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SMALL BUSINESS TIPS Deduct Your Medical Expenses by Hiring Your Spouse Deducting 100% of Your Business Meals New Provisions for the Paycheck Protection Program Pandemic Provision for Tax-Free Payments to Your Employees How to Get Forgiveness of Your Paycheck Protection Loan Tax Impact of the Paycheck Protection Program Economic Relief From The Small Business Administration Deducting Your Business Travel Five Year-End Business Deductions Avoid Taxes On Your Reimbursed Employee Expenses How Will Your Real-Estate Sale Be Taxed? Putting Your Self-Employment Income Away for Retirement Deducting the Business Use of Your Vehicle How to Deduct Your Vacation Travel as a Business Expense Staying Out of the "Danger Zone" of the New Small-Business Deduction New Deduction for Pass-Through Businesses Unlocking the Missed Deductions of a Home Office Avoid the Headaches and Penalties Associated with 1099 Reporting Providing Healthcare Coverage to Your Employees What is the Best Business Structure for You? Are You Protecting Yourself From Your Corporate Income?

Audit triggers to be aware of on your 2018 tax return. 1 2 How likely are you to be selected for an audit? In 2017, the IRS audited just 0.60% of individual tax returns. Most of these returns were filed by mail as opposed to electronically, thus lowering the risk for a typical return to be reviewed for an audit. With that said, there are specific factors that increase the likelihood that your tax return falls into the small percent that receives additional attention from the IRS. One factor that the IRS looks at when deciding who to audit is income. As your income increases so does the chance that the IRS will select your return for further examination. You are also at greater risk of an audit if you operate a small business and report your income on Schedule C. In 2017 taxpayers who filed a Schedule C were twice as likely to be audited than those who did not. We have identified 10 factors that can lead to unwanted attention from the IRS on your 2018 tax return. Some of these red flags can be avoided by filing a complete and accurate return, while others simply require proper record keeping to quickly shutdown any IRS inquiries. 1. Failing to report all taxable income. The IRS receives a copy of all of your W2's and 1099's each year. One of the quickest ways to get their attention is to fail to report some of this income. 2. Deducting "hobby" losses. The IRS is wary of taxpayers who take up a hobby and then report it as a business to deduct their expenses. If your business shows losses multiple years in a row the IRS will begin to question if you are actually operating a business or merely deducting your hobby expenses. 3. Large charitable donations. The IRS knows how much the average taxpayer with your income gives to charity. If you make large charitable donations every year it is important to keep records of those donations. 4. Claiming rental property losses. It is not uncommon for a rental property to show a loss on your tax return. In order to deduct these losses on your return you need to "actively participate" in the rental activity. This is not a difficult threshold to meet, it simply requires that you are involved in making management decisions for the property. But if you show large losses, or if you have significant income from other sources the IRS may question if you are actively involved in the rental property. Keeping records of any meetings for, or trips to, the property can help demonstrate your participation. 5. Taking an Alimony Deduction. Alimony payments can be a significant financial burden, so you want to make sure you are able to offset that cost by deducting your payments from your taxable income. Large deductions for alimony payments can catch the IRS' attention, particularly when the payer claims a deduction but the recipient does not report the income. Before taking a deduction for alimony, be sure that your divorce agreement clearly identifies the payments as alimony or spousal maintenance. Child support payments are not deductible. 6. Failing to report your Health Premium Credit. If your health insurance is provided through the marketplace, you may be receiving subsidies from the government to lower your monthly premium payments. If this is the case you are required to reconcile those subsidies at the end of the year on your tax return by reporting the amounts listed on your form 1095-A. If you do not report the credits received the IRS will reject your return and request that you correct the omission. 7. Taking an early withdrawal from an IRA or 401(k). When you take a withdrawal from an IRA or 401(k) before age 59 1/2 you typically pay a 10% penalty for taking those funds early. There are a number of exceptions that allow you to avoid paying that penalty, such as when using the funds for medical or education expenses. A large number of taxpayers incorrectly claim one of these exceptions when they do not actually qualify. As a result of this taxpayers who claim one of these exceptions on their returns face extra scrutiny from the IRS. If you claim one of these exceptions be sure to keep documentation showing that the funds were used for a qualified purpose. 8. Claiming large gambling losses. If you win the lottery or have a good day at the casino you are required to report your winnings on your tax return. The IRS allows you to offset some of the tax liability of that income by deducting your gambling losses, up to the amount of your winnings. If those losses are too high the IRS may challenge the amount you claim on your return. To prevent the loss of your deduction be sure to get a statement from the casino showing your total losses or keep track of your lottery ticket purchases. 9. Deducting business meals or travel. If you operate a small business and file a Schedule C then the IRS will pay special attention to your deductions for business meals or travel. If these expenses seem large relative to your industry or revenue, the IRS could mark your return for an audit. The key to protecting your deductions is to properly document the business purpose of each meeting or trip, and keep receipts for any expenses over $75. 10. Claiming 100% business use of a vehicle. If you deduct the full purchase price of your vehicle as a business expense and you do not have a second vehicle available for personal use you are putting yourself at extra risk for an audit. To secure your deduction you should keep accurate mileage logs to demonstrate the business use of your vehicle. Summary The chances of an IRS audit are small, but various factors can increase the likelihood that your return is selected for review. While you can eliminate some of these factors by filing a complete and accurate return, you can never be sure that your return will not be audited. Understanding the necessary record keeping requirements can make a large difference in the outcome of an audit should you face one. Read more articles WHAT TRIGGERS THE IRS 10 Red Flags that Could Signal an Audit Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

Three Pricing Options To provide our small-business clients with flexibility in how they work with us, we offer three different pricing options for our services. 1. Additional rental properties will be charged at $50/property 2. Processing of monthly payroll includes Federal 941 Quarterly Payroll Filing State Quarterly Payroll Filing Year-End 940 Payroll Filing W2 Issuance to Employees 1099 Issuance to Independent Contractors 3. Our Tax Savings Manual includes strategies to lower your federal tax bill. Historically we have found that we can save small-business owners between $5,000 and $12,000 per year. 4. Two conference calls throughout the year to discuss: Estimated Payments P&L Discussion Adjustments to Officer Compensation Misc. Business and Accounting Issues 5. Requires a three year agreement.

Charitable giving increases at the end of the year. If you are making donations keep these guidelines in mind to get your full tax benefit. Making The Most Of Your Charitable Donations As we approach the holidays you are most likely busy planning visits to family or getting ready for your holiday shopping. You are also likely planning to give some of your money or property to charity. Many charitable organizations report that they receive a majority of their donations in the last three months of the year. With this in mind, we want to share with you some simple guidelines to be aware of to make sure that you are properly rewarded for your generosity come tax season. There are two different types of donations that you can deduct on your tax return, donations made with cash, and donations made with non-cash items such as clothing, furniture, or food. DONATIONS MADE BY CASH Once you have determined that the organization you have chosen meets the five basic guidelines, you need to make sure that you have proof of your donation. This can be accomplished with one of the following: A receipt or other written document from the organization, showing the name of the organization, the date of the contribution, and the amount of the contribution A cancelled check or credit card receipt that shows the name of the organization, the date of the contribution, and the amount of the contribution. Keep in mind that you can also donate to most governments within the United States, if you ever feel inclined to pay more in taxes. (In which case we may not be the firm for you) NONCASH DONATIONS Noncash donations typically involve dropping off outgrown clothes or unwanted furniture at your local Goodwill or Salvation Army. The guidelines for determining if noncash donations to an organization are the same as the guidelines for cash donations. To determine the amount of a deduction you can claim for your noncash donations you need to know the Fair Market Value of the items. The Fair Market Value is the amount you could reasonably expect to receive if you sold the item instead of donating it. If you need help determining the value of your items, you can use Goodwill's Valuation Guide . When you make a donation to Goodwill or a similar charity, you should make sure you receive a receipt and keep a record of the items that you donate. This will ensure that you can take the tax deduction to which you are entitled. FIVE BASIC GUIDELINES to keep in mind when determining which donations are deductible: 1. Donations must be made to a corporation, trust, community chest, fund, or foundation. This means that donations to an individual, or a group of individuals is not deductible. For example, donating to a group of doctors who are going to the Philippines to provide medical care is not deductible, but donating to an organization that will send doctors to the Philippines is deductible. 2. The organization must be created or organized in the United States. The organization can still operate overseas, as long as it is based domestically. 3. It must operate for religious, charitable, scientific, literary, or education purposes, for the promotion of amateur sports, or for the prevention of cruelty to children or animals. 4. It must not operate for the profit of a private shareholder or individual 5.It must not engage in political lobbying Through the internet, it is easier than ever to give money to those in need. Most charitable organizations now have a website where you can donate online. This surge in online donations has led many to donate smaller amounts to various organizations, rather than one large donation to a specific organization. While this provides donors the freedom to give to the cause they most believe in, it has also blurred the lines between what is a tax-deductible donation, and what is not. To help determine which donations are deductible, see the center box. Read more articles Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

WHITE PAPER INTRODUCTION Our 1-2-3 case involves a husband and wife client of ours who received an unpleasant surprise when they filed their 2017 tax return. The husband and wife are both public servants, between them they are earning $225K per year. On top of this they received another $40K in interest and trust income during 2017. Anticipating a large tax bill, they decided to purchase a rental property and use the expenses they incurred to offset some of their taxable income and reduce their tax bill. During the year they spent $40K on the property. Based on advice they received from coworkers as well as another accountant they consulted, they believed they would be able to deduct this entire $40K on their 2017 tax return. THE CHALLENGE Unfortunately, when they came to us we had to tell them that not only could they not deduct the full amount, they would not be able to deduct any of their expenses on their current year return. There were 3 reasons they could not deduct the $40K they had been led to believe they would be: Cap on Losses from Rental Properties. What this couple was not aware of when they decided to purchase this rental property to write off the expenses, is the $25K limit on rental property losses that can be deducted per year. This means that at least $15K of the $40K they spent would need to be carried forward to a future year. The only exception to this limit would be if one of them qualified as a real estate professional, which they do not as this property is the only activity they have in the real estate field. Capital Expenditures. A large portion of the $40K came from improvements to the property preparing it for rent. These expenses cannot be deducted in the year they are paid but must be capitalized and depreciated over the useful life of the property, in the case of a residential rental property 27.5 years. Income Limit on Passive Losses. The final nail in the coffin for this couple’s rental loss deduction is they failed to realize there is a phase-out threshold for passive losses. Once a married couple, filing a joint return, have adjusted gross income above $150,000 they cannot take a loss for passive activities. Instead those losses are carried forward to future years until their income drops below the phase-out threshold. THE SOLUTION This couple was understandably not happy when we informed them that they would not be able to deduct any of the expenses they had incurred on the property on their 2017 tax return. They explained to us that one of the primary drives behind their purchase of the property was the tax break they expected to receive. Had they consulted with us during the year before making this purchase we could have warned them they would not be able to realize any tax breaks in the short term from the property and could have provided them with some alternative methods to reduce their tax burden for the year. By maxing out their respective deferred compensation accounts they could have reduced their taxable income by $16,000. Contributing to a Health Savings Account could have further reduced their taxable income by $7000. By failing to consult with us before making this decision they missed 3 red flags that show they would not be able to reduce their taxable income by purchasing this property. To avoid missing your own red flags be sure to seek counsel from Monotelo Advisors before making major investment decisions. Save as PDF View More White Papers

July 2019 SMALL BUSINESS TIPS Quarterly: Oct 17 Deducting the Business Use of Your Vehicle If you operate a small business and you drive regularly for that business you have two choices: you can either drive your personal vehicle and reimburse yourself for the business portion of the associated costs, or you can transfer the vehicle to the business and pay all of the associated costs directly from the business. Which of these options you choose depends on the vehicle and how you use it within the business. There are no inherent tax benefits to titling your vehicle into your business, in fact doing so limits your options in how you deduct the cost of that vehicle. However, when your vehicle is 100% business use then titling it to your company can simplify your record-keeping requirements and allow you to pay for your vehicle costs directly out of your business account. The first step to decide where you should place ownership of your vehicle is to determine which vehicle cost deduction method is more beneficial in your situation. Standard Mileage Rate vs Actual Expenses There are two primary methods for deducting the cost of using a vehicle for business purposes: The standard mileage rate method and the actual costs method. Standard Mileage With the standard mileage rate you can deduct a specific dollar amount for each business mile you drive during the year (for 2022 the standard rate is 58.5 cents per mile). The standard mileage rate is used more often since it only requires you to keep track of the miles you drive throughout the year and does not require records of any other expenses. However, the standard mileage rate can only be used for a vehicle that is in your personal name. If your vehicle is titled to your business, you are required to use the actual expense method.. Actual Expense With the actual expense method you can deduct your out of pocket costs for fuel, insurance, repairs, etc. You can also deduct the cost of the vehicle by depreciating it over its asset life (typically 5 years). The actual expense method requires much more thorough record-keeping. You need to keep track of each vehicle related expense throughout the year, and if you use the vehicle for both personal and business use then you also need to keep track of the total business and total personal miles for the year Choosing the Right Method If your vehicle title is in the name of your business you are required to use the actual expense method. However, if the title is in your personal name you can choose which method to use in the first year. You can switch methods in the following years, but there are additional restrictions to do so. It is in your best interest to take the time in the first year to determine which method will be more beneficial. The standard mileage rate method is intended to simplify record-keeping requirements while still providing for an accurate deduction for the cost of using your vehicle in your business. To that end, in many cases the standard mileage rate method should provide the same or greater tax benefits as the actual expense method. However, there are specific factors that can make the actual expense method more beneficial: Price of Car: Since you can deduct the cost of a car over several years with the actual expense method, a more expensive car increases the probability that the actual expense method will be more beneficial Fuel Efficiency: With the standard mileage rate you get the same deduction no matter how many miles you get per gallon, so a less efficient vehicle will eat away at a greater portion of your allowed deduction. Highway vs City: If you are driving primarily in a large city you are likely putting much fewer miles on your vehicle while still spending the same amount on car payments, insurance, etc. If any of these factors apply to your situation then you may receive a greater benefit through the actual expense method. It is also worth noting that under the actual expense method you will receive a greater tax benefit in the first few years while you are depreciating the cost of the vehicle. Once the vehicle is fully depreciated your deduction will drop significantly. Under the standard mileage method your deduction will be relatively consistent subject only to small changes in the standard rate each year. Summary If 100% of the use of your vehicle is for your business and you have large vehicle costs either from buying a newer car or driving mostly in the city, putting your vehicle title into your business can simplify your record-keeping requirements without sacrificing the benefits of the standard mileage rate method. If you use your vehicle for both personal and business needs or you drive an older vehicle with a low market value, you may want to keep it in your personal name to preserve the option to use the standard mileage rate. Previous Article Next Article

SMALL BUSINESS TIPS Quarterly: Oct 17 Deducting Your Business Travel If you travel as part of your business or you have employees who travel you have several options for how you deduct those travel expenses. Typically you can either track and deduct the actual cost of travel or you can use standard allowance amounts provided by the IRS to simplify the record-keeping requirements. If you choose to use standard allowance amounts to deduct your travel expenses it is important to keep up-to-date on what the allowance rates are as they are typically updated on an annual basis. Vehicle Expenses If you use your personal vehicle for business-related travel you can deduct either a portion of your actual vehicle expenses or a standard rate per mile driven. Actual vehicle expenses would include gas, insurance, repairs and depreciation on the cost of the vehicle. For 2022 the standard mileage rate is 58.5 cents per mile, up from 56 cents in 2021. For more information on the vehicle expenses deduction read Deducting the Business Use of Your Vehicle . Meal and Lodging Expenses If you travel overnight for a business-related trip you can deduct your meal and lodging expenses as well as other miscellaneous travel expenses. If you would like to deduct the actual cost of meals, hotel rooms and other miscellaneous expenses you will need to keep copies of receipts for each expense in your records as well as document the business purpose of the trip. If you would prefer not to keep track of each receipt you can instead use the IRS per diem rates to deduct a standard amount for meals and lodging expenses for each day of your trip. You will still need to document the destination, length and business purpose of your trip but will not need to maintain receipts for your expenses. The per diem rates vary depending on your travel destination. You can lookup the rates for your destination at https://www.gsa.gov/travel/plan-book/per-diem-rates . These rates are typically updated every October. The current rates will be effective until September 30, 2022. If you choose to use per diem rates to deduct your business travel, do not have your business directly pay the cost of meals, lodging, etc. Instead, pay for these costs personally and then submit an expense report to your business using the per diem rates and reimburse yourself. If your business is structured as a sole proprietorship, you do not need to reimburse yourself through an expense report. Instead you can simply use the per diem rates to claim a business travel deduction on your tax return at the end of the year. Please note that if your business is a sole proprietorship you can only use the per diem rates for meal expenses, not lodging. Summary Traveling can be expensive. But if you know how to maximize the tax benefits of your business-related travel you can reduce some of that cost. Using the standard mileage and per diem rates can simplify your record-keeping requirements and in many cases can provide a greater tax benefit than deducting your actual costs. To maximize your business-travel deductions read How to Deduct Your Vacation Travel as a Business Expense . Schedule Your Tax-Planning Call Previous Article

Have you taken the proper steps to ensure your loved ones receive your property after you pass away? Save as PDF Read more articles Share 1 2 WILL VS TRUST: WHICH IS RIGHT FOR YOU? Have you ever thought about who you would like to give your money, real-estate, or that special family heirloom to after you pass away? Most of us have, but have you taken the necessary steps to ensure that your belongings are received by that person or persons? The two most common methods of transferring your assets to your loved ones after your death are a will or a living revocable trust . What is the difference between them, and which one is right for you? WILL A will is a written document that allows you to establish how you would like your personal assets to be distributed amongst your family and friends after you have passed away. You can also dictate, within reason, how you would like your assets to be used by their recipient. A will can be changed at any time throughout your life but becomes irrevocable at the time of your death. A will also allows you to designate a guardian for any minor children you may have. Without such guidance in your will, it will be up to a judge to appoint a guardian as they see fit. Advantages Easier to set up. A will is generally easier and cheaper to set up than a trust as it does not need to be actively managed or funded. Can be used to designate a guardian for your minor children Disadvantages More restrictive. A will does not provide as much freedom as a trust to control the distribution of your assets after your death. Court intervention. Transferring your property through a will requires the beneficiaries to go through probate court, which can be a time-consuming process and makes your financial affairs part of the public record. LIVING REVOCABLE TRUST A living revocable trust is a legal entity that you set up in order to manage your assets while you are alive and transfer them to your beneficiaries after your death. Unlike a will, there is no court intervention required to transfer property to your beneficiaries. One of the major differences between a will and a trust is that a trust must be funded in order to be valid. A trust can only be used to transfer property that was placed in it before your death. Advantages Greater control. A trust allows you to dictate how and when a minor child will receive any money left to them. It can also be used to set up specific funds such as for a child’s education. Avoid court. Transferring your property through a trust allows you to bypass the time-consuming process of probate court and allows for your financial affairs to remain private. Any assets placed in a trust can be transferred immediately to your beneficiaries after your death. Disadvantages More costly to set up. Trusts are more expensive than wills because they require continued management after the initial setup and they can only control assets that have been placed into them. Cannot be used to designate a guardian for your minor children. Summary You should consider the unique circumstances in your life to determine if a will or a trust would be more beneficial. In some circumstances it may make sense to have a trust but to supplement it with a will. For example, if you have one or more minor children you may consider setting up a trust so that you can establish college funds or hold money for them until they reach a certain age, and then you may want to supplement that trust with a will to designate a legal guardian for your children if you pass away before they reach adulthood. Read more articles Share Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

Beware of Hedge Fund Managers Bearing Gifts Quarterly: Oct 17 "Do not trust the horse, Trojans. Whatever it is, I fear the Greeks even when they bring gifts." According to Greek mythology, the Greeks had struggled for nearly a decade to penetrate and conquer the city of Troy. In an act of trickery, they constructed a huge wooden horse, hid men inside it and pretended to sail away from the city. Ignoring wise counsel, the Trojans opened the gates and unknowingly opened the door for the Greek army to enter their city. Shortly after the Trojans brought the horse into the formerly impenetrable area, the Greek army sailed back under the cover of night and stationed their men to attack. Once the Greek army was in place, the men crept out of the horse and opened the gates for the rest of the army to enter and destroy the city of Troy. The term "Trojan Horse" has metaphorically come to mean any trick or strategy that causes a target to invite a foe into a securely protected area. We correlate this story to the appeal of hedge funds and private equity to a high net worth investor and the economic reality that is likely to follow. Diverging from our normal lines of discussion, we are going to explore the implications of the Tax Cuts and Jobs Act (the new tax code) on alternative investment income. The tax implications on alternative investment income are staggering. The new US tax code raises the bar so high that most alternative investments will fail to pass the test for the average high-net-worth investor. The term “high-net-worth investor” is a relative term. After all, nobody wants to be the one millionaire on an island of billionaires! Rather than defining high-net-worth by the size of someone’s balance sheet, we are going to define it as anyone with an annual income above $400,000, the beginning of the 35% tax bracket for married couples filing a joint tax return here in the United States ($200,000 is the beginning of the 35% bracket for a single filer). For today’s discussion we are going to use the 37% tax bracket to define high net worth, so technically this would be a married couple with a taxable income above $600,000 or an individual with a taxable income above $300,000. A brief history lesson on our tax code and investment management fees: The “two and twenty” fee structure (2% management fee and 20% performance or carried interest fee) charged by hedge fund and private equity managers has always been a challenging hurdle for alternative investment managers to overcome. Prior to 2018, however, the US tax code took some of that sting out of the bite by allowing investors to deduct their investment management fees once they surpassed 2% of adjusted gross income. In other words, a tax payer with $1 million dollars in adjusted gross income could deduct the investment management fees that surpassed the $20,000 mark (the 2% hurdle). The new tax code however, has removed investment management fees from the list of itemizable deductions. The colossal impact of this change comes down to the fact that 100% of your investment income flows through to your personal tax return and your investment management fees no longer offset that income. It’s like the opposite of a tax-free municipal bond. Instead of receiving income on which the government will not tax you, you are required to pay tax on income you will never receive. Let’s take the example of a married couple making $700,000 per year from their employer plus another $150,000 of income from their alternative investments. To keep things simple, we will make the following assumptions: The couple earns $700,000 in wage income from their employer The alternative investment is custodied in a traditional taxable account (ie. non-retirement account) The alternative investment generates $150,000 of investment income on $1,000,000 of invested capital Half of the investment income is taxed at the investor's ordinary income tax rate and half is taxed at the long-term capital gains rate The investment manager is paid $20,000 from the 2% management fee and $26,000 from the 20% performance fee Description $150,000 Of Investment Income ($20,000) 2% Management Fee ($26,000) 20% Performance fee $104,000 Net to Investor Before Tax Tax Liability +$42,750 (Federal Income Tax) +$3,885 (Net Investment Income Tax) Cannot be deducted on Schedule A Cannot be deducted on Schedule A $46,635 Additional Tax Liability The investor receives $57,365 after investment management fees and federal income tax, and still has a state income tax bill to pay. This 5.7% return is a long way from the 15% gross return generated by the hedge fund manager. Keep in mind, we are just looking at the tax implications of alternative investment fee structures. Considering the fact that the HFRI Equity Hedge Index only returned 3.38% over the last five years (according to Hedge Fund Research, Inc. – 2/28/19), we haven’t even begun to address the impact of performance fees on net returns to investors. Potential Solution: Asset Location One potential way to address this problem is to put investments with high management fees into tax-deferred retirement accounts instead of traditional taxable accounts. The challenge with this option is that it puts the investor at risk of being subject to UBIT issues (unrelated business income tax). Because of the potential UBIT and ERISA issues, some managers and many custodians will not accept retirement assets in alternative funds. This asset location issue is a critical piece of the wealth preservation and accumulation puzzle. Unfortunately, this mission-critical issue is often missed by the wealth management community due to a lack of knowledge about our tax code. Conclusion The Tax Cuts and Jobs Act creates a very challenging hurdle for many alternative investments to overcome. Investors should be careful to analyze the net after-tax return on their investments and make sure they are being fairly compensated for putting their capital at risk.

Roth vs Traditional IRA Which One Is Right For You In our last article, Year-End Tax Planning Strategies , we briefly discussed the potential benefits of a Roth IRA over a Traditional IRA. This article will dive deeper into the differences between these two retirement planning options and provide some guidance on when one makes more sense than the other. Contribution Limits You can make 2019 contributions to a Traditional IRA or a Roth IRA until April 15 of 2020. The maximum amount you can contribute in 2019 is $6,000. If you are over the age of 50 then you can contribute an additional $1,000 to either one. Additional limitations apply differently to Roth and Traditional accounts based on your income level and whether or not you are covered by a retirement plan through your employer. These additional limitations are complicated so we won't get into them now. If you want more information on these limitations you can read "Income Limitations" at the end of the article. Which Account Is Right For You? The primary distinction between a Traditional and Roth IRA is when you pay taxes on the money in the account. With a Traditional IRA you deduct your contributions from your taxable income and do not pay any tax on that money until you withdraw it in the future. With a Roth IRA you pay the tax now but can withdraw the funds tax-free in retirement. One clear advantage the Roth has over the Traditional IRA is the earnings of the account can be withdrawn tax-free after age 59 1/2. With the Traditional IRA you pay taxes on the earning as well as your original contributions when you withdraw them. So what is the advantage of the Traditional IRA if it requires you to pay taxes on your earnings? In the past, the argument in favor of Traditional IRAs was that you were likely to be in a lower tax bracket when you retire so it made more sense to defer taxes today so that you could pay them later at a lower rate. However, with the Tax Cuts and Jobs Act we are currently in one of the lowest tax environments our country has seen in decades. And with the national debt growing at an accelerating pace there is an increasing chance of significant tax hikes in the future. If tax rates rise significantly in the future you could find yourself in a higher tax bracket in retirement, even if your income decreases. With that possibility, deferring taxes now to pay them in retirement may not be the best decision. Summary The decision between a Traditional or Roth IRA comes down to your expectations for your tax bracket in retirement compared to your tax bracket today and the length of time before you retire. If retirement is still 20 or 30 years away, you may be better off investing in a Roth IRA to take advantage of tax-free growth for all of those years. If you are planning to retire in the near future, the benefit of a tax deduction today may outweigh the potential increase in taxes a few years from now, if your income drops significantly when you retire. For a deeper discussion on which account makes more sense for your personal situation, please reach out to us. Income Limitations Roth IRA: To contribute the full amount to a Roth IRA in 2019 your Modified Adjusted Gross Income (MAGI) needs to be less than $122,000 if you file single or head of household and it must be less than $193,000 if you file a joint return with your spouse. If your MAGI is between $122,000 and $137,000 ($193,000 and $203,000 if filing a joint return) then you can make a partial contribution. Once your MAGI exceeds $137,000 ($203,000 if filing a joint return) then you are no longer eligible to contribute to a Roth IRA. Traditional IRA: If neither you nor your spouse are covered by a retirement plan at work then there is no income limit to your Traditional IRA contributions. If you are covered by a retirement plan at work and file single or head of household, your Traditional IRA contribution begins to be reduced once your MAGI reaches $64,000 and is eliminated once your MAGI reaches $74,000. The rules become even more complicated if you file a joint return and either spouse is covered by a retirement plan at work. If you are covered by a retirement plan at work, your contribution begins to be reduced once your MAGI reaches $103,000 and is eliminated once your MAGI reaches $123,000. If you are not covered by a retirement plan but your spouse is then your contribution begins to be reduced once your MAGI reaches $193,000 and is eliminated once your MAGI reaches $203,000. Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.