Should You Fund Your IRA or Roth IRA First?

If you’re trying to decide whether it makes the most sense to fund your IRA or Roth IRA first, you’re not alone. This is a question many people face and often struggle to answer. Since we’ve talked to plenty of clients about this issue, we want to share exactly what you need to know to make the best decision for your personal situation:

The Basic Differences

Before we look at where you should contribute, it’s worth doing a quick refresher of what sets these individual retirement accounts apart. Both were created by the federal government to encourage people to save. With a traditional IRA, the amount you contribute immediately reduces your income tax for the year. Then after you retire and begin withdrawing the money, you’ll pay taxes on that income. With a Roth IRA, you pay the income tax when you contribute but are then able to withdraw from it tax-free after retirement.

Deciding Based on Your Stage of Life

Although these savings vehicles are similar, there is a very big difference in how they affect an individual’s taxes. That’s why the answer of which account you should contribute to first will depend on where you’re at in life. If you’re under the age of thirty, it’s probably going to be in your best interest to put some after-tax money into a Roth IRA. The reason is you’re likely paying a relatively low tax rate, which means a tax break won’t help you as much.

If you’re between the age of thirty and fifty, chances are you have things like a home mortgage deduction, a child tax credit or two and the benefits of filing as one half of a married couple. This may make it seem like traditional IRA contributions should be your primary focus. However, many people in this bracket still pay a relatively low tax rate, which means that Roth IRA contributions can still work best. An additional selling point of Roth IRA contributions is if you ever need to withdraw money you put into it, you can do so without facing any penalties or additional taxes.

For those over the age of fifty, first maxing out your annual traditional IRA contributions are the best course of action. The one exception is anyone who’s at least 71 and still working. For individuals in this situation, Roth IRA contributions can create an appealing stockpile for down the line.

As you may have realized from what we covered above, the optimal account for contributions can actually change from one year to the next. Needing to take a dynamic approach to planning for your financial future is just one example of why it’s so beneficial to have a knowledgeable financial professional on your side. If you want to learn more about how Donohoo Accounting can help, be sure to take a look at our tax services page.

Preparing for a Big Accounting Job Interview

Whether you’re searching for your first accounting job out of school or are in the process of looking for the next step in your accounting career, doing well during job interviews are a key part of reaching your goal. Although it’s completely normal to be a little nervous about a big job interview, the good news is there are clear steps you can take to prepare.

As far as what to expect during an accounting job interview, behavioral interviews are commonly used throughout the industry. The focus of this type of interview technique is to learn about your past behavior and use that as a way to evaluate what can be expected from you in the future. During this type of interview, you can expect questions that focus on your core competencies. Another important thing to keep in mind about behavioral interviews is they pose questions in the form of a situation, action, and result.

Now that you know a little bit more about what to expect during an accounting job interview, we want to share some actual examples that may come up:

Deadlines and Details

Given that deadlines and details both play important roles in the professional lives of accountants, expect questions about these topics. With the former, you may be asked to provide an example of a time when you had various tasks to complete in order to meet accounting deadlines. And for details, you may be asked about what steps you take to ensure that your work is completed with full attention to detail.

Communication and Teamwork

When people outside the industry think of accounting, they often picture individuals who are poring over spreadsheets on their own. While accounting does involve plenty of independent work, communication is still essential within a company or firm of any size. The same is true for teamwork. That’s why behavioral interviews for accounting jobs tend to include questions about these topics. You may be asked to describe experiences where you effectively communicated within your department, with someone in a different department or with a client.

Solving Problems and Setting Goals

If you’re looking for your first accounting job, you can expect to encounter plenty of situations that require problem-solving once you land it. And if you’re already in the accounting field, you’re well aware of why problem-solving is such an important skill. The same is true for setting goals and being able to contribute to hitting goals set by the organization. As you prepare for your accounting job interview, think of examples of situations that required problem-solving, along with other occasions when you worked towards a personal or organizational goal.

By giving yourself time to prepare and keeping the topics we covered above in mind, you’ll be in the best position to do great during your accounting job interview!

Tax Planning for Major Life Transitions

When Benjamin Franklin famously wrote about the certainty of death and taxes, he may not have realized that that these two aspects of American life would later become important elements of financial planning.

Estate and tax planning are not the most enjoyable topics of conversation. However, they are essential in terms of anticipating certain situations that could become costly. Estate planning is related to the efficiently managing money for individuals who are approaching retirement and want a smart way to distribute their assets to loved ones when they pass away. Tax planning involves various methods to reduce tax burdens, particularly in relation to major life events like marriage, divorce, childbirth and going to college.

Many taxpayers are not aware of the potential deductions, deferments and credits that they can take advantage of at certain points in their lives. Here are some examples:

 

Walking Down the Aisle

Most couples believe that getting married means a lower tax liability, and this is true to a certain extent. However, couples who earn incomes that are higher than the national average may end up paying more taxes when their status is “married filing jointly” than other couples who could actually benefit if they file separately. There may be other reasons when filing separately makes sense, such as when one spouse faces tax or child support arrears.

 

Childbirth

The joy of welcoming a baby into the family is shared by the IRS in the form of certain tax deductions and credits. Unfortunately, many taxpayers who are not aware of these benefits forego claiming them.

 

Going to College

Taxpayers who seek higher education are rewarded by the IRS in the form of educational tax credits, as well as tax-free investment and savings accounts. There are certain income limitations that may preclude educational tax credits, and thus it makes sense to conduct tax planning in advance.

 

Dissolution of Marriage

Aside from the obvious change in filing status, getting divorced may bring about certain tax implications related to child support payments and alimony. Individuals who retain child custody could face greater economic burdens even as they receive financial support from their former spouses. For this reason, it is important to investigate potential tax liabilities before the divorce decree is entered.

 

Retirement

When American taxpayers retire, holding on to every income dollar becomes a serious economic priority. Personal savings, retirement accounts and Social Security income can be taxed under certain circumstances. Even moving to a more affordable Latin American or Caribbean nation for retirement does not leave U.S. taxpayers off the hook. The best way to approach retirement taxation is to start planning now.

In the end, tax planning is something that more people should look into before any of the aforementioned events take place. If you would like to learn more about how tax planning can help you save money and take greater advantage of available tax credits, contact the tax professionals at Donohoo Accounting Services in Cincinnati by calling 513-528-3982.

Using Retirement Plan Contributions to Reduce Your AGI

AGI stands for adjusted gross income. This number sets the threshold for certain deductions such as medical expenses. It also determines eligibility for tax credits like the retirement savings credit and American opportunity credit. As its name implies, AGI is something that can change based on certain factors. That’s why we want to cover the effect that contributing to your IRA can have on it, along with another aspect of a retirement plan contribution that can reduce tax liability.

 

How Traditional IRA Contributions Adjust Income

When you make a contribution to a traditional IRA, it receives classification as an adjustment to income. The impact this will have on adjusted gross income is reducing it on a dollar-for-dollar basis. So if you make a fully qualified contribution of $3,000, that’s the exact amount your AGI will be reduced.

While that’s the basic overview of how this type of contribution affects AGI, as with many aspects of the tax code, there are some important considerations to take into account. One is how much of a traditional IRA contribution is deductible. For an unmarried individual who isn’t covered by an employer plan like a 401(k), the amount contributed will be fully deductible.

For people who are married, this type of contribution is only guaranteed to be deductible when neither spouse is part of an employer-sponsored retirement plan. If that criteria is met, contributions made will reduce adjusted gross income. It’s worth noting that while contributing to a Roth IRA can be a smart financial decision, this specific contribution won’t reduce AGI due to it involving after-tax dollars.

 

other Important Notes About Contributions and Retirement Plans

Even for people who are single, if they are covered by an employer plan and their AGI exceeds a certain threshold, their traditional IRA contribution won’t be deducted. Another thing to keep in mind about both traditional and Roth IRA contributions is they can qualify you for the retirement savings credit. If you’re eligible for this credit and claim it, you’ll be able to directly reduce your tax liability.

What’s interesting about the retirement savings credit is even though it lowers tax liability, it does not reduce AGI. That’s because it’s classified as a credit and not a deduction. The main criteria for claiming this credit are being over 18, having a modified AGI that falls below a specified level and not being a full-time student.

As this issue demonstrates, optimizing your tax situation can be quite a challenge. If this is something you want to do but are feeling overwhelmed by the number of questions you have, the best way to get answers and guidance is by enlisting the help of our professional tax services.