smooth out the benefits no matter which way your tax rate goes,” he said.

Other reasons to contribute to a Roth 401(k)

The Roth 401(k) is also good for people don’t want to draw down their retirement accounts during their life, said Laibson, a professor at Harvard University. Roth accounts are not affected by the required minimum distribution (RMD) rules during the owner’s life, he said. Owners of traditional IRAs must take RMDS after turning 70½.

Laibson also said Roth 401(k)s are appropriate if you are very wealthy and your estate will exceed the estate tax exemption. “Moving assets from a regular 401(k) to a Roth 401(k) will reduce the size of your estate, since you pay taxes when you move the assets or when you contribute to a Roth in the first place,” he said “These tax payments come out of your estate, reducing your estate tax obligation.”

Decision not without complications

To be fair, deciding whether it makes sense to contribute to Roth 401(k) isn’t as easy as it sounds. “It’s actually very hard to calculate your current marginal tax rate, because income-based phaseouts of government benefits and tax deductions can raise effective marginal tax rates in unexpected and complicated ways,” said Choi, a professor at Yale University. “This really complicates matters because a key input into your Roth vs. before-tax 401(k) decision is whether your current effective marginal tax rate is higher than what it will be in retirement.”

(Read Americans’ 90% tax rate, Income Tax Issues: How do phaseouts of tax provisions affect taxpayers?, Read tooThinking About a Roth 401(k)? Think Again.)

Another complication is the existence of a 401(k) match. “For many people, the 401(k) match will make Roth contributions relatively less attractive, since each dollar of effective post-tax retirement savings is matched at a lower rate for Roth contributions than before-tax contributions,” Choi said.

Upping your retirement savings

Of course that can work to a worker’s advantage, too. If you are among the few contributing the maximum amount allowed to a regular 401(k) and wish you could contribute more, a Roth account is one way to increase your effective saving, Madrian said.

“The contribution limit is the same for a Roth vs. a regular 401(k), but since you don’t have to pay taxes on the Roth in retirement, $1 saved in a Roth buys more retirement consumption than $1 saved in a regular 401(k),” she said. “The extra retirement consumption isn’t a free lunch—you have to pay taxes on your Roth contributions today. If you’re at the 401(k) contribution limit and your tax rate in retirement is not likely to fall from what it is today, the Roth account allows you to purchase more retirement consumption than a regular 401(k) account.”

Some 20% of workers are contributing to the annual maximum limit, according to Bank of America Merrill Lynch’s 2013 Workplace Benefits Report.

What if tax rates rise?

To be sure, some think that the fiscal situation in the U.S. is likely to result in higher income-tax rates going forward. And that could complicate matters a bit. “If tax rates are increased across the board and your income in retirement does not fall enough to put you into a lower tax bracket, then a Roth would be a better option,” said Madrian.

But Madrian cautioned that it’s anyone’s guess how the U.S. government will address the problem of federal debt going forward. “They could focus on Social Security and increase payroll rather than income taxes, they could increase income taxes for everyone, or they could increase income taxes for some but have a system of allowances or exemptions that allow the burden of higher taxes to fall disproportionately on the employed rather than the elderly,” she said.

Worth talking to an expert

The truth of the matter, however, is this: Broad brush bromides might not be in your best interest. “It’s hard to give succinct advice in this matter, because each person’s relevant circumstances can vary considerably and there’s so much uncertainty about what future tax law will be, said Choi.

Complications in calculating cost basis for DRIP investments ( 'Dividend Reinvestment Plan - DRIP')

Karin Price Mueller/The Star-Ledger  writes: Question:  This idea of "cost basis" for the sale of stocks seems more complicated than it should be. I have had certain DRIPs for 15 years or more. I need to calculate the cost basis when I sell a stock, but I don’t have a computer or the software to make the calculations. I’m afraid to have a professional do the calculations because I fear the cost will eat up what meager profits I make. Can’t I just add up the dividends that I already paid tax on, and then deduct that amount from the profit I made after selling the stock?

— Gary

Answer:  You’re correct that many tax calculations are complex, but it is what it is.

For the uninitiated, DRIP stands for Dividend Reinvestment Plan, in which the dividends paid out are used to automatically purchase more shares of the stock. You have to pay taxes on the dividends whether they’re reinvested or not.

As much as just adding up the dividends seems good enough, it is far from accurate, said Douglas Duerr, a certified financial planner and certified public accountant with U.S. Wealth Management in Montville.

"When you receive dividends through a DRIP, you then buy the applicable amount of shares based on the total amount of dividends and the stock price that day," Duerr said. "These amounts need to be added to your cost basis to accurately reflect the true cost value of the stock owned."

Duerr said you also need to pay attention to whether or not the stock split at all over the time period you owned it. If it did, it would impact the total number of shares owned and the value.

Another key question is whether you’re selling all your shares at once, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights.

If you are, the calculation is more simple.

"He would add up all the dollars invested including the dividends and compare it to the selling price," he said. " The difference would be his gain or loss."

If you’re only selling some of the shares, Maye said, you can’t use an average cost basis to calculate a gain or loss.

Maye said the IRS only allows two methods of accounting on the sale of individual stocks.
The first method assumes that the first shares acquired are the first shares sold, better known as FIFO, or "first-in, first-out."

The second approved method is to use specific identification of exactly which shares are sold.

"Using the specific identification method allows the taxpayer to better manage the gains or losses from the sale of individual stocks," he said.

Maye said the IRS assumes you are using FIFO unless you and the broker take the necessary steps to specify which shares are being sold.

"The burden is really on the reader to maintain the necessary records to calculate gains or losses when he sells an individual stock," Maye said. "Even if he were to hire someone to figure out cost basis, the first thing they will ask for are his records."

Finally, Maye suggests, if you reader want to avoid the hassle of calculating the gains and losses, you could donate the shares to charity, and you’d avoid capital gains altogether.

"However, he would not be able to also claim it as an itemized deduction," Maye said.

Duerr recommends you consider going to your local library to use the public computers to make the necessary calculations.

SugarCRM-QuickBooks Integration with FREE webinar focused on Sugar CRM QuickBooks integration for US and Canadian editions.

From Faye Business Systems Group we read about their  SugarCRM-QuickBooks Integration solution.

SugarCRM is the fastest growing CRM software package in the world. Intuit was named in the Fortune Magazine’s “Best Companies” list  for 11 consecutive years, QuickBooks puts you in control of your finances, your time, your business—and where you work. As QuickBooks continues to command the vast majority of the small business market it only makes sense to integrate the two software packages and streamline business processes.

CLICK FOR FREE WEBINAR  on July 30, 2013 HERE

The SugarCRM – QuickBooks Integration features include:

• Two Way Sync between Sugar and QuickBooks
• Syncs customers, inventory, invoice history, and sales orders
• Enter quotes & sales orders into Sugar and have them appear in QuickBooks
• Post invoices in QuickBooks and have them appear in Sugar (with line items)
• Add new accounts in Sugar and have them appear in QuickBooks
• Update customer addresses in QuickBooks and have them appear in Sugar
• Be able to see inventory items, standard prices and costs, and quantity on hand in Sugar
• Syncing can occur on a scheduler and defaults to every 10 minutes
• Custom mapping of custom fields
• Works with QuickBooks Pro, Premier, and Enterprise
• Works with Sugar hosted in the cloud or Sugar on an in-house server
• Easy to install, easy to use

Purchase of the SugarCRM QuickBooks Integration Includes all integration software, a detailed installation and operating guide, phone and email support, all updates and upgrades to support Sugar updates and upgrades throughout the year, all updates and upgrades to support QuickBooks updates and upgrades throughout the year, and SugarCRM QuickBooks Integration application feature updates as we make the integration more powerful over time.

View the SugarCRM QuickBooks Integration Demonstration

There's No Dollar Limit on Capital-Loss Carry-Overs / Unused Losses Can Help Soak Up Gains in Future Years

From the Wall St Journal TOM HERMAN writes:   Question:Is there any chance that the capital-loss carry-over will ever be increased above $3,000?

J.O., Boca Raton, Fla.

Answer: There is no dollar limit on capital-loss carry-overs, says Barbara Weltman, a tax expert in Vero Beach, Fla., and author of numerous tax guides.

Our reader probably is thinking about a different capital-loss rule. Here's a refresher course on how to take advantage of capital losses:

First, investors can use capital losses to soak up capital gains on a dollar-for-dollar basis. There is no dollar limit.

But let's assume your losses are bigger than your gains, or you don't have any gains. In that case, you can deduct as much as $3,000 a year (or $1,500 if you're married and filing separately from your spouse) of these net capital losses from your ordinary income, says Tim Hanford, a consultant in Bethesda, Md., and a former House Ways and Means tax staffer. "You can carry over any capital loss above that indefinitely into the future," Mr. Hanford says.

Here's an IRS example: Suppose a married couple lost $7,000 on the sale of securities last year and had no other transactions. Their taxable income was $26,000. "On their joint 2012 return, they can deduct $3,000," the IRS said. "The unused part of the loss, $4,000 ($7,000−$3,000), can be carried over to 2013."

So what are the chances of increasing the net capital-loss limits?

"I think there is very little chance of any real tax legislation between now and the midterm [elections]," says Clint Stretch, senior tax policy analyst at Tax Analysts. "The limit is not receiving any particular attention."

It's conceivable the situation might change—but not likely.

The idea of increasing the $3,000 limit "has gotten little attention in Congress" during the past few years, says Mr. Hanford. "It is possible that it could be considered as part of the fundamental tax reform the Senate Finance Committee and House Ways and Means Committee are working on," he says. "However, one factor Congress would have to take into account is the cost to the federal government of increasing the loss limit."

Social Security Benefits Now Available to Same-Sex Couples / Spousal, survivor payments could be worth thousands of dollars

• JENNIFER WATERS for the Wall St Journal writes:   
The Supreme Court's recent decision striking down the Defense of Marriage Act gave a huge retirement present to couples in same-sex marriages.

Social Security and Medicare benefits—two cornerstones of retirement planning long enjoyed by most married Americans—will be a bonanza for couples in the 13 states that recognize gay marriage. Gay and lesbian couples will be eligible for valuable spousal and survivor benefits that could be worth tens, maybe hundreds, of thousands of dollars to each household.

President Barack Obama has promised that all relevant federal benefits and obligations will be implemented "swiftly and smoothly," including retirement and health benefits, according to the Social Security Administration.

Once they are, gay couples married in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont, Washington and Washington, D.C., will be able to incorporate Social Security and Medicare benefits into their post-career planning. Minnesota and Rhode Island join that roster Aug. 1.

Men (or women) married to each other, even if divorced, for example, will be able to collect up to half of each other's Social Security benefits if certain conditions are met. If one is widowed, even if divorced, he can receive up to 100% of the deceased spouse's benefit if it's less than his own benefit, and a spouse or divorced spouse may qualify for half of a worker's disability benefits. Medicare benefits also are available to spouses who haven't contributed.

For those living in states that accept only same-sex civil unions, the federal benefits will not be so generous. The Obama administration will not extend federal-worker benefits to domestic partners who are not legally married.

That applies to civil unions in Colorado, Hawaii, Illinois and New Jersey. Oregon, Nevada and Wisconsin have domestic-partnership laws on the books. Activists hope to eke out a legislative or court victory for gay-marriage laws in Illinois and New Jersey by the end of the year. Other pivotal states in the near term include Hawaii, Nevada, New Mexico and Oregon.

The first known legal test to overturn bans on gay marriage emerged last week when civil-rights lawyers, representing 23 men, women and children, challenged Pennsylvania's law.

The Supreme Court did not touch a DOMA provision that states need not recognize same-sex marriages performed by other states. Because the Social Security Act relies on where you were "domiciled when you filed for benefits," Congress will have to address changing the law to apply to couples who get married in states where gay marriages are legal but move to states where they're not. Thirty states outlaw same-sex unions.

"States have all kinds of rules about what is marriage, but at this point if your state of residence says you're not married, you're not married," says John Olivieri, a partner at White & Case law firm.

New Jersey and the Taxation of Software Services / Technical Bulletin on Software, Platform, & Infrastructure as a Service

TaxRates.com writes: Are cloud computing services taxable? After much deliberation, Vermont determined that they are. In Idaho, they aren’t.  And although the taxation of cloud computing services is controversial in Massachusetts, it may well be on its way to becoming a reality.

And New Jersey? A technical bulletin issued earlier this month by the New Jersey Division of Taxation explains the application of sales and use tax to cloud computing services (SaaS, PaaS and IaaS).

Certain services are subject to sales tax under New Jersey law. These include, but are not limited to:

• Producing, fabricating, processing, installing, maintaining, repairing or storing tangible personal property or a specified digital product if it is not being purchased for resale or “held for sale in the regular course of business….”
• Tanning services.
• Massage services.
• Information services.

Tax the SaaS

As noted by the New Jersey Division of Taxation, “[u]se of software application is not listed as a taxable service.” Most charges for Software as a Service software (such as Salesforce and DeskAway), therefore, are not subject to sales tax.

However, some SaaS information services are taxable. These include “[c]harges for SaaS where the software is accessed and used as a tool for providing information to customers by an information service provider….”

Information defined

New Jersey law defines information as “the furnishing of information of any kind, which has been collected, compiled, or analyzed by the seller, and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people.”

In sum, if SaaS is not providing information, it is not a taxable service. If it is providing information, it is taxable.

Don’t Tax the PaaS or the IaaS

Both Platform as a Service (PaaS) and IaaS are not taxable services in New Jersey.

CLICK HERE TO READ  NJ's Sales & Use Tax / Cloud Computing (Saas, PaaS, Iaas) Technical Bulletin.