Simply Junior

Last year, millions of Americans took advantage of online tax filing services. In fact, the Internal Revenue Service offers links to income tax preparation services on their website, and many of these services offer free federal income tax filing for people who meet certain income qualifications.

Most online tax filing sites function similarly. First, you must establish an account by setting up a user name, password, and providing an email address. An email confirmation will be sent automatically, and including a secure link to the site for confirmation of your identity.

Once your identity has been verified, you can begin entering information. These sites are generally divided into several sections. First, basic information such as your name, address, filing status, and name of dependents must be provided. The next section requires entry of information from your W-2s, and then you will be asked questions to determine what, if any, deductions you may have in order to determine your taxable income. Finally, the program calculates the amount of your income tax, and depending on your status, the amount you owe or your refund.

Once all the information has been entered, you can file electronically. Many sites provide free federal tax preparation and filing, but charge for the state tax preparation and filing service. You must pay any fees prior to the actual filing using a either a credit or debit card. You will also be asked how your refund should be processed. Generally, you can choose to have a check sent or for the money to be deposited into your checking or savings account.

If you have not previously filed electronically, you must either sign electronically (you need to have the previous year’s return to do this), or opt to sign a paper form, which will be mailed to you after you have filed.

After you have paid, you will have an opportunity to print out your return for review prior to filing. If everything looks okay, your return can be filed. Click the appropriate button, and then wait for verification that the transaction was processed successfully. You should also receive email confirmation of this transaction.

Anyone who files a 1040EZ or 1040 can file online with most of the sites. If your return is more complex, the selection is more limited, and it may be advisable to use a tax accountant. However, most of these sites can handle 1099s and business deductions.

Some tax software vendors offer free online tax preparation depending on your income level. A list of sites is available on the IRS web site indicating the income level at which they offer the free filing service. Be aware, though, that the free filing only pertains to your federal tax return, not the state.

Once you have used a tax service, your information is stored for the next tax-filing year. Write down your user name and password on the hard copy of your tax form, also noting the site’s address. This will ensure that, next year, you will be able to log in and proceed without having to enter any preliminary information.

After you leave a job, there is a big tax question you will have to deal with and that is what should you do with any money you have in a qualified retirement plan with that former employer. This included the 401(k), stock bonus, profit-sharing and any other qualifying plan. Generally you would be advised to roll it all into an IRA.

While this usually makes a lot of sense, it allows you to take management of your funds for retirement and continue deferring taxes on income the funds generate. Be aware though, if this process is not handled correctly the rollover can end up being very costly. Let us take a look at the property way your should arrange your rollover tax-free.

Roll over directly (trustee to trustee)

If the decision to rollover is what you made, make sure you plan for a trustee-to-trustee or direct rollover from your retirement account into a rollover IRA. Don’t have the check written to you personally, make the check you receive from your company’s plan out to the trustee or the custodian of your new rollover IRA. You can even have a wire transfer made into your new IRA rollover account.) Since the new IRA has to be set up before you receive the rollover, your IRA account can remain empty until the rollover transaction is made.

The direct rollover is essentially important because if you get the check made payable to yourself there is a 20% taxable amount withheld for the federal income tax. Leaving you with sixty days to get the “missing” 20 percent and put it in the rollover IRA. And you will end up owing taxes on that 20%. And you will end up paying the dreaded ten percent early withdrawal tax as well if you are under 55.

If you are Over 55 you Should not Rollover Any of the Money You Need

Generally rollovers are good because they defer the taxes, but think about it this way… you are over 55 and you get a payout from the former employer’s retirement plan, you will not have to pay the premature 10% withdrawal tax if you keep the money (but you will still owe the income taxes). But if you roll that money into the IRA and then you need to take some out later, before the age of 59.5, you will have to pay a ten percent penalty tax on it.

Obeying the 60-Day Rule

This is another pitfall in the rollover, failure to meet their 60-day ruling. You will have to deposit the distribution into the new rollover IRA within the 60 day period in order to get the tax-free rollover. This 60-days will start the day after the funds are received from the company’s retirement account. And if the 60-day period ends on a holiday or weekend, you will not get any slack.

The Bottom Line Is

It might seem like a simple task, however arranging your tax-free rollover of your retirement account is not so simple. I have seen failed rollover attempts from people many years now and there is no end in sight. Ask the advice of a tax pro to clarify anything you don’t understand that we went over in this article.