Roth withdrawals are tax free (post age 59½ and as long as the first contribution was made at five years prior to the withdrawal). Traditional IRA withdrawals are subject to ordinary income tax on all the growth as well as on all the deductible contributions. At age 70½, distributions are required from traditional IRAs but none are required from Roths.
Question: How much of my paycheck should I be saving each year? Does that impact my tax hit?
Lepson: The amount one should save for retirement depends upon how old a person is, how much they have saved already, where the money is invested and what lifestyle a person envisions they would like down the road. For people first staring out, a good target would be 10-15 percent of income. For people who are starting later or who are behind in their savings, the percent should be much higher.
If you save in an employer sponsored plan like a 401(k), you can save on a pre-tax basis and that will reduce your current income and provide you with a tax break. Traditional IRAs can also be deductible and are often terrific places to save as well.
Question: I am starting a new job and was curious what taxes I would have to pay if I withdrew from my Annuity Savings Account.
Lepson: If possible, I would highly recommend against withdrawing from your retirement plan. But if you must, you will have to pay taxes at your current tax rate and if you are under 59½, you will also have to pay a 10 percent penalty tax. It’s best to keep the money in the plan or roll it to an IRA so it will be there for you in the future.
Question: Last year, my wife and I paid $14,000 in daycare expenses, but found out we only can apply for a $200 tax credit due to our combined income. Since we’re both working, I believe we can deduct up to $5,000 of this expense. Why is this deduction so far below the real cost of daycare, especially since this helps both parents to be productive members of society?
Lepson: Day care is expensive, and the IRS sets the rules. Employees may receive up to $5,000 tax free benefits under a dependent care benefit (DCB) plan. The plan may be paid with employee’s pre-tax earnings. These dependent care benefits are reported in box 10 of the employees W-2 and are not included as wages in box 1. Check with your employer to see if they offer such a plan
Question: I made a fair amount of money through legal (and illegal) poker games. Should I declare it?
Lepson: Wow — winning at the poker table — good job. But, yes, you should declare the income.
Question: My self-employed husband hit upon hard times recently and owes several years of back taxes to IRS. With penalties, it’s up to $70,000. Since we file jointly, my name is on it, though my taxes are paid through my employer. We submitted an offer of compromise four months ago and are waiting to hear the outcome. Should we hire a tax adviser to help us navigate this precarious situation? A tax attorney? We’d love to discuss with an expert on how to proceed, but are not sure where to turn?
Lepson: Tough stuff, Julie. You should absolutely look to a professional for help and guidance. A good CPA and/or tax attorney can certainly help. They will be able to navigate the system much better than any of us could on our own. See my answer above for finding a qualified professional from the Mass. Society of CPAs.