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Determining Tax on Roth IRA Distributions in 5 Easy Steps

Determining Tax on Roth IRA Distributions in 5 Easy Steps

Roth IRA distributions are always tax-free... right? Not necessarily. There are certain circumstances where your Roth IRA distribution could be subject to income tax. Determining whether your withdrawal will be taxed depends on factors such as your age and the type of funds you’re withdrawing.

What are the ordering rules? Roth IRA distributions can consist of contributions, converted funds and earnings – or any combination of the three. To determine what your distribution is, you must use “ordering rules” which dictate the order in which these categories of Roth IRA money must be withdrawn. All Roth IRAs are considered one Roth IRA for distribution purposes. A Roth IRA distribution will consist first of any Roth IRA contributions. If there are no contributions or those amounts are completely exhausted, the next funds out are converted funds. Once all converted funds have been exhausted, the remainder of the distributions will consist of earnings. 

Here are 5 steps you can follow to determine tax on Roth IRA distributions:

1. Are you withdrawing a contribution? Roth IRA contributions are the annual amounts that you contribute to a Roth IRA account. A distribution of Roth IRA contributions will always be both tax and penalty free.

2. Are you withdrawing converted amounts before age 59 ½? Converted funds are never subject to income tax. However, they will be subject to the 10% penalty for early distributions (unless an exception applies) if you are under 59 ½ and they have been in a Roth IRA for less than five years. Each conversion starts its own 10% PENALTY 5-year clock, and the converted amounts are withdrawn on a first-in, first-out basis.

3. Are you withdrawing converted amounts after 5 years or age 59 ½? A distribution of converted funds after 5 years or after age 59 ½ will be entirely income tax and penalty free. 

4. Are you withdrawing earnings before age 59 ½? Earnings withdrawn prior to age 59 ½ are generally subject to income tax regardless of how long they’ve been in a Roth IRA account. Earnings withdrawn prior to age 59 ½ are also generally subject to the 10% penalty for early distributions unless an exception applies. 

5. Are you withdrawing earnings after age 59 ½ and 5 years? Earnings withdrawn after age 59 ½ are never subject to the 10% penalty. They may, however, be subject to income tax. If you have held a Roth IRA for more than 5 years, your earnings are tax free, if not, they are taxable at ordinary rates.

Still have questions or need help with your unique situation? Click here to contact the office nearest you so that we can give you the help you need.

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Planning for Health Savings Account (HSA) Distributions in 5 Easy Steps

A Health Savings Account is a tax-advantaged medical savings account that helps people pay for qualified out-of-pocket medical expenses.

What are the withdrawal rules for HSAs? Are there special considerations that must be taken into account?

Here are 5 easy steps you can use to plan for  Health Savings Account (HSA) Distributions:

1. Withdrawals can be taken at any time. There is no holding period like with Roth IRAs. The entire withdrawal (including any earnings) is tax-free as long as there is a corresponding qualified medical expense. The medical expense must be incurred by either the owner or his or her spouse or dependents. Additionally, the medical expense does not need to occur in the same taxable years as the withdrawal. Instead, the medical expense must simply occur before the withdrawal is made. 

2. HSAs are owned by the individual. That means the balance carries over year-to-year and also stays with the individual, even if they change jobs or health coverage. If someone is no longer covered by a qualified High Deductible Health Plan, they can still take distributions from their HSA. This includes individuals covered by Medicare. 

3. Unlike flexible spending accounts or health reimbursement accounts, an individual does not need to “substantiate” a medical expense before withdrawal. That means an individual does not have to provide receipts or other proof that a qualified medical expense has incurred before accessing the account. However, the individual should retain documentation in the event of an IRS audit.

4. HSAs are not subject to the Required Minimum Distribution rules, and there is no requirement that the monies be used on current medical expenses. This means HSA funds can remain in the account over the life of the owner and be used to supplement Medicare coverage during retirement years.  Finally, if an HSA account is passed to a spouse, the spouse beneficiary can continue to take withdrawals on the same tax-free basis. If a non-spouse beneficiary is named, the HSA ends on the date of death.  

5. Know the rules! The penalty for not following the rules is stiff. Not only does the entire distribution become subject to income tax, it is also subject to a 20% penalty. The penalty is waived if the HSA owner is age 65 or older or disabled at the time of the distribution. However, the distribution is still treated as taxable income. Distributions are reported to the account owner and the IRS using IRS Form 1099-SA. 

Have questions or need to consult an experienced and educated financial advisor? Click here to contact the nearest Portnoff Financial office to you. 


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The Roth Conversion Conversation

Are you wondering whether you should convert your traditional IRA to a Roth IRA? You may have heard of the tax benefits of a Roth, but how do you know if it’s the right move for you?

Converting to a Roth IRA can come with several benefits, but there are a few factors you should consider prior to taking this step, like your tax rate and when you’ll want to access your retirement funds.

To find out if a Roth conversion is right for you, click here to download “The Roth Conversion Conversation.

When you convert funds to a Roth IRA, your pre-tax funds will be included in your income in the year of the conversion. This will increase your income for the year of the conversion, which may impact deductions, credits, exemptions, phase-outs AMT (alternative minimum tax), the taxation of your Social Security benefits and more.

The trade-off is the big tax benefit down the road. But, a Roth conversion isn’t for everyone. Make an appointment to answer these questions together before going through with a conversion.

1. When will I need the money? Are you thinking long term with no plan to touch your retirement savings or is it possible you may need this money as a back-up emergency fund? Could you need the money immediately for living expenses?

2. What is your tax rate? If you are retired and your income is lower, that mayfavor conversion.

3. Do you have the money to pay the tax on the conversion? It is always best to pay the conversion tax from non-IRA funds.


If your answers to the above questions indicate a Roth conversion is right for you, take note of these advantages:

1. After conversion, your converted funds can always be distributed from your Roth IRA both tax and penalty free if you are over age 59 ½. However, no matter your age, you must wait five tax years from the year of your first Roth IRA conversion or tax-year Roth IRA contribution to any Roth IRA to make a tax-free Roth IRA distribution of earnings.

2. There are no required minimum distributions (RMDs)! If you convert your traditional IRA to a Roth IRA, you must take your RMD before converting. However, that will be the first and last one.

3. The converted Roth IRA can be stretched – meaning it can sit there growing tax free for your beneficiaries who will inherit more because of this extra growth. 

Are you a good Roth conversion candidate? The best way to find out is to make an appointment today to discuss your options. Click here to contact the office nearest you.


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Using a Tax Refund to Fund an IRA in 5 Easy Steps

If you received a refund this tax season, you are likely considering how to spend the extra cash. Instead of purchasing a new car or taking avocation, what if you invested the money in a way that would not only reduce your tax bill, but also fund your future?

If you haven’t already maxed out your contributions, you may want to consider depositing your tax refund into your IRA. The IRA funding deadline is April 17, so if you decide to you want to do this, you’ll need to move quickly. 

What does the basic process entail? An income tax refund can be directly deposited to an IRA up to the annual contribution limit. The contribution limit is $5,500 ($6,500 for individuals age 50 or older) for 2017 and 2018. It can also be split among multiple accounts.. 

1. It is tax time!  Prepare your tax return for the year.

2. Determine the refund amount.  Once you know how big your refund will be, decide how much, if any, you would like to contribute to your IRA or Roth IRA up to the maximum annual contribution allowed. 

3. One, two, three.  A refund going to only one account can be done directly on IRS Form 1040.  Prepare IRS Form 8888 to direct the refund to up to three accounts. 

4. Watch out!  If you use Form 8888, pay attention to the six cautions provided by the IRS on the instructions to ensure that you do not fall into any of those traps.  The form can be found on the IRS’ website (

5. Follow-up, follow-up, follow-up.  If the IRA deposit is meant to be for the prior year, make sure the institution will code it that way, and that it is received in time.  If the refund amount is adjusted for math errors or tax adjustments, check which accounts on the form are affected.  You may need to do an amended return if the IRA deposit is adjusted. Refund offsets can be done against any accounts receiving the refund.  Again, you may need to do an amended return.  If the funds go into the wrong account, deal with the institution to get the funds credited to the correct account.

Click here to download “Using a Tax Refund to Fund an IRA in 5 Easy Steps.”

For further assistance with your planning needs, Click here to contact the office nearest you.

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2018 Retirement Plan Contribution Limits

Maxing out your retirement account contributions can be a smart financial move not only to help reduce your tax bill, but also to ensure you’re setting aside enough money for the future. But do you know how much you’re allowed to contribute?

Contribution limits can vary greatly depending on the type of retirement account(s) you have. Some accounts also have catch-up contribution options available for those who are nearing retirement..

To find out how much money you can contribute to your retirement account(s), click here to download “2018 Retirement Plan Contribution Limits.”

Have additional questions about funding your retirement account(s) or making 2017 contributions before Tax Day? Click here to contact the office nearest you.

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Choosing the Right Tax Professional in 5 Easy Steps

With a New Year comes a fresh start, which means now may be a good time for you to consider whether or not you’re working with the right tax professional. With the April deadline just a couple of months away, you may have already started reviewing your financial documents for your 2017 return. But do you have a qualified professional on your planning team? There are certain questions to ask and criteria to look for before hiring anyone.

Why do you need a tax professional?

Managing taxes during retirement will be the single most important factor in determining your ultimate lifestyle. In addition to a financial planner and estate planning attorney, a qualified tax professional is an integral part of any planning team. 

1. Ask for references. Have you ever stopped to think about how you picked your doctor or mechanic? Chances are you chose them because a friend or family member recommended them based upon a positive experience. The same should be true of your tax professional. Often times, people are afraid to ask for advice from those closest to them when finances are involved, but picking the right tax professional is too big of a decision, so “do your homework” and ask around. 

2. Check for credentials. Not all tax preparers are CPAs. In fact, in many states, anyone can prepare tax returns and call themselves a tax professional. Most serious tax professionals will either be a CPA or an EA (Enrolled Agent). However, this does not necessarily mean that they are competent enough in the retirement area to assist you. 

3. Ask about experience. In most cases, you would opt for experience over a novice. Do you really think your choice of a tax professional is that different? Sometimes, there is no substitute for experience. Ask your tax professional about cases similar to your own, how often they deal with them and how they typically handle them. 

4. Ask about education/training. When most people think “CPA,” they think tax expert. But, the rules governing retirement accounts are highly complex and are constantly changing. If your tax professional is serious about this area of retirement planning, they will make sure to stay up-to-date on the latest tax law changes. Make sure to ask about the last conference or continuing education class they have attended on retirement planning.

5. Ask about continuity. Planning to maximize your retirement distributions and transfer your wealth is not a one-time deal. Some of your most important decisions may not be made for years, or even decades. If you don’t expect your tax professional to still be working, you may want to ask what type of plan they have in place to make sure you will still receive the high level of advice you deserve when you need it the most.

For professional assistance with tax planning strategies, click here to contact the office nearest you and schedule an appointment.

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TAX REFORM IS HERE! Here's What it Means For You

The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and most of its key provisions are now in effect. The law effectively overhauls the tax code and can have implications for your retirement plan, estate plan, education savings, and more.

But what does it all mean for you and your retirement plan? Here are some highlights:

Big Changes

Tax reform keeps seven tax brackets and lowers the top rate to 37% for individuals. The Alternative Minimum Tax (AMT) has been scaled way back. The standard deduction is doubled to $12,000 for singles and $24,000 for those who are married, filing jointly, and the child credit has been expanded. Personal exemptions are suspended.

Many popular deductions have been eliminated or scaled back. The state and local tax deduction is limited to $10,000, and the mortgage interest deduction will be limited to the first $750,000 in mortgage interest debt for new home purchases.

These changes, like most of the changes tax reform brings for individuals, are scheduled to sunset after 2025. Tax reform also brought sweeping reform to corporate taxation. Changes on the corporate side, unlike the individual side, are permanent.

Your Retirement Plan

When it comes to your retirement plan, the big news may be what was NOT changed by tax reform. 

Your ability to make pretax salary deferrals to your 401(k) is unchanged. Proposals to require after-tax contributions, instead of pre-tax (i.e., the so called “Rothification” concept), never made it into the final legislation. Despite rumors of its demise, the stretch IRA also remains on the table as a planning strategy for you to leave your retirement funds to your heirs.

Roth IRA conversions may make more sense than ever. Tax brackets have been lowered and the AMT has been limited to a very few taxpayers. This may be the time to have a conversation about conversion with your advisor. These changes are currently scheduled to sunset in a few years, so there is a window of opportunity here. Now may be the time to act. No one knows for sure what the future will bring, but higher tax rates are a strong possibility. Converting now locks in today’s low rates and avoids the worries of future tax uncertainty.

Tax reform’s changes to the “kiddie tax” may be yet another reason to convert to a Roth IRA. The new law taxes children’s unearned income at tax bracket rates imposed on trusts and estates, not the rate paid by parents or the child’s own rate. The new rates can be much higher. Required minimum distributions (RMDs)from an inherited IRA are ordinary unearned income taxable at top rates. So, distributions to children from inherited traditional IRAs can get hit with very high rates very quickly, even if parents pay lower rates. Converting to a Roth IRA eliminates this worry because RMDs from inherited Roth IRAs are generally tax-free.

Recharacterization of Roth IRA conversions is not available for conversions done in 2018 or later.Conversions are now irrevocable. A Roth conversion may still be the right strategy for you, but you must be sure. You will want to be certain that there is enough money available outside of your IRA to pay the taxes. Because there is no “do-over,” advice from a knowledgeable advisor is more important than ever. Doing smaller, or partial, conversions to hedge your bets may be a strategy worth undertaking. Also, waiting until closer to the end of the year when you have a better understanding of your tax situation may be a wise move. 

Recharacterization of contributions survives. This is good news for those who change their mind about the type of IRA to which they want to contribute. For example, if you discover your traditional IRA contribution is not deductible, you can still recharacterize that contribution to a Roth IRA if you are eligible to make a Roth contribution for the year.

Consider a back-door Roth IRA if your income is too high for you to make Roth IRA contributions. If you had concerns about this tactic in the past, you can rest easy. The committee reports that were released along with the new law explicitly mentioned the tactic on four separate occasions. However, you must have taxable compensation and be under age 70 ½ for the year to be eligible. Also, the pro-rata formula will apply.

Qualified Charitable Distributions (QCDs) are more valuable than ever. The QCD has always been a great tool for those who have an IRA and are charitably-minded. With tax reform expanding the standard deduction and doing away with many popular deductions, it is expected that fewer taxpayers than ever will itemize their deductions. This means that even though the charitable deduction remains, fewer taxpayers will use it. A QCD is a way you can still get a tax break for your charitable contribution while also using the new expanded standard deduction. If you are over 70 ½, you can transfer up to $100,000 tax-free directly from your IRA to the qualifying charity of your choice. These funds will not be included in your income for the year, and you can even use a QCD to satisfy your RMD.

For 2017 and 2018, the threshold for medical deductions is lowered from 10% of AGI down to 7.5% of AGI. This expands the 10% penalty exception for distributions from IRAs for deductible medical expenses, making it available for those whose medical expenses exceed only 7.5% of AGI (instead of 10%). If you have large medical expenses, you might want to consider bunching them in 2018 if you are looking to deduct them or access your IRA funds penalty-free. Remember, the exception to the 10% penalty is available even if you choose to go with the now larger standard deduction instead of itemizing.

Tax reform does away with the itemized deduction for advisory fees for your IRA. Consider paying these fees directly from your traditional IRA instead of out of pocket. Although it reduces the amount growing tax-deferred, you get a break by using pretax dollars. Because Roth IRAs are an after-tax account, this strategy won’t work there.

Tax reform also does away with your ability to claim a loss on your IRA. This was only available if you cashed out all your IRAs of the same type and the total distribution was less than your basis, so it was uncommon. However, now it is eliminated. These provisions are both scheduled to sunset after 2025.

If you lived in a qualified disaster area during a previous year, you may qualify for special treatment for a distribution taken from a retirement account in the coming years. For example, if you lived in an area hard hit by Hurricane Matthew, this could affect you. The special treatment is limited to $100,000 and includes relief from the 10% penalty if you are under age 59 ½, as well as extended time to roll over distributions.

You will have more time to roll over a plan loan offset if you leave your job or the plan is terminated. Old rules only gave you sixty days to roll over the unpaid loan balance. Tax reform will extend this rollover deadline until your tax return due date (including extensions) for the year during which the loan offset occurred. This can help if you are between jobs and need more time to come up with the cash.

Your Estate Plan

The estate, gift and generation skipping tax exemptions are doubled to $22,400,000 (married couple) or $11,200,000 per person for 2018. The top rate stays at 40%, and the step-up in basis stays intact. But these changes are only through the end of 2025, and then the exemptions go back to the $5 million per person indexed for inflation.

With such high exemptions available, few estates will be hit with the estate tax. However, those that are subject to the tax will be hit hard. If that is you, talk to your advisor about strategies such as maximizing gifts over the next few years.

When planning, don’t overlook the state estate tax, which can have much lower exemptions than the newly increased federal ones.

Education Savings

529 plans have been expanded. Previously, these accounts could only be used for higher education expenses. Now, 529 accounts can distribute up to $10,000 annually per student to pay for public, private, or religious primary or secondary school costs.

Contribution limits have been increased for ABLE accounts. If you have family members with disabilities, tax reform brings some good news in the form of increased contribution limits. Also, the designated beneficiary of the ABLE account can claim the Saver’s Credit for contributions made to their account. The Saver’s Credit was previously only available for retirement plan contributions.

Distributions from 529 plans can now be rolled over to an ABLE account, if that ABLE account is owned by the designated beneficiary of that 529 account or a family member.Rollovers count towards the annual contribution limit.

Other Provisions of Interest

The Affordable Care Act’s individual mandate, which penalizes people who do not have health care, will go away in 2019.

In the past, taxpayers could claim a deduction for major losses arising from fire, storm, or similar casualties, with some limitations. Tax reform will restrict this. Personal casualty losses will be deductible only if the losses are due to a federally declared disaster. If you are not in a federally declared disaster area, casualty losses will no longer be deductible.

The corporate tax rate has been cut from 35% to 21% starting in 2018. The AMT for corporations has been eliminated. Tax reform also creates a 20% business income deduction with some limits for pass-through businesses such as partnerships and shareholders of S-corporations, LLCs and partnerships. Unlike the majority of the tax cuts for individuals under tax reform, these changes for businesses are permanent. Now may be a good time to investigate changing your business structure to maximize your benefits under the new rules.

Good Advice Is Essential

Are you ready for tax reform? Do you have questions about your own situation? These big changes mean that now more than ever, good advice is essential. A qualified financial advisor can help guide you through all the new rules and ensure that you are best positioned to take advantage of the breaks and avoid the pitfalls.


Download “Tax Reform Is Here!” for a PDF version of the highlights listed above.

If you have more questions about how the new law might impact your financial plan or need a referral to one of our trusted tax specialists, please click here to contact the office nearest you.

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A Guide to 1099-R

If you’ve started taking distributions from your retirement account, you will soon receive a new form that will play a crucial role as you file your 2017 taxes. A 1099-R form is issued for all IRA distributions that are made payable to an IRA or Roth IRA account owner or beneficiary and for all IRA distributions that go to a Roth IRA account, as well as all employer plan distributions.

A copy of this form is sent to the IRS in February before you file your tax return, so it is crucial that it accurately records the amount of income you received in order to avoid any unnecessary taxes and penalties.

Click here to download a Guide to IRS Form 1099-R.

Have questions? Click here to contact the office nearest you.

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Calculating the Pro-Rata Rule in 5 Easy Steps

What is the pro-rata rule?

The pro-rata rule is the formula used to determine how much of a distribution is taxable when the account owner holds both after-tax and pre-tax dollars in their IRA(s).  For the purposes of the pro-rata rule, the IRS looks at all your SEP, SIMPLE, and Traditional IRAs as if they were one.  Even if you have been making after-tax contributions to a separate account for years, and there have been no earnings, you cannot isolate your after-tax amounts and must take your other IRAs into consideration.


If you hold both pre-tax and after-tax money in your IRA, you’ve likely heard of the pro-rata rule. It’s important to understand how this rule is calculated and how it can impact your retirement funds. In simple terms, the pro-rata rule is used to determine how much of a distribution is taxable when you have a combination of both pre-tax and after-tax dollars in your account.

As you proactively plan for retirement, understanding the tax implications of your various accounts can be key to maximizing your savings. Using the pro-rata rule to help determine the tax on your distributions can give you a better idea of how much money you’ll owe Uncle Samin retirement.

Here's five steps you can use to calculate the pro-rata rule:

#1 - Total up all of your IRAs.  Calculate the total balance of all of your IRAs.  Include the balanc-es from each of your IRA accounts, including SEP IRAs and SIMPLE IRAs.  Roth IRA balances and balances from any non-IRA based company plans are NOT included for this purpose.

#2 - Total up all after-tax dollars in IRAs.  Calculate the total balance of all after-tax dollars in all of your IRAs.  After-tax dollars are either non-deductible contributions made directly to an IRA or rollovers of after-tax dollars from a company plan.  If this is not the first year you have had after-tax dollars in your IRA, you should be able to find the previous year’s after-tax total on IRS Form 8606.

#3 - Calculate your percentage of after-tax dollars.  Divide your after-tax IRA dollars (step 2) by your total IRA balance (step 1).  If you have $20,000 of after-tax dollars in all your IRAs and the total balance of all your IRAs is $100,000, your percentage of after-tax dollars is 20% ($20,000/$100,000 = 20%).

#4 - Determine the taxable amount of your distribution.  Take the total of all your distributions and multiply it by the percentage you have arrived at in step #3.  This is the total amount of the distribution that is tax free.  If, in our example, a distribution of $10,000 was made, the tax-free portion would be $2,000 (20% x $10,000 = $2,000).  The remaining portion of the distribution ($8,000) would be taxable at ordinary rates.

#5 - Exception for rollovers to a company plan or charitable rollovers.  Under the Tax Code, only pre-tax dollars can be rolled from an IRA into a company plan.  If you are making a rollover from your IRA to a company plan, disregard the pro-rata rule altogether.  Just be careful not to roll over more than the total amount of pre-tax dollars in all your IRAs.  Qualified charitable distributions (QCDs) from IRAs also disregard the pro-rata rule.

For professional assistance with proactive tax planning for your retirement accounts, make sure to contact us. Click here to contact the office nearest you. 

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