Updated Friday, August 1, 2014 as of 10:02 AM ET
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Ask Ed Slott: Reducing Taxes for Self-Employed
Thursday, May 9, 2013
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We are looking to convert an IRA to a Roth IRA.† I took a loss on a variable life policy that was converted to an annuity.† Can we use that loss to offset the tax due on a Roth conversion?

The conversion to the Roth IRA is taxed as ordinary income. Please talk to a tax advisor or insurance professional with respect to whether or not you can deduct a loss on a variable life policy.

I have been self-employed for over three decades and have made yearly maximum contributions to my 401(k) plan. I am now required to take yearly distributions, and in addition to continuing full-time employment, the taxes are killing me. It is my understanding that I am "over qualified" income wise and unable to set up or roll over into a Roth IRA.

What can I do to reduce my taxes?

Everyone is now eligible to convert funds to a Roth IRA. There are no longer income limits to do a conversion. You should consider rolling over (converting) your 401(k) funds to a Roth IRA. All funds, except any 401(k) minimum distributions, are eligible to go into the Roth IRA. While the conversion will be taxable, the future withdrawals from the Roth IRA wonít be, if certain rules are met. Also, there are no required minimum distributions from a Roth IRA.

I am unclear on the President's proposal to `cap IRAs.' I see no reference to Roth IRAs where taxpayers have already paid full Federal and State Income Taxes. Is he proposing to reverse or `go back' on earlier promises of tax-free withdrawals from Roth IRAs?†

As part of the Presidentís fiscal year budget, he proposed limiting IRAs and employer retirement plans to a certain level based on a formula. That level is approximately $3 million. It is too early in the process to clarify any budget proposals. Also Congress has different ideas that will compete with the Presidentís proposals.

Have a question for Ed Slott? Please send your mailbag questions to†mailbag@irahelp.com†and we'll†pick several to answer each Friday.

(3) Comments
And once again you are covering some very interesting topics here. I have some friends who always turn to financial adviser for a proper assistance. But looks like it is just a waste of money, especially when you live from paycheck to paycheck. Was also really curious about taxes as I am currently self-employed and would like to know what I can count on. Seems like converting fund to Roth IRA is exactly what I need to do in the nearest future. Thank you so much Ed for you valuable advices. Den from cashadvance in Saskatchewan Province store
Posted by Alicia S | Thursday, June 06 2013 at 5:59AM ET
Calculate the business expenses you need to cover. Many business owners start their business from a spare room and for some the business is able to grow without needing to relocate to separate offices. If you do work from home you should definitely make a claim for the use of your home as an office.
Posted by KIMMY B | Monday, October 21 2013 at 3:17PM ET
The self-employed do not suffer deduction of tax at source. As with all planning it is necessary to commit all the figures to paper to completely understand the financial implications and result.
Posted by STEVE B | Thursday, November 28 2013 at 11:00AM ET
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