Tuesday, March 4, 2014

Quick Question About IRA Tax Deduction

Over at Bogleheads we came across the following discussion: 

Quick Question About IRA Tax DeductionPostby Milano » Mon Mar 03, 2014 4:58 pm

I am trying to get out of an annuity sold to me in 2011. I can withdraw free of penalties 10% every year, to minimize the damage that this annuity is doing to my prtfolio I am planning to to put this amount into my IRA account, it is March now, can I claim a deduction if I transfer the funds now? Or is this deduction good for the '14 tax return?User avatar
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Re: Quick Question About IRA Tax DeductionPostby DSInvestor » Mon Mar 03, 2014 5:09 pm

It is not too late to contribute to Traditional IRA or Roth IRA for 2013. The deadline for 2013 contributions is April 15, 2014.


Before making the contributions, make sure that you can get the tax deduction. The tax deduction for Traditional IRA is a little tricky. If you're not covered by an employer plan, you can fully deduct the Traditional IRA contributions. If you are covered by an employer plan, there are MAGI limits that may phase out or eliminate the tax deduction. See IRS Pub 590 How much can I deduct? Limit if covered by an employer plan. Pay attention to tables 1-2 and 1-3:
If you cannot take the Traditional IRA tax deduction, see if you're eligible for Roth IRA contributions. Roth IRA contributions do not offer tax deduction but once in the Roth IRA, your investments will grow tax free and can be withdrawn tax free. Roth IRA would be a far better investment container than a non-qualified variable annuity.
If you're in a high cost annuity, you may just want to rip the bandaid off in one shot and pay the surrender charges. The surrender charges are a sunk cost that you agreed to the moment you signed up for the annuity. If you stay in the annuity to avoid the surrender charges, you're paying very high expense ratios and mortality and expense fees. They get the money from you either way.


Here's a link to a thread where another poster is considering leaving a high cost variable annuity and ran some numbers. Looking at some prospectus for Ameriprise VAs it was possible that he may be paying close to 3% in expenses to stay in that VA. Compare that to 0.10 -0.2% for moving to a low cost fund(s) at Vanguard and he'd come out ahead in just a few years even after paying surrender charges.
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Re: Quick Question About IRA Tax DeductionPostby Milano » Mon Mar 03, 2014 5:23 pm

DSInvestor wrote:It is not too late to contribute to Traditional IRA or Roth IRA for 2013. The deadline for 2013 contributions is April 15, 2014.
If you're in a high cost annuity, you may just want to rip the bandaid off in one shot and pay the surrender charges. The surrender charges are a sunk cost that you agreed to the moment you signed up for the annuity. If you stay in the annuity to avoid the surrender charges, you're paying very high expense ratios and mortality and expense fees. They get the money from you either way.


Here's a link to a thread where another poster is considering leaving a high cost variable annuity and ran some numbers. Looking at some prospectus for Ameriprise VAs it was possible that he may be paying close to 3% in expenses to stay in that VA. Compare that to 0.10 -0.2% for moving to a low cost fund(s) at Vanguard and he'd come out ahead in just a few years even after paying surrender charges.



Thank you for your very useful reply, considering that this sale is by ML and Prudential I do need to gain an understanding of the costs and tax implications.User avatar
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Re: Quick Question About IRA Tax DeductionPostby DSInvestor » Mon Mar 03, 2014 5:29 pm

Milano wrote:
DSInvestor wrote:It is not too late to contribute to Traditional IRA or Roth IRA for 2013. The deadline for 2013 contributions is April 15, 2014.
If you're in a high cost annuity, you may just want to rip the bandaid off in one shot and pay the surrender charges. The surrender charges are a sunk cost that you agreed to the moment you signed up for the annuity. If you stay in the annuity to avoid the surrender charges, you're paying very high expense ratios and mortality and expense fees. They get the money from you either way.


Here's a link to a thread where another poster is considering leaving a high cost variable annuity and ran some numbers. Looking at some prospectus for Ameriprise VAs it was possible that he may be paying close to 3% in expenses to stay in that VA. Compare that to 0.10 -0.2% for moving to a low cost fund(s) at Vanguard and he'd come out ahead in just a few years even after paying surrender charges.



Thank you for your very useful reply, considering that this sale is by ML and Prudential I do need to gain an understanding of the costs and tax implications.



Is your annuity qualified or non-qualified? In the case of the other thread, his Variable Annuity was inside a SIMPLE-IRA so there would be no tax consequences to rollover to a Traditional IRA or Rollover IRA.
If your annuity is non-qualified (outside of IRA, 401k, 403b etc), there would be tax consequences to take the money out. I believe earnings come out first when you withdraw from non-qualfied annuities and 10% early withdrawal penalty may apply if younger than 59 1/2. Have you heard of 1035 exchange? That's a tax free transfer from one non-qualified annuity to another preferably one with lower costs. Vanguard offers a variable annuity that may have much lower costs than ML or Prudential.
Vanguard Annuities:
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Re: Quick Question About IRA Tax DeductionPostby Milano » Mon Mar 03, 2014 5:48 pm

Is your annuity qualified or non-qualified? In the case of the other thread, his Variable Annuity was inside a SIMPLE-IRA so there would be no tax consequences to rollover to a Traditional IRA or Rollover IRA.
If your annuity is non-qualified (outside of IRA, 401k, 403b etc), there would be tax consequences to take the money out. I believe earnings come out first when you withdraw from non-qualfied annuities and 10% early withdrawal penalty may apply if younger than 59 1/2. Have you heard of 1035 exchange? That's a tax free transfer from one non-qualified annuity to another preferably one with lower costs. Vanguard offers a variable annuity that may have much lower costs than ML or Prudential.
Vanguard Annuities:
The annuity is in a taxable account (non qualified?). I was 'switched' or 'twisted' into this by a ML advisor in 2011 from a previous annuity, many complaints over this on my part towards ML. I had to pay taxes in 2013 when I withdrew the penalty free 10% as I needed the money. I am below 59-1/2" years old, so yes a 1035 exchange to a lower cost product makes sense, I need to understand the expenses, the PRU website is basic, not very informative. I have a lot to learn.User avatar
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Re: Quick Question About IRA Tax DeductionPostby DSInvestor » Mon Mar 03, 2014 5:58 pm

You may want to give the Vanguard annuity group a call. 800-357-4720. They may be able to describe their offerings and explain their fees. Mortality and Expense fees etc. Once you understand the fee structure at Vanguard's annuities, it may shed some light on the fees charged by ML and Prudential and help you understand the ML and Prudential annuity prospectus which I'm sure is over 100 pages long!
Here's a link to a Vanguard page showing investment options with total expenses which includes Mortality and Expense Risk Charge in the Vanguard Variable Annuity:
Vanguard Variable annuities do not charge sales load and do not have surrender charges.
I have seen some mention of Jefferson National for low cost variable annuities but I have never spoken with them.
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Re: Quick Question About IRA Tax DeductionPostby Milano » Mon Mar 03, 2014 6:30 pm

Thanks for the valid responses.
The greater question here is if I should eek my way out of the annuity by withdrawing and investing the 10% each year into my IRA and take the tax deductions for then years or take the plunge and 1035 int a lower cost annuity. Doing the math is what I need to learn.User avatar
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Re: Quick Question About IRA Tax DeductionPostby DSInvestor » Mon Mar 03, 2014 6:51 pm

Milano wrote:Thanks for the valid responses.
The greater question here is if I should eek my way out of the annuity by withdrawing and investing the 10% each year into my IRA and take the tax deductions for then years or take the plunge and 1035 int a lower cost annuity. Doing the math is what I need to learn.



Let's assume that you can take the Traditional IRA tax deduction for $5,500. If you withdraw $5,500 from Non-Qualified Annuity, earnings come out first so that's $5,500 income to you assuming it's all earnings. This withdrawal will probably lower your annuity balance by more than $5,500 due to the surrender charge. The TIRA tax deduction of $5,500 negates the withdrawal income of $5,500 but you still have to pay the IRS 10% early withdrawal penalty on the earnings withdrawn at tax time.
If you do the full 1035 exchange to a low cost annuity, you pay the surrender charge to your old annuity and then invest the remaining assets in the new low cost annuity. The bigger the difference in expense ratios, the more it makes sense to do the exchange.
Let's say you have 100K in the annuity subject to 7% surrender charge ($7000). The annuity charges 1.5% M&E charge and expense ratios average 1.5%. Total expense is 3%. Might be higher than what you're paying. I imagine you're paying 2-3%.
The Vanguard VA would have total expense of around 0.6% depending on what you're holding.
Let's also assume that both annuities invest in the same asset allocation and get the same gross returns. The net return will be gross return minus expenses.
Let's see what happens in 10 years if gross returns are 5% per year for 10 years.
In the high cost cost VA, Net return = 5% - 3% = 2%
In 10 years, 100K grows to: 100,000 X (1.02 ^ 10) = $121,899
You transferred out and paid 7K in surrender charge investing 93K in lower cost annuity. The net return = 5% - 0.6% = 4.4%
In 10 years, 93K grows to: 93,000 X (1.044 ^ 10) = $143,050.
Low expenses makes a huge difference.
Run your own numbers after you find out a) what you're paying in expenses to stay in the annuity and b) what your full surrender charge would be.
Posted on 7:51 AM | Categories:

Psst...the Backdoor Route to a Roth IRA / High Earners Who Can't Contribute to a Roth Have Another Way In

Karen Damato for the Wall St Journal writes: Going through the back door can pay off for high-income retirement savers. We're talking about the backdoor route into popular Roth individual retirement accounts, which offer tax-free income in later life.
The front door into Roths is shut for many investors. Married couples earning $191,000 or more and singles earning $129,000 or more in 2014 are barred from contributing directly to Roth IRAs.
But there's a simple detour that works for many of them. They can put money into a traditional IRA—and then roll that into a Roth IRA, getting all the benefits.
More than 40% of the Silicon Valley executives working with adviser Bijan Golkar of FPC Investment Advisory Inc. in Petaluma, Calif., do this year after year, he says. Roth IRAs are "a great tool" for these clients, who are likely to be in high tax brackets even in retirement because of hefty 401(k) accounts, he says.
Paul Hoppe
With a Roth IRA, contributions are made with after-tax dollars, but earnings compound without tax and can be withdrawn tax-free in retirement. With a traditional IRA, in contrast, qualifying savers get an upfront tax deduction but owe tax when money is withdrawn.
Most high earners who can't contribute directly to a Roth also can't make a deductible IRA contribution. For instance, there's no deduction if you are covered by a retirement plan at work and have 2014 income of at least $116,000 on a joint return or $70,000 as a single filer. So for those investors, a traditional IRA is ho-hum.
But high earners are still allowed to contribute to a traditional IRA, and that's the first step in the indirect route to a Roth IRA. The next step, which might occur as soon as a few days later: Convert that traditional IRA to a Roth, which is a move available to all.
There's one big caveat: This strategy works best for people who don't already have money in traditional IRAs. That's because in conversions, earnings and previously untaxed contributions in traditional IRAs are taxed—and that tax is figured based on all your traditional IRAs, even ones you aren't converting.
For an investor who doesn't already hold traditional IRAs, creating one and then quickly converting it into a Roth IRA will cost little or nothing in tax, because after a short holding period there's likely to be little or no appreciation in the account.
But if you already have money in traditional IRAs, particularly ones for which you took a deduction, you could face a far higher tax bill on the conversion.
"That is definitely a trap that people fall into," says Jeffrey Levine, a CPA with Ed Slott & Co. in Rockville Centre, N.Y.
One possible workaround, he says, is to roll older traditional IRAs into your 401(k) plan, if the plan allows. Then converting a new IRA into a Roth will cost you taxes on only the earnings, if any, of the new account.
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Advisers Warn Against 401(k) Loans / Such borrowing only as a last ditch resort

Murray Coleman for the Wall St Journal writes: Investors are racking up billions of dollars in defaults on loans taken from their 401(k) plans, ignoring warnings from financial advisers they're incurring needless tax hits and endangering their retirement nest eggs.

 At the same time, participants in 401(k) plans have been taking out more loans against their accounts since the start of the financial crisis, according to one recent industry study.
At the same time, participants in 401(k) plans have been taking out more loans against their accounts since the start of the financial crisis, according to one recent industry study.
"The amount of loans outstanding in 401(k) plans has risen significantly over the past five years and paints a very sobering picture of America's capacity to save for retirement," says Rob Austin, director of retirement research at human-resources consulting group AON AON -1.13% Hewitt.
In U.S. 401(k)s and related accounts, one out of every four plan participants has borrowed against his or her principal, according to the group's latest research.
Meanwhile, an estimated $6 billion a year in loans wind up in default, finds a new study published by the Wharton School of the University of Pennsylvania.
The vast majority do pay off their loans, says Jean Young, a co-author of the report and a senior research analyst at the Vanguard Center for Retirement Research in Valley Forge,VLYFQ -14.29% Pa.
But those making less than $30,000 a year are most likely to get into situations where they need to take out a loan, Ms. Young says. "These are also the employees who are least likely to contribute to their workplace retirement plans," she adds.
Financial advisers typically target more affluent investors. It's not surprising then that much of the 401(k) borrowing activity probably takes place without much in the way of outside expertise, says Mr. Austin of AON Hewitt.
"Our research leads us to believe that 401(k) plan participants are looking for more financial help, and that they tend to make better decisions by seeking out independent advice," he says.
Last year alone, adviser James Sampson says he talked to more than 100 different investors about taking out 401(k) loans. He focuses on helping companies run retirement plans at Cornerstone Retirement Advisors in Warwick, R.I., with $200 million in assets.
His responsibilities include working with plan participants, both executives and rank-and-file employees. In most cases, Mr. Sampson says he recommends 401(k) loans only in the most dire of circumstances.
In some cases, particularly when credit-card debt builds and comes with double-digit interest rates, he says that borrowing from a retirement plan at much lower rates can make sense.
Mr. Sampson also tells investors that 401(k) loans act much like a slow-growth bond investment since loan amounts taken out are usually repaid at fairly low rates of interest.
During stock market uptrends, pulling money out of a retirement plan's long-term oriented investment portfolio can prove counterproductive as well, he says.
"People think about 401(k) loans as free money, but the opportunity costs can be enormous over time," Mr. Sampson says.
If a loan goes into default, the amount still owed is likely to be considered as taxable income for that particular year, notes Marilyn Plum, director of portfolio management at Ballou Plum Wealth Advisors in Lafayette, Calif., with $270 million in assets.
"It's important to let people know that they risk kissing any chance for a tax refund at the end of the year goodbye if they take out a 401(k) loan and can't pay it off," Ms. Plum says.
A 401(k) loan default usually occurs after the investor leaves his or her job and fails to repay the loan in full--normally within 30 to 90 days, according to advisers.
Investors who default in most cases have to pay federal and state income taxes. Those under age 59 1/2 who default also are likely to be hit with a 10% early-withdrawl penalty.
But the ease of taking out a loan at work as compared with using a traditional bank can be very tempting, says Chad Carlson, an adviser at Balasa Dinverno Foltz in Itasca, Ill., with $2.7 billion in assets. "We see a lot of repeat offenders who treat 401(k) accounts almost like their own personal piggy banks," he says.
In most cases, better ways can be found to overcome mounting debt, suggests Michael Gouldin, chief executive at Gouldin & McCarthy in Basking Ridge, N.J., with $400 million in assets.
Planning ahead and doing proper due diligence is the key, he says. Still, Mr. Gouldin estimates that only about 10% of the investors his firm works with through individual accounts and serving as an adviser for 401(k) plans actually ask before taking out a workplace loan.
"By the time it reaches that point, they don't want to hear someone tell them not to do it," he says.
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The 401k move that guarantees a higher return / When it comes to company retirement plans, costs loom large, though few people pay much attention to them. It's simple math: Lower your fees and reap the reward.

John Wasik, Forbes/MSN Money writes: Costs matter. Vanguard founder Jack Bogle has been saying that for years and I've been echoing him every chance I get.
When it comes to 401k expenses, costs loom large, although few pay any attention to them. Most workers assume their employers are getting the best deals for them when, in most cases, they aren't.
Enter the exchange-traded fund (ETF) platform. This is a new way of tapping ultra-low-cost ETFs for retirement plans. ETFs pool money like mutual funds, only they are listed on stock exchanges. Most of them are passive index funds that invest in large baskets of commodities, stocks and bonds.
Although the $2.4-trillion-plus ETF market has been growing like topsy for years, only recently have they been added to retirement plans. Companies likeInvestnRetire, for example, have made it possible to own ETFs and reinvest in them through vehicles like 401k's. The bookkeeping technology has gradually caught up with the explosion in ETFs.
Now that the discount brokerage giant Charles Schwab (SCHW -2.45%, news) has entered the ETF 401k business, employers might get serious about lowering costs. Schwab is offering a platform that covers 27 asset classes and offers funds from rivals iShares and Vanguard. The cost savings are going to be dramatic.

Why costs matter

Fund expenses are typically expressed as an annual percentage of assets under management. Most employees think that 1 percent annually -- which is close to the average for most actively managed stock funds -- is no big deal. But what if you could save on expenses by a factor of 10?
Schwab says it will offer ETFs that cost about $7 to $10 for every $10,000 invested, compared to around $70 for an actively managed fund. Those savings will be huge over time and will automatically boost your return. It's simple arithmetic.
Let's say you invested $100,000 over 30 years at a conservative 5-percent annual rate of return. With a 0.70-percent annual expense ratio, you'd have $350,000 after three decades, but you will have lost $82,000 to fees and foregone earnings.
What would happen to the same amount invested under similar assumptions with a 0.07-percent annual expense in an ETF-based portfolio? After 30 years, you'd have nearly $100,000 more. That's because your fees would be roughly ten times less and you could compound more of your money.
You don't have to believe me on this. Do the math yourself using the SEC mutual fund cost calculator. It will take you less than a minute and could vastly boost your retirement kitty. Once your eyes pop out of your head after you do a comparison between what you're paying now and what you could be earning, your next step is to approach your boss and 401k administrator.
Not only could you do much better, but everyone in the company plan could benefit. Do the math today and stop griping about your lousy returns at the water cooler.
Posted on 7:50 AM | Categories:

Exact Online software integrates with QuickBooks bridging the gap between manufacturing, distribution, and traditional accounting functions.

Anna Wells for Manufacturing Business Technology writes: This past fall, Exact, the business software partner for small business manufacturers and wholesale distributors, officially launched new software that helps small manufacturers and wholesale distributors in the U.S. operate more efficiently and profitably. Available through a monthly online subscription, this software streamlines tasks such as production and inventory management, logistics and CRM. The newly available Exact Online software integrates seamlessly with QuickBooks Online and QuickBooks Desktop, bridging the gap between common manufacturing and wholesale distribution tasks and traditional accounting functions. The software replaces disparate systems and manual processes, giving business owners a 360-degree view of their businesses while enabling accountants to become even more trusted advisors to their clients.
MBT sat down with Steve Leavitt, GM of U.S. Cloud Solutions at Exact, to discuss the unique technology needs of small and medium businesses (SMBs).
MBT: Many software companies focus on primarily on large companies. Why focus on small businesses?
SL: For us, it’s really in our core DNA. The company was founded, about thirty years ago, by entrepreneurs. Since the inception, we’ve always focused on and invested in the entrepreneurial type space. We’re putting almost all of our investment specifically into SMB. SMB, for us, is classified by number of employees and, out of the gate, we’re really focused on the 2 to 20 person shop or wholesale distributor — and that’s going to be our sole focus.
MBT: Can you talk about a few of the features that you believe provide the strongest business case for investing in this type of a solution?
SL: One of the things that we are really proud of that we bring it bear is that we provide small companies the ability to miss nothing. We just returned from a trade show, and as people were walking by the booth we were asking one simple question: What visibility do you have into your business while you’re here at the show? I would say 90 to 95 percent of the people who were asked that question said ‘Zero.’ So, what if you did have access to it? What would you be able to do if you could access it? That’s what we give them the ability to do — truly visualize their business anytime, anywhere, and from any device. That’s the value of the cloud. You are be able to make informed decisions based on real time data, and can work with your advisors and make very strong decisions. From what we’re hearing, it’s something that’s lacking in the market today, unless they make the jump to an on-premise, large scale ERP type system.
MBT: When you were chatting with these manufacturers and distributors at the trade show, what were the product features they found to be the most buzzworthy?
SL: I think it was more the aggregation of features that we’re bringing to bear. Our product is very tightly aligned with QuickBooks, and a lot of people we talk to are now using a manual process like a spreadsheet or white board. Or, they have several different disparate systems. So what they liked about us is the ability to help them buy materials, track the status of the build process, and — now with integrated CRM – have the ability to track the sale. It’s more of a lifecycle approach, allowing them to get rid of the multiple subscriptions that they have. One of the things that was really getting traction was their ability to say, ‘What do I have sitting on a shelf today (inventory)? Who has traditionally bought this product, when, and at what price point?’ They can now campaign through CRM to move that stuff off the shelf where it’s a cost center, turn it into a profit center, and now start the process of replenishment. It’s really giving them some level of analytics around their business to do things differently, increase revenue, and drive cost out.
You can read Manufacturing Business Technology Here. To read more by Anna Wells, sign up for a newsletter. You can also follow Anna on Twitter @IndustrialAnna
There is no connection or relation between Exact Online and us, ExactCPA, LLC
Posted on 7:49 AM | Categories:
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