Tax Day

Moves To Make Before April 17th

With less than one week left before Tax Day, I wanted to give you some last-minute moves that you can consider making right now.

Obviously, if you haven’t yet completed your return for this year you should do all the usual things like making sure you take every deduction you’re entitled to and get your return in on time.

I would also point out that if you’re receiving a refund from Uncle Sam this year, it’s possible to have as much as $5,000 returned to you in the form of I Bonds, which I recently told you about, by using form 8888. (As a side note, this is actually the only way that investors can still get PHYSICAL I Bonds now that financial institutions are no longer selling them.)

Of course, even if you have ALREADY filed your 1040 it’s not too late to take advantage of some very powerful tax shelters.

Remember, the term “tax shelter” does not automatically mean some offshore corporation.

Nor are tax shelters merely available to wealthy Americans with teams of attorneys and accountants.

Take Individual Retirement Accounts, or IRAs.

Nearly everyone has heard of them … loads of Americans use them to save and invest … and yet they ARE, technically speaking, tax shelters.

Better still, you can still fund an IRA for 2017 up until April 17th.

Like 401(k) plans, IRAs were created by amendments to the Internal Revenue Code. And they serve much the same purpose — allowing individuals to sock away money for retirement and reap tax benefits in the process.

The two biggest categories are traditional IRAs and Roth IRAs.

Traditional IRA Recap:

  • You contribute pre-tax money and thus save on your current taxes by lowering your taxable income…
  • Your contributions and earnings will be subject to taxation upon withdrawal…
  • And you must stop contributing and begin withdrawing money at age 70½.

Roth IRA Recap:

  • You contribute after-tax money and thus gain no upfront tax-savings benefit. But…
  • Your contributions — and earnings — will never be taxed again, so long as you meet the basic guidelines (eligible age of 59½ and held for at least five years)!
  • Plus, you can continue socking away money as long as you have earned income, no matter what your age. And you never have to make minimum withdrawals, even if you live to be 110.

Now, BOTH of these account types:

  • Give you a huge range of investment choices, pretty much everything offered by your broker…
  • Can be funded until tax day of the following year.
  • And allow catch-up provisions for contributors over the age of 50. For 2017, the regular limit for either IRA is $5,500 and $6,500 for age 50+.

However, it’s important to note that you can only contribute to a Roth IRA if your Modified Adjusted Gross Income (MAGI) falls within certain levels.

Regular IRAs, on the other hand, have no income restriction for contributions, though the tax deductibility can be affected by your MAGI and whether or not you’re covered by a retirement plan at work.

All these reasons are why Uncle Sam gives you until tax day of the following year to fund an IRA — because there may be no way for you to determine which IRA to use or fund for a given year until you finalize your taxes!

There are no age restrictions for Roth IRAs — as long as you have earned income you can start socking away money. Your ability to contribute is also unaffected by any retirement plan you might have through your employer.

Just remember that you cannot max out both a regular and Roth IRA in the same tax year.

Your total contributions to all IRA accounts — not counting rollovers and such — must fall within the aforementioned ranges.

And please realize that there are other types of IRAs beyond the common types I just described.

For example, rollover IRAs act just like traditional IRAs but they’re funded by converting other retirement plans such as 401(k) plans.

For the self-employed, there are also SEP IRAs and Simple IRAs. Both types allow small businesses or self-employed individuals to sock away money in lieu of establishing pension plans.

There are also self-directed IRAs, which allow you to invest in a broad range of items, including real property such as land and houses.

As I’ve mentioned in this space before, I also use a Solo 401(k) plan – which is another type of plan available to anyone with their own business. I’m in the process of making a major contribution to that account for the 2017 tax year as well.

Meanwhile, even my 10-year-old daughter is getting in a last-minute tax shelter contribution through her Coverdell Education Savings Account.

These used to be known simply as Education IRAs, and they function very much like Roth IRAs designed for young students.

In fact, like Roth IRAs, they allow you to sock away money — $2,000 a year in this case — by tax day.

That means you can contribute another $2,000 into a new or existing Coverdell and still count it for 2017.

And like Roth IRAs, as long as the funds are used for the benefit of schooling costs, any returns earned in the account will be distributed free of additional taxation going forward.

No, $2,000 isn’t all that much … especially with the skyrocketing cost of higher education. But it’s still a nice chunk of change that will add up over the years.

Plus, it’s perfect for using any tax refund money you might have already received if you happened to file your taxes early.

And don’t underestimate the benefit of that tax shelter:

Let’s say you happened to put $2,000 into your child’s Coverdell account and invested it so wisely that within ten years it had miraculously turned into $200,000.

That full amount would be available to pay for your kid’s education, and not one penny of taxes would need to be paid as you pulled it out!

Another cool feature of Coverdell accounts is that — unlike ever-popular 529 Plans — they can be used for expenses related to ALL types of schooling: High-priced pre-K classes, private secondary education, and even many associated costs such as computers and books.

Like the Roth IRA there are some income caps to be aware of.

However, even a child with no earned income can contribute to a Coverdell!

So if you’re above the income threshold, you can just gift the $2,000 to the child under the Uniform Transfer to Minors Act and then they can put it in the Coverdell themselves.

And again, please note that you can establish a Coverdell for ANY child in your life — not just a direct relative but even a friend’s child or grandchild.

Corporations and trusts are also free to establish Coverdells.

Just know that a Coverdell’s beneficiary can only have $2,000 contributed to his or her account in any given year. So you should always ask whether an account already exists and how much has been deposited before establishing one on your own. Contributions must also be made before the beneficiary turns 18.

A Coverdell beneficiary has to use the funds before turning age 30, or else taxes and penalties will likely be owed. However, the account can always be switched to another beneficiary before then — even if the new recipient is between ages 18 and 30!

If you’re interested in establishing a Coverdell, just check with your regular brokerage house or other financial institution. Most offer them, and it’s just a matter of completing some simple paperwork.

But do it now… there are only a few days left to fund any of the shelters I mentioned for 2017!

To a richer life,

Nilus Mattive

Nilus Mattive
Editor, Rich Life Roadmap

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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