Join

When you start planning for retirement, the hope is that you will set aside money and it will grow until you leave the working world to spend your time on things other than working at a job. 

However, life happens. There are going to be times when you will need money to pay for things that pop up. It is at times like these that you will want to pull money out of your IRA.

However, you do need to be careful.  If you pull money out before you reach age 59-and-a-half, you will face a 10% penalty for early withdraw.  This would apply if you were pulling money out of either a Roth or Traditional IRAs.

However, it only applies to the amount of the distribution that is included in gross income.  Therefore, it does not apply to the part of your distribution that is a return of your contributions.

However, this is not a hard and fast rule.  There are certain instances where you will not be subject to the 59 and-a-half rule.  When you receive your 1099-R that shows the amount you received, Box 7 will have a code in it that will signify what type of distribution it is. 

Let’s take a look at these codes and what they mean.

If you see Code 1 in box seven, you have had a separation of service. 

  • This means you received the distribution in the year you turned 55 or 50 if you are a qualified public safety employee. 
  • A public safety employee is someone from any level of government (federal, state or local) who is a police officer, firefighter, customs official, border patrol agent, air traffic controller, or provides emergency medical services. 
  • Keep in mind that this code does not apply to IRAs.

Code 2 in box seven means that you have received a distribution that is part of a series of substantially equal periodic payments. 

  • Unless the payment schedule is modified before you reach age 59 and-a-half.

If you have a total and permanent disability, you should see a three in box seven, indicating that the payments you receive are due to a disability.

Code 4 in box seven means that you are receiving the payment as a beneficiary of the participant in the plan, who has died.

If you have received a distribution from the retirement plan to pay for unreimbursed medical costs, box seven will have a five in it.  

If you underwent a divorce, and as part of qualified domestic relations order fund were distributed from a retirement plan (other than an IRA), box seven with having a six written in it.

If you have left a job and have been receiving unemployment compensation for 12 consecutive weeks, you can receive money from a retirement plan to pay for unemployment health insurance. 

  • If that is the case, you should see a seven in Box 7 of your 1099-R.

You can make withdraws from an IRA to pay for education costs, including tuition, supplies, books, and room and board for someone who is a half-time student. 

  • This withdrawal would be indicated by an eight in Box 7.

First-time homebuyers are allowed to withdraw up to $10,000 from an IRA to purchase a home. 

  • The $10,000 is a lifetime limit, and you must not have owned a home for at least two years. If you are married, both you and your spouse are entitled to a $10,000 lifetime withdraw. 
  • The number nine will show in Box 7 if you have made this type of withdrawal.

Code 10 in Box 7 indicates that a distribution was made from a retirement plan to pay an IRS levy.

If you are a reservist called to active duty for a period of 180 days or more, or for an indefinite period, if number 11 appears in in Box 7 indicates that you have received a qualified reservist deferral.

Need some help with understanding your options when it comes to early retirement distributions? 

Drop me a line at [email protected] and we can discuss your situation and how best to take advantage of the deductions and credits available to you.

In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. 

If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.

0 Comments
Potomac Local News: Today, what we’re going to talk about is preparing for your new baby. There are some tax implications that come with having a new child growing the family, correct?
Chris Peden: That’s absolutely right. The first one is a child tax credit, which can give you up to $2,000 per child as a tax credit on your taxes. They just need to be under 17.
You provide at least half their support and they live with you at least half the year. So that’s something that can certainly help parents out of tax time.
Potomac Local News: Are there things like documents, records that that should be held on to immediately or throughout the year? What should parents be doing to collect, I guess, build a file for tax time?
Chris Peden: Absolutely. One thing we always need is a Social Security card because that’s going to go on a tax return to be able to claim your child.
Second, we’re just going to need some proof that the child actually lived with you. A great way to do this is to have a doctor bill with a child’s name on it and your address also your poly may end up putting the child in child care. So you want to get a document from the child care provider that has their name, how much they spent with them, as well as their tax period notification number so that you can take a credit deduction for the child care that is being provided for you.
Potomac Local News: And we don’t want to forget about new parents who are adopting a child. Are there ways people can save on their taxes with these fees and these adoption fees?
Chris Peden: You can deduct up to $14,080 for your 2019 taxes for the expenses that you incurred to adopt the child. However, if you have a special-needs child, you automatically get that $14,080 credit. So you want to keep track of everything that you’ve spent to get that child adopted in as part of your family. Keep records of what you have spent with lawyers, adoption agencies or what have you.
Anything that could go into claiming that child as your child for the adoption credit. And, really, what I say to my clients is “keep all the information, gathered together. Let us go through it, review it, so we can see the deductions you can and can’t take. Let’s work with you to see what we can deduct for you.
Potomac Local News: And finally, as your child grows, as it gets out of the infant stage or into the toddler phase, what else should you think about when it comes to your children and taxes?
Chris Peden: Your child’s education. When you contribute to a Virginia 529 plan, you get $2,000 per child. So something to keep in mind because you want your child going to college. That’s one way that you can take advantage of tax laws to pay for college.

Chris Peden is the principal owner of Peden Accounting Services in Manassas. Contact him today for all of your business accounting needs by calling 703-967-1948.

0 Comments

Potomac Local News: Today we’re going to talk about hiring your children. This is something that business owners can take advantage of, and, “hiring” is not such a dirty word when it comes to your children, correct?

You can actually hire your kids and set them up for success in the future. What is this all about?

Chris Peden: Well, first of all, people see that and they say, “wow, you know, I can pay them and deduct them for doing chores.”

Well, no, actually, they work they do has to do with your business. So if you have a payroll set up with a payroll company, you can actually put them on payroll and have to do taxes.

  • As long as the work related to your business, has a business purpose, and they’re capable of actually doing those tasks, you pay them like you regularly would or you’d make a payment to, say, a Roth I.R.A., or to an educational fund to fund your college education or the retirement fund.

What can my child do for my business? 

Potomac Local News: I imagine that this type of thing would work for for for certain businesses, like office locations, and home-based businesses. Can you give us an example of some of the tasks that a business owner may have their child do?

Chris Peden: Yes. Well, I actually have a friend out in California. I work a lot with him about dealing with tax plans and tax savings, and he puts together a little binder. And what he does, he has a son sit down and put the pages in the binder to organize it.

  • Or you may have a child in high school who’s into graphic art or graphic arts and likes working with their computer to create images for marketing brochures for your business.
  • These tasks are examples of what you can pay your child to do for rather than sending that work out-of-house. Maybe your children have a great knowledge of social media and can help your business in that respect.
  • With this approach, you can have a little more control because it’s your child sitting there and you can help them. And this teaches them to learn to work in a business and then feeds their passion for what they’re doing.

Potomac Local News: A few of the questions that could lead to fear is, when it when I get my kid in the business, what about all of the paperwork involved?. Is the IRS going to look down on me for hiring my child? On paper, does it make me look like I am forcing them to do something they don’t want to do?

Walk us through the set-up process? What’s the paperwork? And then what’s the legality of it all?

The paperwork is easy

Chris Peden: The paperwork is basically setting up an employee on your program, on your payroll. I would recommend working with a great payroll company such as Paychex, which will walk you through the legal ramifications.

  • When it comes to the amount of pay, make sure that the work you’re paying them a market rate for it. Ask yourself, “What would I pay a normal if someone outside my family to do this work?”
  • And you want to pay them a market rate, be sure they do the work. Is the job you’ve hired them for at their skill level? Are you only going to pay someone to do quantum mechanics unless they’re really, really smart, like young Sheldon Cooper?

Potomac Local News: And finally, once you have your kids working in your business, is the work you’re paying them to do “busy” work designed to keep them entertained and out of your hair? Or, are you actually helping to set them up for success and giving them real-world experience?

Chris Peden: Absolutely. If they’re coming, they’re working for you, they’ve worked for you as an employee in your company.

  • They can list that experience on a LinkedIn profile. They can put on a resume that they’ve actually done this work and they have experience.
  • And if they do things as we’ve mentioned, graphic arts, social media posts, they have samples that have actually been used in a business that could lead them to find a job somewhere else or starting their own company.
  • It helps them build a portfolio that they can go out and be working for other outlets for someone else or get clients on their own.

Chris Peden is the principal owner of Peden Accounting Services in Manassas. Contact him today for all of your business accounting needs by calling 703-967-1948.

0 Comments
Ă—

Subscribe to our mailing list