RMDs require careful planning

After all the advice you've received about saving for retirement, taking money out of your traditional IRAs and other qualified retirement plans may feel strange. Yet once you reach age 70½, the required minimum distribution (RMD) rules say you have to do just that.

Under these rules, you must withdraw at least a minimum amount from your retirement plans each year. Since the withdrawals are considered ordinary income, planning in advance can help you prepare for the impact on your tax return.

Here are two suggestions.

* Make a list of your accounts. The rules require an RMD calculation for each plan. With traditional IRAs, including SEP and SIMPLE plans, you can take the total distribution from one or more accounts, in any amount you choose. You can also take more than the minimum.

However, withdrawals from different types of retirement plans can't be combined. Say for instance, you have one 401(k) and one IRA. You have to figure the RMD for each and take separate distributions.

Why is that important? Failing to take distributions, or taking less than is required, could result in a penalty of 50% of the shortfall.

* Plan your required beginning date. In general, you're required to withdraw RMDs by December 31, starting in the year you turn 70½. The rules provide one exception: You have the option of postponing your first withdrawal until April 1 of the following year.

Delaying income can be a sound tax move. But because you'll still have to take your second distribution by December 31, you'll receive two distributions in the same year, which can increase your taxes.

To discuss these and other RMD rules, give us a call. We can help you create a sound distribution plan.

"Basis" is important to an S corporation

Losses can be hard to take - so if you think your S corporation will show a loss for 2013, now's the time to plan to make sure you'll get the full tax benefit.

The Problem. The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S corporation stock and certain corporate debt. This is true even though the loss reported to you on Schedule K-1 is greater than your basis.

Here's how it works. Typically, stock basis in an S corporation begins with the capital contribution you make to get the company started. (When you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.)

At the end of each taxable year, your stock basis is adjusted to reflect the business's operating results. Taxable income increases your basis, while losses reduce it.

Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.

After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That's the basis you have in loans you make to your company.

Once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. However, you can generally take suspended losses in future years, when you again have basis.

The Solution. You can increase your basis - and your ability to take losses - by adding capital or making loans to your business.

Please call to discuss how basis affects your individual income tax return. We can guide you through the rules to optimize available breaks.

Don't make these common IRA mistakes

These days we need to do all we can to boost our retirement savings, and tax breaks can be a big help. Using a traditional IRA to build your nest egg is a great idea. Just be sure you don't make any of these common IRA mistakes.

THE WRONG INVESTMENTS. Don't put tax-free investments, such as municipal bonds, in an IRA. You'll end up paying ordinary income tax on money that wouldn't have been taxed, or you'll sacrifice earnings for a tax benefit you'll never receive.

NO CATCH-UP CONTRIBUTIONS. Be aware that if you're 50 or older, you can contribute an extra $1,000 to your IRA each year.

THE WRONG BENEFICIARY. Your choice of beneficiary can affect how quickly IRA funds must be distributed. The longer money stays in an IRA, the longer it grows tax-free.

EARLY WITHDRAWALS. You'll pay regular income tax as well as a 10% penalty on early withdrawals from your IRA unless an exception applies. Early withdrawals are those you take when you're under age 59½.

MISSED RMDs. You are required to take distributions from your IRA when you reach 70½. You have until April 1 of the year after you turn 70½ to begin withdrawals. The penalty for withdrawing less than the required amount is 50% of the shortage.

IRA mistakes can be costly. If you'd like answers to your IRA questions, give us a call.

Is all "income" taxable?

You only have to examine your paycheck to realize that certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.

Do you know the tax status of other types of income? Here's a quiz to test your knowledge.

1. You tell your son he'll be the sole beneficiary of your estate, and that you've decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he'll have to pay in taxes. What do you tell him?

Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary.

2. You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you're not of retirement age. Do you have a taxable event?

Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it's not included in your income and you can withdraw it penalty- and tax-free.

3. You purchase a piano at an auction and take it home. While cleaning it, you discover $5,000 inside. Is this money taxable to you?

Answer: Yes. Once it becomes yours, "treasure trove" property is taxable to you at fair market value.