Information About Traditional IRAs from The National Association of Tax Professionals

What is an IRA?


An individual retirement account (IRA) is a trust
created in the United States for the exclusive
benefit of you or your beneficiary. Pending certain
guidelines, it allows you to defer up to $5,000 of
income from current taxation (a married couple
can defer a total of $10,000). If you are age 50 or
over, you may contribute an additional $1,000.


Who Can Contribute to an IRA?

You can contribute to an IRA if you have earned
income and have not reached age 70½ by the end
of the tax year. Earned income includes wages,
salaries, bonuses, tips, commissions, alimony, and
other amounts received for performing personal
services, including those performed by a selfemployed
individual.


How Much Can Be Contributed
to an IRA?

You can contribute the lesser of your earned
income or $5,000 for the year. Contributions to a
Roth IRA are combined with IRA contributions
when determining these limits.

Married taxpayers filing a joint return can
contribute up to $5,000 each to an IRA if:

• Either spouse has earned income; and
• Together they have at least $10,000 of earned
income.

If you are age 50 or over, an additional
contribution of up to $1,000 is allowed.

Maximum deductible contributions are based on
modified adjusted gross income (MAGI). For
most taxpayers, MAGI is the same as adjusted
gross income. Contributions that exceed the
maximum amount allowed are subject to
an excess contribution penalty of 6%.

Excess contributions withdrawn from the IRA
before the tax filing due date (plus extensions)
are not subject to the 6% tax, provided that no
deduction is taken for the amount withdrawn.

Income earned on the amount withdrawn,
however, is taxable and the 10% penalty for early
withdrawal may apply to this amount.


What Contributions Are Deductible?

Contributions to an IRA are fully deductible,
regardless of income level, if neither you nor your
spouse is an active participant in an employer
retirement plan. Generally, if Box 13, “Retirement
Plan” is checked on your W-2, you are an active
participant.


If you are not married and are an active participant
in an employer plan, no amount of your IRA
contribution is deductible if your 2010 MAGI
exceeds $66,000. Partial deductions are allowed,
if your MAGI exceeds $56,000 but is less than
$66,000. These limits are scheduled to increase
with inflation in future years.

If you are married and not covered by an employer
plan, but your spouse is, you can take a full IRA
deduction if your joint MAGI is less than $167,000.
Joint MAGI between $167,000 and $177,000
qualifies for a partial deduction.

If you are married and both you and your spouse
are covered by an employer plan, no amount
of your contribution is deductible if your joint
MAGI exceeds $109,000 ($10,000 if married filing
separate). You are allowed a partial deduction if
the joint MAGI is more than $89,000 but less
than $109,000.

Nondeductible IRA contributions are reported
on IRS Form 8606. While contributions are made
with after-tax dollars, earnings accumulate taxfree
until distributed. If Form 8606 is not filed,
the contributions are considered deductible
contributions and will be included in income
when they are distributed.

Time Deadline for Establishing an IRA
and Contributing

IRAs must be established and funded by the tax
return filing deadline (not including extensions) for
the year in which the plan is to become effective.
Generally, this deadline is April 15.

When Can IRA Distributions Be
Taken?

You can take IRA distributions at any time, but
there is a 10% penalty on the amount distributed,
in addition to regular tax, if the distribution is made
before you reach age 59½. However, exceptions
may apply.

The exceptions to paying the 10% early-withdrawl
penalty are:

• The distribution is a series of substantially equal
payments based on your life expectancy (or
your life and the life of your beneficiary). These
payments must continue for at least five years
or until you reach age 59½, whichever is later.

• The IRA account owner dies or becomes
disabled.

• The distribution is a return of nondeductible
contributions.

• You roll the distribution into another IRA
within 60 days.

• You use the distribution for medical expenses
in excess of 7.5% of your MAGI, regardless of
whether you itemize.

• You are a first-time homebuyer or pay higher
education expenses.

• You use the distribution to pay health
insurance premiums when you are unemployed
for twelve weeks or more.

• Distributions due to an IRS levy.

• Distributions made to reservists or National
Guard members during active duty if called
to active duty for a period exceeding 179 days
after September 11, 2001.


When Must IRA Distributions Be
Taken?

You must start taking distributions by April 1 of
the year following the year you reach age 70½,
or there is a 50% penalty on the amount not
distributed as required.

How Are IRA Proceeds Taxed?

Deductible amounts contributed to an IRA will be
fully taxable upon distribution. For contributions
of nondeductible amounts, only the earnings
allocated to the distribution will be taxed. There are
special rules for determining the taxable amount
when both deductible and nondeductible amounts
have been contributed to an IRA.

What About the Self-Employed?

Self-employed individuals can contribute to an IRA.
Earned income for the self-employed is the net
amount obtained from the business. This amount
does not include income deferred into retirement
plans or one-half of the self-employment tax.

For business income to count as earned income,
personal services must have been provided to
the business. If a business has a loss, but there
are wages from employment, the loss from
the business does not reduce the wages for IRA
contribution purposes.


This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.


#842 – © Copyright May 2010

National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002

www.natptax.com

A Very Important QB Report That Is Neglected

The Statement of Cash Flows, which is pictured above, is a very important report that many business owners don't know about. Why is this report so important? Simply put, it tells you where your cash is coming from and where it is going.There are three major components - Operating Activities, Investing Activities and Financing Activities. Operating Activities starts with Net Income and then is adjusted for changes in various G.L. Accounts. In this example, Accounts Receivable is a negative $8,086.50. The reason it is negative is because the A/R balance increased. Since A/R is going up, it means that cash is not being collected. Accounts Payable contributes a positive $502.00. This is because A/P increased, which means that cash is not leaving the company.

Investing Activities show how much is being spent on Investments and Fixed Assets. The reason that Computer & Office Equipment is negative is because cash is being spent on Fixed Assets.

Financing Activities shows where the money that is being invested is coming from. In this case, it is a negative  $123,000. That is because the owner is withdrawing cash from the company.

Probably the most important thing to look for is whether or not Net Cash provided by Operating Activities is positive. If it is negative and stays negative over more than one period, it means that your company is in trouble and could be running out of cash. Unless you have access to an unlimited supply of cash, you simply cannot stay in business if you a running negative on cash flow from Operations on an ongoing basis.

Troubleshooting Clients’ Cash Basis Accounts Receivable at Year-End

Hear me and fellow QuickBooks Expert, Shelly Robbins, discuss Cash Basis Accounts Receivable.

http://bit.ly/i3mK04

QuickBooks Newsletter February 2011

See how you can save time with Memorized Transactions at my latest QuickBooks Newsletter.

 QBC_Newsletter_February_2011.pdf

What is the Current Ratio?

The Current Ratio = Current Assets/Current Liabilities

Current is defined as assets and liabilities that will be received or paid within the next 12 months or operating cycle.

The ratio is used to give an idea of the company’s ability to pay back its short term
Liabilities(debt and payables) with its short-term assets ( cash, inventory,and receivables).
The standard that most outside users of the financials look for is a ratio of 2 to 1.

The major limitation of the ratio is that you include both receivables and inventory in the calculation of Current Assets. It would seem to me that you would want to back out receivables more than 90 days old and inventory that is obsolete, slow moving, not selling, etc, in order to get a more realistic Current Ratio.

How Can Ratio Analysis Help My Company?

Ratio Analysis is the use of your accounting information to help you become aware of potential problems and also to see how you compare to your industry ratios.  In this economy, successful companies are the ones who can use their accounting information to see who their best customers are, which products are most profitable and if there are any danger signs ahead, such as lack of cash.

The ratios are grouped into four categories, Profitability, Activity, Leverage and Liquidity. Profitability tells you how well you are doing. As with all Ratio Analysis, it is critical that you have some industry statistics, so that you can see how your company's performance compares with your peers.

Activity Ratios tell you the quality of your Accounts Receivable and your Accounts Payable.

Leverage Ratios tell you how well you are managing debt and Liquidity Ratios warn you if it looks like you will have trouble paying your current bills in the future.

In later posts, I will talk about Ratio Analysis in greater detail. However, needless to say, in order to take advantage of Ratio Analysis, it is critical that your accounting information be accurate.