Simply Junior

Have you ever completed your tax return to find out that you owe the federal government thousands of dollars? If so, I expect it was because you raided your pension or retirement plan. If you haven’t learned this painful lesson yet, you should read this article so that you don’t end up owing the IRS thousands.

“NEVER TAKE MONEY OUT OF YOUR RETIREMENT PLAN!” read the sign that hung in the tax accountant’s office. I knew this was an overstatement, but understood why the accountant had such a sign in his office. Too many times did I, as a tax accountant myself, have to console crying or angry clients after explaining to them that they owed the government thousands of dollars because they withdrew money from their retirement or pension plan. The worst part is that these people that withdrew were often already facing immense financial problems – job losses, foreclosures, and bankruptcies.

If you take money out of your pension or retirement plan, you will first find out that the law requires retirement plan administrators to withhold 20 percent of your money for the federal government. Most people are upset by this news and believe withholding this amount will cover their tax bill. After all, it is a lot of money. What’s important for you to know is that it’s only the beginning.

Most taxpayers still need to worry about more federal and state taxes due. If you’re in the 28 percent tax bracket, you’ll owe the federal government another 8 percent of the amount you withdraw. Worse yet, if you’re under 591/2 years of age, you’ll most likely be penalized another 10 percent. In addition, most states will tax you 5 to 10 percent.

How will this affect your tax bill? If you withdraw $20,000, the plan administer will withhold 20 percent, leaving you with $16,000. By April 15 you’ll realize that you owe another $3,600 to the federal government and $1,500 to the state. So by taking out $20,000 of retirement savings, you end up with only $10,900. Now you’re probably beginning to understand why that tax accountant hung the sign “NEVER TAKE MONEY OUT OF YOUR RETIREMENT PLAN!”

Sure, there are exceptions. There are a number of ways to avoid the 10 percent penalty – using the retirement proceeds for tuition, medical costs, or to buy your first time home (up to $10,000). Some states don’t have an income tax. And, of course, these penalties and taxes don’t apply to ROTH Individual Retirement Accounts.

What’s important to remember is that your tax advisor will be able to explain to you the financial consequences that specifically pertain to your situation. He or she may even be able to suggest alternatives, such as taking a loan out against your retirement plan. Remember, contributing to a retirement account is a wise choice, just don’t make the very unwise choice by liquidating your account before speaking to a tax professional.

It’s that time of year. You know, when people like myself peer into our hazy crystal balls and predict the future with amazing accuracy. In this article, we take a look at where taxes are headed in 2011.

As I write this, the effort to extend the Bush Tax Cuts looks like a sure thing, but is still winding its way through Congress. Still, I feel fairly confident predicting they will make their way through and give us another year or two of low, low tax rates as the government tries to revive the economy. Of course, another $700 billion tacked on to the national deficit will probably kill any impetus, but we’ll worry about that down the road. Let’s just pray it isn’t a very short road!

2011 will not be the year of significant movement at the federal level. So, does that mean you are home free? Not a chance, my friend. You are going to get hit with the tax stick till you beg for relief. While the feds may not be doing it, the state and local governments will.

Let’s be blunt. The vast majority of states are flat broke and they can’t borrow money. This creates a unique situation. While the federal government falls all over itself to save Wall Street bankers, the political scuttlebutt is they may be unwilling to bailout states like California and Illinois when the come to Washington, D.C. with hat in hand.

This will lead to the states looking for help from another source. In this case, “help” will consist of new and higher taxes. I probably don’t have to tell you that the “source” will be you and me. The states have already been taxing like mad in 2010. Expect it to continue in 2011 as it becomes apparent that the government claims of an economic recovery are simply false. The economy is stagnant at best, which means tax revenues are as well. With states so far upside down, they are going to have to find a way to fund their shortfalls. There is only one way to do that – more taxes.

Where are taxes headed in 2011? It should be more of the same at the federal level, but keep an eye on your state government. All indications are they are going to try to tax you blind.

People like to be proactive rather than being reactive. Thus everything needs to be planned in advance. Retirement planning has become a necessity of life. And nowadays, the world is forcing you to do it because of following factors.

Factors that force you to do the retirement planning:

Maintaining status in society Increased Industry regulations Tax planning Uncertainty of the market Security of life Future planning State and federal government are actively focusing on regulating pension planning Benefits and incentives given for advance retirement planning

Don’t ever think that the social security is enough for you. You’ll end up fooling yourself only. To maintain quality of your life and your dependable life proactive financial planning has to be done for the retirement.

Many pension plans are available in the market each having their own pros and cones. Pension plans can be broadly divided into 2 types.

1. IRA – Individual retirement Accounts

2. Employer sponsored plans

IRA – Individual Retirement Accounts: These accounts are opened by the individual to have the future retirement income. It is managed by individual.

Two types of IRA are used popularly

1. Traditional IRA- Here your money will be taxed on withdrawal. If you withdraw before set limit age say 59.5 years you have to bear penalty by cut in the benefits.

2. Roth IRA- Here there is absence if penalty for the withdrawal anytime and the early contributions will have to bear tax. But no tax on the interest gained. Thus here earning will be free of taxes.

Employer Sponsored Plans: These accounts are managed by employer

DB plan – defined Benefit plan:

Quite old plan It was popular during 50s era. But after 70 s it was less popular. Here your income will be fixed and cannot be changed. Thus it will be like a future salary for you. It’s a low risk low return plan.

DC plan – Defined Contribution plan:

Her employer and employee both invest amount in a preset ration. Investments are done on mutual agreement like in Mutual funds or stock markets etc. Here your benefits are realized based on the investment performance in the market. SO it can be a high risk high return plan if both employee and employer agree to be in.

401(K) plan: Nowadays mostly used by the employers. Here tax deferral is the big advantage till 59.5 years of the employee.

Profit sharing plans: Here an employer pays all the contribution to share future profits. Profit will be shared between employer and employees. It has been settled and agreed well before.

Which one to select?

Now which one from above will be best is the subjective issue and varies from each person. Generally following things should be considered before selecting the appropriate plan for you.

Which plans you are eligible for? – read all eligibility conditions

Which plans suits your age?

What are the benefits for me in each? Compare it in your perspective

Is the plan flexible enough? You shouldn’t ended up in investing in such way that you can access your money even if you need it.

Taxes and cost: do your taxes and cost planning and forecasting can try to synchronize your plan to cope up with it.

Tax Day 2011 Extension

Normally, all previous years’ taxes are to be postmarked no later than midnight on April 15th of the following year of any given year. Meaning, that your taxes due for 2010 must be paid and filed by April 15th 2011, correct? Well, normally, yes; but not this year. The only time that this normally fluctuates is if and when April 15th falls on a weekend. April 15, 2011 will be on a Friday – so what gives? For the millions of American, like me, who wait until the last possible minute (my mantra – procrastinate later) this is welcome, but puzzling news. While we procrastinators and last minute filers rarely reason long enough to ask why, it is important to know the correct date, and to realize how it may or may not have an effect on other dates relevant to Tax Day 2011 such as automatic extension dates.

Extension to Pay NOT an Option

It is imperative to state and remind that although the IRS grants “automatic” extensions allowing taxpayers to file their final forms sixty days later, the extension and any estimated owed taxes are still due on tax day, which for 2011 means that your forms and payment (normally done on a Form 1040 V) must be postmarked at or before midnight, Monday April 18, 2011. Tax Day 2011 Extended Due to Emancipation Day Recognition What holiday? So by now, most of us Americans are racking our brains and scratching our heads trying to figure out what holiday in April is nationally celebrated. Tax Day 2011 has been extended due to remembrance, recognition and celebration of Emancipation Day, a Washington D.C. holiday, not a nationally recognized holiday.

Emancipation Day had been recognized previously by (Washington D.C.) mayoral proclamation and now by being officially designated as an officially recognized public holiday of the District of Columbia. The holiday commemorates the “first freed” by the U.S. federal government when President Lincoln signed the Compensated Emancipated Act nine months prior to his issuance of the infamous Emancipation Proclamation.

As a result of the public holiday in Washington D.C. the Department of Treasury, the governing body overseeing the Internal Revenue Service, has extended Tax Day 2011 until Monday, April 18, 2011. Careful Calendar Markings Required Emancipation Day does not equate to Tax Amnesty Day. Just because Tax Day 2011 is not April 18th versus the 15th does not automatically adjust other dates by 3 days. Keep these dates in mind:

Overseas Exception Due Date: June 15, 2011, the 15th falls on a regularly scheduled business day and hence the deadline will not be extended without approval.

Automatic Approval Extensions Due Date: June 15, 2011 (remember – estimated payments must still be sent in via IRS Form 1040V with the request for extension; it is better to over estimate as you may still be held liable for penalties for underpayment.)

Approved Filing 1040 Extensions Due Date: October 15, 2011

The extension of Tax Day 2011 will give some the necessary additional weekend and time to prepare and file the required forms and payments, but hopefully it will allow all to reflect on the reason – Emancipation Day, commemorating the freeing of those held in servitude in the federal capitol.