Joe & Al Answer Your Personal Finance Questions

Would contributions to a traditional IRA reduce your tax burden? How do you start saving money at a young age & what are the benefits of a Roth IRA? Find out the answers to these and more as hosts answer your email questions.

Q1 (2:31) “Would contributions to our traditional IRAs reduce our tax burden? My wife and I currently have no tax write-offs and our mortgage is paid off on our home. I contribute the maximum to my 403(b), but I also have a traditional IRA and a Roth IRA, as does my wife. We have been contributing to our Roth IRAs over the years to the neglect of the traditional IRAs. I was wondering if it would make sense to start contributing to the traditional IRAs so we can start to decrease our tax burden every year. Of course, the benefit of the Roth would have tax advantages years from now when I retire. My wife and I are both in our late 40s and I have about 10 to 11 years before I think I can retire.”

A1 (4:02) “A 403(b) for those of you who don’t know is the equivalent of a 401(k) plan. It’s a defined contribution plan where you put the money in pre-taxed, it grows tax-deferred and when you pull the money out it’s 100% taxable at whatever rate you pull that money out.”

4:35 “Because you have a 403(b) plan, you’re subject to income limitations. A deductible IRA phases out between $98,000 and $118,000 of adjusted gross income as a married couple.”

5:43 “If you’re already maxing out the 403(b) plan and putting money into a Roth, I would say stay with the Roth. That’s going to give you the tax diversification that you’ll need long-term.”

5:57 “With the Roth, if your adjusted gross income is below $184,000, the contribution limit is $5500 per person. Once it gets to $194,000 it gets completely phased out.”

6:25 “If you’re doing this (contributing to a Roth IRA) year after year, it’s going to be a pretty large balance by the time you retire, plus if you have a pension you’ll have a lot of ordinary income so you’re going to want some tax diversification.”

Q2 (10:52) “How should I start saving? I just started my first job and they don’t provide 401(k)s. What should I do to prepare for life, and to start saving? I’ve heard a Roth IRA is the way to go. Is this something I want? Other than tax benefits, does it grow?”

A2 (11:33) “Yes, a Roth IRA is the way to go – I’ll tell you why. You’re young and just starting out so that Roth IRA will grow all through your working years. All that growth is 100% tax-free. Usually when you’re starting out [in the workforce], you’re in a lower paid position so the immediate tax benefit [of a tax-deferred account] is not going to be that important to you, but what is going to be important is 30-40 years of compounded tax-free growth.”

13:10 “To start a Roth IRA, you need earned income.”

13:33 “Another good caveat is that you always have access to that money; you don’t need to be 59 ½ to take the contributions out of the account. You can put up to $5500 into it [annually], and say it grows to $8500 – you can still take that $5500 but the growth of $3,000 you need to wait until 59 ½.”

14:45 “The sooner you establish that Roth IRA, the better off you’re going to be.”

15:00 “Invest in a fund like a total stock market fund. You can go to Vanguard, Fidelity, there are a number of places that have good total stock market index funds that have very low cost ratios which means more of the growth and return comes to you.”

Q3 (15:24) “What are the tax implications of removing part of my IRA to give to my ex-wife? My ex-wife and I had separate IRAs. We divorced in 2014, but I kept the house. I owe her money in several months as a first payment on the value of the home. What are the income tax issues I will face by removing a large portion of my IRA to hand over to her?”

A3 (15:59) “When you take money out of your IRA there’s no choice for it not to be taxable. It’s fully taxable as income at your ordinary income rates and if you’re under 59 ½ [years old] you have to pay a 10% penalty to boot. What should have happened is this should have been part of the marriage settlement agreement. There’s this thing called a QDRO (qualified domestic relations order) which means you can actually take your IRA and put it in her name and there’s no tax consequence to either party.”

Q4 (19:09) “Will a loss on our sold home off-set taxes on a 401(k) withdrawal? My wife is 65 years old and I will be turning 65 in May 2017. We are planning to move out of California to Las Vegas for good. I will have to withdraw 100% of my 401(k) to put as a down payment to purchase a home in Las Vegas. Then, we plan to sell our house in California which is paid-off. We believe that after the sale, we will have a loss. Would we be able to use that loss to reduce taxes on the 401(k) or IRA withdrawal?”

A4 (20:04) “The answer, unfortunately, is no for two reasons: the first reason (assuming this is the home you’re living in, that it’s your residence) is that a loss on a personal use asset including a residence is never deductible, it’s a non-deductible loss.”

20:24 “A rental property is a different story. That’s an investment property. The odd thing about a rental property, although it’s a capital asset, is that you actually get an ordinary loss deduction under code section 1231.”

Q5 (24:38) “Will a Trump presidency reduce the tax and regulatory burdens placed on my small business? I own a small business in the New York area and have recently started to work on our 2017 financial projections. I have spoken to a number of friends, family and other small business owners about the ramifications of a Trump Presidency. Although I do not agree with many of his polices, I am hopeful that he will be able to reduce the tax and regulatory burdens of operating a business. When creating my forecast, what should assume and what should I ignore?”

A5 (25:18) “Trump has promised to lower taxes and help smaller businesses. As it relates to small businesses, what Trump would like to do is lower the C-Corporation rate to 15% which right now is 35%…when you look at the GOP plan that came out last June, they recommended a 25% tax for small businesses, and honestly without going into a lot of detail, 15% is unrealistic.
25:56 “What I would do right now is just use the current tax brackets because we have no idea what’s going to happen. You don’t want to forecast your small business on lower taxes, and if it doesn’t happen it’ll blow you up. If the tax rates actually do go down, then you’ll be in a better spot than you actually thought.”

Q6 (27:35) “Will I be thrown into a higher tax bracket due to a high ordinary income tax? I reach age 66 in July, full retirement age, and will continue working. I’m considering taking Social Security retirement at 66 and contributing to a 403(b) account to increase the balance. Is the entire amount, Social Security and wages, taxed as ordinary income, so that I will be thrown into a higher tax bracket? Is Social Security income counted dollar for dollar? Would it pay me to invest the max amount in my 403(b)?”

A6 (28:30) “If you’re still working, don’t take your Social Security – wait until you retire. Hopefully, wait until you’re age 70 because you get so much more monthly benefit (8%) every single year that you wait after full retirement age, in fact the difference between 66 and 70 is somewhere around 32% higher – in other words, your monthly payment is going to be 32% higher.”

29:28 “With Social Security, most of it, depending on your income level, is taxed at ordinary income. If you’re working, it’s probably 85%.”

32:09 “There’s another reason why I still would want to wait on Social Security; it’s because it’s great longevity insurance. You don’t know how long you’re going to live, but what if you live into your 90’s or even past 100? Having that Social Security at a much higher level is going to be very important as you get older…it’s a way to protect yourself for a long life.”