How a Spousal IRA Works and the Benefits

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A spousal IRA allows a working spouse to contribute to a non-working spouse’s IRA under specific conditions

Key takeaways

  • IRAs can create tax savings while providing future retirement income
  • A non-working spouse might not be eligible for a regular IRA
  • But the working spouse can make contributions to a spousal IRA
  • This arrangement benefits the family through greater tax deductions and retirement savings

Putting money away for retirement is essential, and many workers take advantage of IRAs because of their tax benefits. 

Participants can invest money through a traditional IRA and deduct the contribution amount from their taxable income. Alternatively, you have the option of contributing a post-tax amount through a Roth IRA, which means the eventual withdrawals are tax-free. The vehicle you choose is dependent on your retirement plans and current and future tax situations, but many people use both. 

However, couples living on one income might struggle to save enough money for retirement while reaping the most tax benefits. 

One potential solution is a spousal IRA, a fund allowing the earning spouse to make tax-advantaged contributions to a stay-at-home spouse’s separate IRA. The result is more significant retirement savings and tax benefits for the couple. 

An overview of Spousal IRAs

A non-working spouse won’t have an active 401k and might not be eligible to contribute to a traditional or Roth IRA. The solution is a spousal IRA, which permits the working spouse to make regular contributions to a distinct retirement account. 

There are rules, though, as the total contributions to the spousal IRA must stay below whatever is smaller between the couple’s combined taxable income and the IRS’s $6,000 annual limit. That limit grows to $7,000 for those 50 and older. 

These regulations mean the couple can contribute a total of $12,000 (or $14,000) per year, which is double the individual $6,000 ($7,000) limit. 

Opening a spousal IRA

Opening a spousal IRA is a straightforward process because it’s essentially the same as opening a standard IRA account. All you’ll do is head to your brokerage or create an account online through your bank or investment firm. 

You’ll have to provide bank account information for funding the account and select how often you wish to contribute to the fund. The IRS has specific laws applying to spousal IRAs, but you shouldn’t run into any problems as long as you stay within its limits. 

Remember that you must file joint income tax with your spouse to be eligible for a spousal IRA. So if you haven’t been filing your tax returns together, make sure you start this practice before opening one.

How this arrangement benefits married couples

A spousal IRA is beneficial because it allows you to double the amount of money you’re putting into your IRAs without the non-earning spouse returning to work. 

This advantage could eventually become huge when this larger amount is allowed to grow over time. Like any IRA, you can buy stocks, bonds, ETFs, mutual funds, and other investment vehicles with this capital, and it could fund a large portion of retirement if invested smartly. Spousal IRAs can also make it easier to plan for retirement because each individual will have a separate retirement fund. 

The tax benefits are significant, too, because you can potentially deduct both contributions from taxable income. 

Factors to remember

Although signing up for a spousal IRA plan is relatively simple, there are some factors to consider when planning. 

First, keep in mind that your IRA contributions might not be fully deductible in all cases. For example, if the working spouse is covered by an employer-sponsored retirement plan, you’ll only receive a full deduction for contributions if this individual is making less than $105,000 annually. There’s a partial deduction available for those making under $125,000, as well. 

You must also make less than $208,000 combined to remain eligible for a Roth IRA, which allows you to avoid taxation on post-retirement withdrawals. 

Next, you can only make contributions for the year up until the annual tax deadline. Once the deadline passes, contributions apply to the following year’s limits. 

Get the tax advice you need

Gaining tax advantages through a retirement fund can make life easier now while helping you prepare for the future. And the way these options interact—and the number of retirement plans available—varies based on each individual’s employment situation.

Provident CPA & Business Advisors offers advice to individuals and business owners, helping them choose the most tax-advantaged strategies for their needs. Contact us to learn more about our services. 

5 Problem-Solving Tips for Business Owners

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Business problem-solving is not always straightforward, and it requires collaboration, creativity, and a deep dive to uncover the root cause.

Key takeaways:

  • Identify and address the root cause
  • Know when to delegate
  • Take time to outline your thoughts
  • Ask for new perspectives
  • Use the EOS Toolbox™ and the Issue Solving Track™

Solving problems is a process business leaders have to keep improving over time. Issues change from one day to the next. Individuals and teams thus must blend the right planning and organizational skills with a level head and critical thinking. Putting out fires is a regular part of the gig, as there are always unknowns that arise, whether you’ve just started a business or have been in operation for years.

There are a few steps you can take that will help the process every time, even with the most challenging hiccups. These five business problem-solving tips will help you face challenges more efficiently.

1. Address the root cause

One of the biggest mistakes any leader can make is taking care of a surface-level issue without digging to find out what really caused it and addressing the bigger problem. You may see an easy way out with a quick fix, but the issue will keep happening unless you deal with the root cause. 

Uncovering that root cause may mean meeting with all employees to understand better who is involved and who isn’t. Discover where the issue was first noticed and make sure there weren’t any factors or missed steps before that. You may not always be able to solve a problem entirely on the first try, but don’t be afraid to spend the time and energy to get down to the bottom of things.

2. Know when to delegate

As a business owner, it’s too easy to want to handle everything yourself. You may worry that if you pass responsibility to someone else, it won’t get done correctly. But the truth is, many problems will come up—and owners can’t take on each and every one of them. Spreading yourself too thin means that none of the issues are getting the attention they need for proper resolution. 

Instead, give team members a chance to shine by delegating, or at least involve them in the problem-solving process so they can learn something and handle an issue the next time. You’ll be setting up your employees for future success while ensuring more than one mind behind a solution. This diversity of perspective ups the odds of finding a creative, efficient fix that one person may not have thought of on their own.

3. Take the time to outline your thoughts

Depending on the complexity of the problem, there could be lots of moving parts and several people or departments involved. Write everything down in a simple outline of what’s happened and what needs to happen next, or create a chart with the known facts. This exercise helps keep it all straight and track the steps toward success. A diagram can help you assign tasks to other people, too, and explain the problem to others. 

Outlining is a key stepping stone in staying organized, which is an integral part of problem-solving of any kind in the business world. Seeing the facts laid out can also open up opportunities to get more creative with an approach. And it may help you create a realistic timeline for getting an issue resolved and setting appropriate business targets.

4. Ask for new perspectives

You may be an expert in your field, but that doesn’t mean you always have complete vision. Sometimes the answer might be obvious, but you won’t find it unless someone else points it out. Try asking for help from others when facing an especially challenging problem. They could have the exact answer you’re looking for, drawing from their own experience or creative ideas. Also, simply explaining everything aloud allows individuals to break things down and find new perspectives on their own.

5. Use the EOS® toolbox

The Entrepreneurial Operating System® (EOS) offers problem-solving tools and a coherent business structure a team doesn’t get slowed down by challenges, which are impossible to prevent completely. And the right toolbox enables quick and consistent responses to issues, even if the effort first involves asking more questions. 

There are three critical steps in the EOS approach to solving problems, known as the Issue Solving Track™: 

  • Identify: More often than not, the real issue isn’t what’s first stated and requires going down a few layers to uncover.
  • Discuss: The discussion stage involves deeper discussions with involved team members—laser-focusing on the issue at hand and saving other problems for another time. Everyone should be able to share their thoughts openly, and this step may take a while.
  • Solve: Actually solving the issue involves clarity: about the real problem, the potential solutions, and all team members who will implement and monitor the solution. The resolution also requires a plan about what business systems need to be involved and whether new technology is necessary to ensure the issue doesn’t keep happening.

These steps could vary based on the size of your team and the depth of the problem. Some issues will be easier than others to solve, but implementing a systemic approach for all challenges gets you used to the process (and better at it).

Strategic business coaching and more

Many problems business owners face may just require the intervention of a professional in an area in which they aren’t an expert. So if you’re running into issues with cash flow, tax preparation, or business growth strategies, Provident CPA & Business Advisors is ready to help. We specialize in tax minimization for business owners and follow the EOS model in our business guidance services. And it all starts with a complimentary 90-minute meeting so we can get to know each other better. 

Contact Provident CPA and Business Advisors to talk to our team and learn more about our services.

6 Ways to Manage Tax Records More Efficient

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Are you keeping your business tax records organized? Here are 6 tips for doing it right.

Key takeaways:

  • Six tips for better records management:
    1. Keep tax documents together
    2. Go digital
    3. Get ahead of deadlines
    4. Use one account or card for expenses
    5. Put a weekly plan in place
    6. Know which documents to keep and for how long

Tax preparation isn’t just something to do in the spring—it should be an ongoing, year-round process. A business has many financials to manage and track, and without a solid record-keeping strategy, the numbers and documents can get out of hand quickly. Both tax management and financial forecasting require preparing regular statements to get a good idea of where the business stands each year.

So, what records do you need to keep? How do you stay organized? What steps should you take year-round to keep things in order? These tips will get you moving in the right direction:

1. Keep tax documents together

Taxes are one crucial reason to implement a solid record-keeping system. When you’re working with an accountant, you’ll have a much faster and more successful experience if you already have all applicable documentation ready to go. 

This means keeping quarterly financial reports, expense receipts, deductions, income statements, and other business tax records together so you’re not scrambling to deliver everything to your CPA.

2. Go digital

Gone are the days when you had to store all receipts in a box under your desk. Most vendors and businesses will send digital copies, so use that option where possible. It’s also advisable to leverage a platform like QuickBooks that automatically tracks expenses as they come out of your accounts. 

These processes help you find everything with a simple search and store all information in a cloud folder for easy access. Going digital not only helps prevent misplaced documents but also helps your office reduce its carbon footprint and avoid digging through reams of paper.

3. Get ahead of deadlines

Tax deadlines abound for business owners, so create a schedule to help you stay on track. You have to pay estimated quarterly tax and may need to issue employee tax forms, like W-2s and 1099s. These documents must include accurate data, including contact and personal information and income and benefits earned, so don’t leave them to the last minute.

Additionally, don’t put off starting an annual tax return until April. Schedule time with an accountant early in the year, so you’re not scrambling to get it done or paying higher fees for rush services. 

4. Use one account or card for expenses

Listing all expenses on a tax return can be the most time-consuming part of the process. You may be wasting a lot of time browsing through statements to find business-related purchases, and mistakes happen more frequently that way. 

Make it easier on yourself and your financial professionals by using one account or credit card for business expenses. This keeps these purchases separate from personal expenses and helps you add everything up quickly when the time comes.

You can even link this account to QuickBooks or a similar dashboard so that only the expenses that appear will be compared with the business’s income. This practice also enables automatic income, expense, and cash flow reports that keep tabs on business performance.

5. Put a weekly plan in place

All of these moving parts require consistent attention. Try setting aside thirty minutes to an hour every week to make sure you’ve saved income and expense records. Pay attention to upcoming deadlines and reporting timelines. Schedule appointments with your accountant or business strategist if you have questions or need assistance.

Dedicating this time each week to finances and record-keeping helps you stay ahead of what’s coming and keeps the business organized.

6. Know which documents to keep and for how long

After filing a tax return each year, it may be tempting to get rid of all those documents. But the best practice is to keep tax returns and the documentation used to complete them somewhere safe for at least three years after the date you filed.

Why? Because the IRS statute of limitations is three years, meaning you have that amount of time to claim a refund. The IRS also has three years to go back and try to validate your tax return information. That said, if you have employees, the best practice is to keep employment tax records for at least four years. Make sure to back up all these documents in a digital format that is safe and secure.

Get professional strategic help

Just because you know these best practices doesn’t mean you always have the means to stay on top of them. When you need a little help determining which documents are crucial and understanding your tax obligations, work with the team at Provident CPA and Business Advisors. 

We specialize in minimizing taxes for business owners and assist with growth and profit improvement, a proactive management system, business advice and strategy, and much more. 

Contact Provident CPA and Business Advisors to learn more about our services.

The Top 7 Financial KPIs for a Small Business

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Are you keeping accurate tabs on your business’s performance? These 7 financial KPIs will help!

Key takeaways:

  • Financial KPIs help you understand how the business is performing and what to focus on now and in the future
  • 7 important financial KPIs:
    1. Net profit
    2. Net profit margin
    3. Average customer acquisition cost
    4. Working capital and current ratio
    5. Operating cash flow
    6. Budget vs. actual
    7. Acid test ratio/quick ratio

Knowledge is power, and in the world of business, this means having a firm grasp on the financials. You need to know if your business is profitable and where it can improve. Financial reports should work together to provide an accurate picture of past, present, and future performance. Only then can you understand which tactics are working and which aren’t, and where you should be placing more attention. 

Key performance indicators (KPIs) give you this information. A financial KPI is a metric that illustrates if you are hitting specific goals and objectives. Here’s a guide to why they matter and seven KPIs to master:

Why are financial KPIs important?

Some people may assume there’s not much to measure when a business is doing well, as long as the cash keeps coming in. But without knowing the facts, you won’t know what’s causing success, how long it may last, and how to deal with downward trends when they do happen. 

Financial KPIs measure and track successes and failures and allow you to see an actual performance number versus the objectives. Goals and benchmarks vary by industry and business, so each organization’s KPIs may be a bit different—and there may be more of them that are relevant. But here are seven financial KPIs most businesses should monitor:

1. Net profit

Also known as net income, net profit is how much cash you have after paying all business expenses. This is a basic but crucial KPI because it reveals the true profitability of the organization, going beyond straight revenue. To find net profit, simply subtract total expenses from total revenue. 

2. Net profit margin

Once you know your net profit, you can move on to the net profit margin. Divide net profit by total revenue to get the percentage of income that ended up being profit. For example, if you earned $500,000 in revenue, but business expenses equal $400,000, your net profit would be $100,000. The net profit margin is $100,000 / $500,000 = 20%. (This number varies by industry, but 20% is generally considered a high net profit margin.)

Net profit margin helps you set goals for future profits and understand what the benchmarks should be. 

3. Average customer acquisition cost

A valuable insight is understanding how much you spend to get a new customer. This is referred to as the average customer acquisition cost. First, add up every expense required to get a customer, including sales and marketing costs. Then divide that spend by the number of new customers acquired in the period being measured. The goal, of course, is to lower this benchmark.

4. Working capital and current ratio

When assessing available liquidity—for example, making sure you can cover an immediate expense—you need to know the working capital. This number reflects liabilities minus current assets. Liabilities include debt payments, accounts payable, and payroll, and assets are accounts receivable and cash. Working capital tells you how much is on hand in the short term. To find the current working capital ratio, divide current assets by current liabilities. 

5. Operating cash flow

Healthy cash flow is a must for small businesses. It assesses money coming in and going out over a specific period. Positive cash flow is more income than expenses, and negative is when what’s going out is more than what’s coming in—an alarming scenario that calls for quick action.

The operating cash flow is a subset of that—the cash brought in through normal operations. It tells you the success of your primary business activities and helps determine whether or not you can generate enough positive cash flow to keep growing or maintain operations. It is essentially the “cash impact of a company’s net income from its primary business activities,” as Investopedia puts it.

6. Budget vs. actual

Creating a business budget is usually time-intensive, so make sure it’s working by performing a budget vs. actual comparison. This measure compares what you’re actually spending or earning with what you’ve outlined in the budget. “Budget variance analysis” is another term for this process. It helps a planner determine where the business is overspending and what areas need to be modified.

7. Acid test ratio/quick ratio

Finally, the quick ratio or acid test ratio tells you whether you can pay short-term liabilities. To find this number, first, subtract inventories from current assets. Then, divide that number by the current liabilities. This quick ratio helps determine immediate liquidity, or how much cash you have on hand right now to meet your needs.

Setting up a plan with financial experts

Measuring these financial KPIs is only one piece to the puzzle of running a business. For example, you may not know how to put the right procedures in place to track them or generate the reports you need. Further, the best businesses have dedicated processes and aligned team members, and they take a systemic approach to achieve objectives. 

Provident CPA and Business Advisors is ready to help you set and meet your goals, putting your business on the path to stability and growth. We also ensure you’re never paying too much in taxes with our expert tax planning services.

Reach out to the team at Provident CPA and Business Advisors to learn more.