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What You Need to Know About IRA Rollovers

Are you thinking of an IRA rollover? Getting these three rules right is critical if you want to avoid a big tax bill.

THE 60-DAY RULE

Your rollover must be completed within 60 days of withdrawal, or it’ll be taxable. You’ll also get hit with a 10% early distribution penalty if you’re under the age of 59 1/2. If you miss the 60-day limit, you may qualify for a rule waiver. The late rollover must be due to one of the IRS specified reasons and completed within 30 days after the specific reason for failing to meet the 60-day requirement.

THE ONE-ROLLOVER-EVERY-12-MONTHS RULE

This rule applies in aggregate to IRAs and Roth IRAs. If you have both types of IRAs, you are still limited to just one 60-day rollover in a IRS-month period. Additional rollovers can result in federal income tax and possible early withdrawal penalties. Some specific exceptions apply.

THE SAME-PROPERTY RULE

If you received a cash distribution, cash must be deposited in the rollover IRA. Similarly, if you took your distribution in stocks, you must deposit the same stock shares in the rollover IRA.

Talk to your tax professional.

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A Benefit Plan From B to Z

The Baby Boomers, Generation X, millennials, and Generation Z, who make up most employers’ workforce, have different situations and benefit needs. That’s why increasing numbers of employers are looking beyond a one-size-fits-all plan to multi-generational benefit plans.

KNOW YOUR DEMOGRAPHICS

The first step in moving your company’s benefit package toward a multi-generational offering is to know your workforce demographics and identify
what the different generations have in common and what their differences are.

The University of North Carolina Kenan-Flagner Business School Guide to Leading the Multi-Generational Workforce identified these age-arcing values: success for the companies; a culture that encourages leaders to lead by example, be accessible, serve as a coach or mentor, challenge employees, and hold them accountable; to enable success in their careers; recognition of different life stages; and expectation of new and unanticipated challenges ahead. Specific to benefits, a Forbes Advisor survey found that Gen Z, Gen X, and baby boomers all prioritize flexible work options, paid time off, and parental leave.

COMMUNICATION AND FEEDBACK

Tailor communications. Baby boomers, for example, value job security and loyalty to their employers. Gen Xers prioritize work-life balance and flexibility. Make all communication clear and easy to understand, and send through multiple channels. Gen X, millennials, and Gen Z have grown up in a digital age of instant information. They prefer short, straightforward messages. Solicit feedback throughout the year and act on it. And measure benefits use over time and adjust your program accordingly.

RECOGNITION AND TEAMWORK

Motivate employees with incentives that matter to them. To create effective reward programs, consider what inspires (or turns off) certain generations or individuals. Create programs that encourage generations to work together and to share knowledge. Let them know that sharing their knowledge is vital to the success of your organization. For more direction, review your benefits program regularly with your financial professional.

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Should You Lease or Buy

Leasing equipment can be a great option for newer businesses short on cash, while buying may be better in the long run when possible. But the decision isn’t that cut and dried. You need to consider numerous other factors.

BUYING

Generally, if you have the money and a solid cash flow, buying equipment may prove less costly than leasing. It may also provide more choices, allowing you to shop around, compare prices, and get exactly what you want. In addition, owning builds equity in the equipment, so if you need to sell the equipment, you potentially recover some of your initial cost.

Consider tax benefits. For example, if you finance your purchase, you can typically deduct the interest as a business expense. For some business assets, such as automobiles, you may be able to deduct the vehicle’s depreciation. IRS Section 179 allows businesses to deduct the total purchase price of qualifying equipment purchased or financed during the year (within limits) rather than expensing it.

On the minus side, buying equipment entails higher up-front costs, ties up cash that may be better used for other expenses, and puts the responsibility for all maintenance on your business. Depending on the type of equipment, you also risk obsolescence.

LEASING

Leasing gives you easy, predictable payments spread over time and leaves the business with more cash for unexpected expenses or business opportunities. It may be a good option if you’re looking to build your credit. You also reduce obsolescence risks if your lease allows for technology updates and regular maintenance is included. As for tax benefits, payments are typically a deductible business expense.

Detractions include a total cost that usually exceeds the purchase price, no equity in the equipment, the leasing company controls maintenance, and you may have limited choices. You also may be unable to alter the lease agreement to best meet your needs.

Need some guidance? Your financial professional has experience with other businesses and can assist you, too.

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April 2024 Client Line Newsletter

Should You Lease or Buy – leasing can be a great option if your short on cash while buying may be better in the long run.

A Benefit from B to Z – based on the age or your employees, they have different situations and benefit needs.

What You Need to Know About IRA Rollovers – getting these three rules right is critical if you want to avoid a big tax bill.

Too Young to Need Life Insurance – what’s your excuse for not having life insurance?

Is Alimony Taxable? – for federal income tax, the answer is “Yes” and “No”, depending on your divorce agreement date or last modification.

April 2024 Client Profile

Claiming Deductions for Volunteer Work – volunteering may give you a tax deduction.

April 2024 Question and Answer

Considering Unretiring? – 1 in 6 retirees are considering a return to work.

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March 2024 Question and Answer

QUESTION:

I’m big into spring cleaning this year and wondering whether I can toss my old tax returns and records.

ANSWER:

Generally, keep tax returns for at least three years from the return’s due date. The IRS can go back up to six years if your return omitted more than 25% of income. There’s no limit if fraud is proven. Also, businesses should hang on to payroll tax records for a minimum of four years after the due date for filing Form 941 for the fourth quarter of a year. Additionally, records on costs of business assets, depreciation, etc., should be retained for decades. It’s best to follow the advice of your tax professional.

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Auto-Enrollment is Coming

On average, 401(k) plans with an automatic enrollment feature have a 20% higher participation rate than plans without, according to Bankrate.com.

ENTER THE SECURE 2.0 ACT

Automatic enrollment is about to become more “popular.” If you’re a new plan sponsor or contemplating adding a 401(k) plan to your benefits package, the SECURE 2.0 Act may have taken the decision of whether or not to include automatic enrollment in your plan out of your hands. Under the Act’s provisions, starting in 2025, many 401(k) and 403(b) plans set up after 2022 must automatically enroll all employees who meet their company’s plan eligibility requirements.

The SECURE 2.0 Act’s other automatic enrollment provisions include:

  1. The plan’s initial contribution amount must be at least 3% and no more than 10%.
  2. Contributions increase by 1% annually until reaching at least 10%, but not more than 15%.
  3. Existing 401(k) and 403(b) plans pre-Act are grandfathered.
  4. Small businesses with ten or fewer employees, businesses newer than three years old, and church and government plans are exempt.
  5. Individual employees may opt out of the automatic enrollment.
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Heirs or Beneficiaries?

The terms heirs and beneficiaries are interchangeable, right? Not necessarily when it comes to distributing your property after death. So, knowing the difference between the two is essential in estate planning.

THE DEFINITION OF HEIRS

An heir is a legally identified person who’s entitled to receive your estate property when no will or trust dictates distribution. In that case, state law dictates how an estate is distributed and which heirs are entitled to assets.

Generally your heirs, in succession order are:

  1. Your spouse
  2. Your children
  3. Your parents
  4. Your siblings
  5. Your grandparents
  6. Your next of kin. If no next of kin, your property would revert back to the state.

BENEFICIARIES DEFINED

A beneficiary is a person you’ve specifically named to receive proceeds and assets from:

  • Life insurance,
  • Employer-provided qualified retirement plans,
  • Individual retirement accounts,
  • Trusts, and
  • Annuities, as well as property distributed under your will.

A beneficiary may or may not be an heir and vice versa. Understanding a beneficiary’s role in your estate plan and their rights to your assets or property is a key element in planning. If you don’t name beneficiaries with a will or other planning tools, they’ll be chosen for you.

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The Lowdown on Excise Tax

Generally, federal excise tax is imposed on the sale of specific goods, services, or certain uses. Some examples include fuel, airline tickets, heavy trucks and highway tractors, tires, tobacco, alcohol, indoor tanning services, and other goods and services. The tax may be imposed at the time of import, sale by the manufacturer, sale by the retailer, or use by the manufacturer or consumer.

REPORTING AND PAYING

You generally must file an IRS Form 720, Quarterly Federal Excise Tax Return to report and pay the tax. Excise taxes are in addition to any sales tax on items and independent of income tax. States may levy excise tax as well. You’ll find a similar state or local form on the tax authority’s website.

You can pass the cost of excise tax onto your customers.

DEDUCTIBLE?

You can deduct federal excise taxes paid for goods or services on your small business taxes, potentially decreasing your small business effective tax rate.

Excise taxes collected from customers are not deductible.

You might want to consult a tax professional to help you with reporting and filing.

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March 2024 Client Profile

Marlene owns rental property inherited from her father. She’s looking for money to expand her veterinary clinic and diversify her investments. One option is a home equity loan.

Checking with local banks, Marlene has found that not all banks offer home equity loans on rental property and that lenders share standard requirements for these loans:

  1. 15% to 20% equity minimum,
  2. minimum credit score of 620 to 700, and
  3. debt-to-income ratio of 43% or less.

Some lenders may also have limited Loan-to-Value caps for investment properties, 60%, for example.

She’s also learned that the rental property home equity loan interest may be tax deductible, but, generally, only if she uses the loan to improve the property and designates it as a qualified residence for the tax year claimed rather than renting it.

Marlene also has found some alternatives—a home equity line of credit, a cash-out refinance, and a personal loan. She’s going to discuss her possibilities with her financial professional.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.