Ed Slott In the News: May 29

Our typical Friday feature, In the News, updates you on a short work week following the Memorial Day weekend. Here are a few articles to peruse and use for valuable informational tidbits as the weekend approaches.

• Ed Slott wrote a May 24th article for Investment News titled, "Education expenses and 72(t) plans". By now, most advisors -- at least the ones that train with us -- know that IRA owners under age 59 1/2 are subject to a 10% penalty on the taxable amount of any distribution they take. However, there are exceptions to the rule. One involves setting up a 72(t) payment plan -- referred to in the tax code as a series of substantially equal periodic payments. You can learn more about 72(t) plans by reading the article HERE.
• The current economy has yielded a cautious approach among investors with IRA accounts. Ed Slott warns that there is a big disconnect about IRAs this year, and that most investors are holding off on putting more money in for fear of losing it in the stock market. However, Slott says that people can put the money in certificates of deposits or bonds or money-market accounts. Slott told Andrew Lecky, "I like to use an analogy of the IRA as a wine glass: You can put in either water or straight vodka. It all depends on how aggressive you really want to be." CLICK HERE to read the entire article.
• Tom Lauricella of The Wall Street Journal wrote a May 23rd piece about the pitfalls of raiding a 401(k) or IRA. As Ed Slott warns, "This can be the most expensive cash you'll ever withdrawal." CLICK HERE to read the entire article.

--By Jared Trexler

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Retirement Fears: What's In a Name?

"He that is strucken blind cannot forget the precious treasure of his eyesight lost."

What does that quote have to do with this week's Retirement Fears column? Not much of anything, except that the famous Romeo and Juliet quote follows the two key participants in this week's advisor-consumer story.

Juliet's father, aptly named Romeo, passed away and Juliet went to the bank to set up new accounts so she could close out her father's savings account. She also filled out the paperwork to transfer her father's brokerage account and IRA to the new accounts she set up in her name.

Big problem? You bet.

Romeo's name was nowhere to be found on the 1099-R and it didn't even specify the IRA as an inherited IRA. Now, Juliet owed tax on the entire $200,000 (at ordinary income tax rates) and lost out on the ability to extend distributions of the account out over her life -- a potential multi-million dollar mistake.

Here is how the mistake could have been avoided:

1. After inheriting an IRA, make sure to set up the new account correctly. The new account title MUST contain the deceased IRA owner's name and must indicate that the IRA is an inherited (or beneficiary) IRA. For example, in our situation the account should have been set up to read "Romeo's IRA (deceased 10/1/08) FBO Juliet."
2. Move inherited IRA money directly from one institution to another by "trustee-to-trustee" transfer. Non-Spouse beneficiaries of IRAs must move money this way, or else it becomes immediately taxable .
3. One mistake can mean the end of your IRA. Make sure to work with an advisor who has specialized knowledge in this area to make sure you can avoid these mistakes.

CLICK HERE TO READ THE ENTIRE RETIREMENT FEARS ARTICLE.

--By Jared Trexler

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IRA to IRA Rollovers -- The Once Per Year Rule

IRAs are not savings accounts. The IRA account comes with some very strict rules on moving the funds from one account to another. If you do not follow the rules, you can lose the tax deferred status of the IRA funds and have to pay income tax on them.

There are two ways to move IRA or Roth IRA funds. You can do a trustee-to-trustee transfer (direct transfer) where the funds go directly from one IRA custodian to another, and you cannot spend the funds while they are out of the IRA. You can do an unlimited number of transfers. The other method is a rollover where the funds are distributed payable to you and you can spend them while they are out of the IRA. You have 60 days from the date you receive the funds to put them back into another IRA or qualified employer plan. You can only do ONE rollover per year (365 days) per IRA or Roth IRA account. If you take a second distribution before the year is up, it is a taxable distribution to you and the funds cannot be put back into an IRA.

There are some exceptions to this rule. Funds moved from an employer plan to an IRA, funds converted to a Roth IRA, funds moved from an IRA to an employer plan are all exceptions to the rule because they are not IRA to IRA rollovers. Other exceptions include qualified hurricane distributions, qualified reservist distributions, Exxon Valdez settlements that are rolled over, involuntary distributions from Resolution Trust Company, and first time home buyer distributions where the home purchase transaction is cancelled.

Be careful of these traps: looking for a higher earnings rate and moving the funds more frequently than once per year, taking advantage of the free look period to cancel an annuity when investing the IRA in an annuity, cashing out an investment or an IRA when you think the institution is in trouble, etc.

--By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC

Have You Completed a Beneficiary Audit?

Most people think that their IRA assets will be distributed by their wills upon death. It is the designation of beneficiary form on file with the IRA custodian that will govern who receives those assets. It is important that each IRA account has a designation of designation form filled out with both a primary and contingent beneficiary. The only time a will will (say that five times fast) determine where the IRA assets go is if there is no beneficiary form, or perhaps it is lost, and the custodian agreements defaults to the estate. An estate is the worst beneficiary because generally the IRA can't be stretched out over the life expectancy of an individual.

There are several important points to keep in mind with a designation of beneficiary form:

1. Has it been filled out properly with a primary and contingent beneficiary?

2. Check with the IRA custodian to ensure they have an updated copy on file.

3. Is it updated to reflect any family changes such as divorce, death of a beneficiary or any new children or grandchildren?

4. Retain a copy for your records so your beneficiaries can locate it.

In a recent case, the U.S. Supreme Court ruled unanimously that a designated of beneficiary form trumps all other estate planning documents. In that case a plan participant got divorced and under the divorce decree, the ex-wife waived her rights to any benefits under his retirement plan. It was intended that his daughter would receive the proceeds from the plan at his death. The beneficiary form on file with the plan sponsor was never changed to the daughter. Therefore the daughter got nothing and the ex-wife received all the money.

It is interesting that most people can locate their wills and not their designation of beneficiary form, but the will does not cover the IRAs or qualified retirement plans.

--By Jared Trexler

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*Copyright 2009 Ed Slott and Company, LLC

Ed Slott In The News: May 22nd

Ahead of the long Memorial Day weekend, catch up on what's been happening this week with our weekly installment of In the News.

• Required minimum distributions CAN NOT be converted to Roth IRAs. However, with no RMDs for 2009, you can take what the distribution would have been and convert it in 2009. Taxes are due on the conversion, but money in a Roth IRA can grow tax-free and without more RMDs while you are alive. "You can get a huge benefit by doing something now," said Ed Slott. CLICK HERE TO READ THE ENTIRE ARTICLE.

• Kathrytn Walson from Kiplinger.com wrote an article about how to keep your IRA "heir-tight." The first step is to designate a beneficiary, or several, on the IRA forms. Make sure YOU AND YOUR LAWYER keep copies. "People think that if they set up a beneficiary, the banks will have it on file," said Ed Slott. "With all these bailouts and market problems, odds are your beneficiary paperwork is not their top priority." CLICK HERE TO READ THE ENTIRE ARTICLE.

--By Jared Trexler

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The Slott Report Mailbag: May 21st

Memorial Day weekend is upon us...well almost. We don't mean to jump the gun. Here are this week's questions and answers from The Slott Report Mailbag.

1.

Hello,

My husband has a ROTH account that has been open for 5 years this year. He is currently 58.
He wants to convert an IRA account to a new/different ROTH account with a different investment company. Is EACH Roth account subject to its own 5-year requirement before he can withdraw without penalty (once he is 59 1/2, of course. ) Once he reaches age 59 1/2, will he be able to withdraw from either ROTH without penalty, or will each Roth separately need to have been opened for 5 years?

Thanks!

Answer:
Each IRA will have it's own 5 year holding period.

Once a Roth IRA owner attains age 59 1/2 they can always take out their basis (the amount put in) without penalty. If they take any amount above their basis a penalty will apply in the first 5 years.

2.

Hello my name is Angela,

I am currently converting my traditional IRA into a ROTH. The trust company is telling me that the taxes owed are required to come from the Traditional IRA account. I do not want this to happen. I would like to pay the taxes out of my personal checking account to keep purchasing power in the ROTH.

Is this possible?


Also, for the 1st time in 24 years I showed a loss on my taxes in 2008. I plan to amend my 2008 taxes and pay the taxes on the conversion for 2008. I was told this is possible and since I showed a loss, that this was a really good time to do this.

My current IRA was created when I did a direct roll over from a QRP years ago. I then rolled my 401k into a traditional when that 401k was terminated. I have since combined both into the same traditional.

Can this cause me any problems in the future?


Furthermore, is there any way for me to save on the amount of taxes it will cost me to convert. The total estimated conversion for me is 57,000 and the total for my spouse is 97,000. We are doing this to purchase income producing real-estate in a flex Roth. We anticipate selling the real-estate for a substantial profit in the next 2 years.

This is the main reason for the conversion.

Patiently awaiting your response,

Angela Bertone

Answer:
I would suggest you talk to someone else (perhaps higher up) at that institution. Paying the taxes due from other assets is generally a smart thing to do.

If you converted in 2008 that amount should be included in your 2008 return. The actual taxes due on the conversion would have had to be paid by 4/15/09, assuming no extensions. Most qualified retirement plans and other retirement plans such as IRAs are now portable. You can combine most of them into a single IRA.

I would suggest consulting your accountant or tax advisor about saving taxes. They would know what if anything can be done in your personal situation.

3.

Dear Ed and Company,

I have a SEP-IRA established for my business. I have every intention of continuing to work beyond 70.5. Can I delay RMD from that account so long as I continue to work, and if so, what notification do I have to provide the IRA in that regard?

Thanks so much!

John Wellfare, Fremont, CA

Answer:
At age 70 1/2 you must commence taking required minimum distributions from your SEP-IRA. A SEP-IRA is treated like any other traditional IRA.

4.

Form 5305-A says that when the depositor dies after the RBD and the beneficiary is not the spouse, "the remaining interest will be distributed over the beneficiary's remaining life expectancy..." (emphasis added). See 5305-A, Article IV(3)(a)(ii). I find no language in the IRS form that permits accelerated distributions, even though it is commonly understood that distributions may be made more rapidly. The section does not say "over a period not longer than" as in Article IV(2)(b). Do you see a problem with the form?

Sincerely,

Sean K. Mangan

Answer:
Reading further on in Article IV, section 5 describes the minimum amount that must be distributed each year, 5(b) applies to distributions to non-spouse beneficiaries. There is nothing in the document that says that a beneficiary is prohibited from taking more than the minimum and by using the word "minimum" the document is indicating that amounts over the minimum can be taken. In addition, Article IV starts out by saying that the Article "shall" comply with §408(a)(6) which in turn refers you to §401(a)(9) which are the distribution rules for employer plans. The easiest way to get to an answer is to remember that as a general rule, whatever is not expressly prohibited, is allowed.

--By IRA Technical Consultant Marvin Rotenberg; compiled by Jared Trexler
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Retirement Fears: a 72(t) Disaster

Peter had a problem. As it turned out, 8 years worth of problems after finding out his 72(t) payment disaster would cost a 10% penalty for ALL distributions he had made, and those amounts would also be subject to interest accrued over that time.

And this hit him hard during a time of financial hardship.

CLICK HERE to read the entire Retirement Fears story about 72(t) distribution payments.

How can you avoid a 72(t) payment disaster?

1. Only use 72(t) payments if necessary. If you are only going to need the payments for a brief time, it may be better to just pay the penalty on the amount you withdraw. In Peter's case, he could have paid a penalty on only 3 months worth of withdrawals the first time he needed the money and avoided the hassle and headache of the 72(t) schedule.
2. If you have a 72(t) schedule already set up, or you are going to set one up, do not add or remove any money from the account besides the 72(t) distributions.
3. The rules and regs for IRAs are complex. Add in 72(t) distributions and you've got the potential for a real disaster. Make sure you consult with an IRA advisor who has specialized knowledge in this area.

Lump-Sum Pension Payments

Lump-sum pension payouts may not be available to all holders of defined-benefit plans. A new law requires employers to tell their workers if a defined-benefit plan is fully funded. Fully funded means does the plan have all the money needed to pay its obligations. Fully funded plans may offer retirees either a series of payments or a lump-sum payout, but plans that do not have enough money to pay in full at least 80% of employees who are allowed to pay only 50% of a retiree's pension in a lump sum. And plans that do not have enough money to pay at least 60% of employees who do not have to make any lump-sum payments at all. The remainder will be paid in a series of payments. Ask your defined-benefit plan’s manager for details on the financial health of your company’s plan.

--By IRA Technical Consultant Marvin Rotenberg; compiled by Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC

Ed Slott In the News: May 15th

It is Friday so open this online newspaper and let us recap the week that was.

• You need to know how to protect your IRAs and 401(k)s from creditors. The Wall Street Journal's Kelly Greene took a question about the legal protections of 401(k)s and what if any are lost during a Roth conversion or a rollover from an employer-sponsored 401(k) to a solo 401(k).

Here are a few highlights from the article.

• Savings in a 401(k) account are protected from all forms of creditor judgment (including bankruptcy). Solo 401(k)s DON'T necessarily have the same protections as other 401(k) plans.
• There are TWO exceptions. Federal tax liens imposed by the IRS and judgments against individuals who had "administered an employer-sponsored plan for embezzlement of the plan or a fiduciary breach against it."
• IRAs don't have the same shields -- BUT a 2005 law called the Bankruptcy Abuse Prevention and Consumer Protection Act states that up to $1 million in IRA assets are protected in event of bankruptcy.
• In other types of lawsuits, IRA protection varies from state to state. In Ed's home state of New York, "creditor protection for IRAs and Roth IRAs is unlimited," he said. But even if you live in a state where laws give less protection, Slott warns, "I wouldn't leave the money in a 401(k) just for that season alone."

You can CLICK HERE to read Kelly Greene's article in its entirety.

--By Jared Trexler

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Slott Report Mailbag: May 14th

It's Thursday, which means it is time to open the mail and sort through the issues facing consumers nationwide. Below are three questions we felt were pertinent to the times. We know you will find the answers applicable in some way to your retirement questions and concerns.

1.

Mr. Slott and Company,

My wife and I have about $315K in our company 401(k) plans and we're interested in possibly converting these funds to Roth IRAs to avoid what I believe to be impending soaring tax rates. I'm 55 and my wife is 50. Although I'll earn more than the $100K limit this year (assuming I get to keep my current job) and Julie will make an additional $15-20K, I understand that the income limits will be removed in 2010 and everyone will be eligible to convert 401(k)s.

My question is twofold: First, should I forgo additional contributions to my current plan and divert those funds to a Roth IRA instead for the remainder of 2009 and then work on converting the company plans into that Roth after 1/1/10? Second, would it be advantageous to convert the 401(k) funds in stages over, say, two or three years to keep our tax bracket as low as possible during the conversions?

Additionally, I have a defined pension plan with my employer for whom I've worked 30 years. I'm currently fully vested in my $28K/yr. pension which will increase at a rate of 2.5% of my salary per year.

Due to my recent transfer and a depressed job market, Julie is working for considerably less here than she was making in our former location; about $18K now vs. the $40K+ she was earning in TX. I also have an Employee Stock Purchase account with about $30K worth of SLB stock.


Finally, we have practically no debt beyond our mortgage although a new vehicle is probably on the horizon within the next five years. Our current home in LA is worth about $175K and our current mortgage balance is $100K at 4.375% for 15 years. We're currently paying an additional $400 each month subject to our income and expenses remaining stable at the current level.

Assuming nothing changes we should own our home in 5-7 years.

Any advice you could offer would be greatly appreciated.

Thanks,

Ernie Cash
Bossier City, LA

Answer:
Ernie, thanks for the personal story. We see stories very similar to yours throughout the country. I cannot provide specific advice based on your questions. However, I will provide some guidance.

You should check with the plan administrator to see if there is what is called an in-service withdrawal provision in the plan. If there is one, it generally applies to participants age 59 1/2 or older. Absent an in-service withdrawal provision it would generally not be prudent to take money out of the plan. You should also check to see if your employer is providing a contribution match to your contribution to the plan. If they are matching, you would generally not want to give that up.

You could also inquire if your company offers a 401(k) Roth. If so your contributions can go into the 401(k) Roth. Converting in stages could be advantageous if you know that your individual taxes will be lower or you have the ability to manage them in any given year.

2.

Can a beneficiary IRA be converted to a beneficiary Roth IRA?

Thanks,

Irene Feeley

Answer:
Irene, thanks for your question. The answer is flatly, NO. An inherited IRA cannot be converted to a Roth IRA under current law.

3.

Hi Ed and Company,

I have just read the new 2009 rule on this blog and would like your advice as to whether I'm interpreting it properly to fit my circumstance. I will be 70 1/2 in November of this year. I would like to take my first distribution and install it in a Roth IRA. By doing that I would not have to add it to my current yearly income ($62,000) and pay taxes on it this year. If in 5 years I withdraw it I would not have any tax to pay then either, correct?

Thank You!

Below is the Post the Question is Referring To:

Tuesday, May 12, 2009

The New Law Suspending 2009 RMDs Creates Opportunities

The Worker, Retiree, and Employee Recovery Act of 2008 suspends RMDs for IRAs in tax year 2009 for those individuals age 70 ½ and older and beneficiaries of inherited IRAs. Individuals can still take distributions but it is not mandatory.

The new law states that distribution of amounts that would have been RMDs for 2009 (but now are not) will not be treated as RMDs and not be subject to the normal 20% withholding. In addition, IRA owners can rollover these distributions to another traditional IRA or Roth IRA if they qualify to do so. Normally you cannot roll over a RMD, but now, since it is not required to take a distribution for 2009, it can be rolled over. This also means that what would have been an RMD can be converted to a Roth IRA, if the IRA owner qualifies under the $100,000 income eligibility limit for 2009. The would be RMD taken would be included in adjusted gross income counting toward the $100,000 income eligibility limit. However, the amount being converted will not count towards the $100,000 Roth IRA conversion income limit.

Answer:
Sounds like a plan. You have interpreted the new law correctly. Just a word of caution. You want to do a trustee-to-trustee transfer from the plan to a Roth IRA for the amount that you transfer. This will avoid any possible problems that could occur if you received a check directly.

--By IRA Technical Consultant Marvin Rotenberg; compiled by Jared Trexler
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Your Beneficiary Form

The following points about an IRA beneficiary form apply to all beneficiary forms, including forms for employer plans, insurance policies and annuities.

Have you filled out a beneficiary form for your IRA? When did you fill it out? Do you remember who you named as the beneficiary?

These are all critical questions. An IRA passes to a beneficiary named on the beneficiary form. It does not normally go through probate. You do not need to have a trust beneficiary to keep the IRA out of probate. A properly completed beneficiary form will do that. However, having a dead person named as a beneficiary, having no one named (which can happen if the IRA custodian “loses” your form) or having an ex-spouse still listed as the beneficiary could mean that your heirs end up in probate or in court. Don’t let that happen to your IRA. Check on your beneficiary forms now. Call your IRA custodian today.

--By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.

*Copyright 2009 Ed Slott and Company, LLC

The New Law Suspending 2009 RMDs Creates Opportunities

The Worker, Retiree, and Employee Recovery Act of 2008 suspends RMDs for IRAs in tax year 2009 for those individuals age 70 ½ and older and beneficiaries of inherited IRAs. Individuals can still take distributions but it is not mandatory.

The new law states that distribution of amounts that would have been RMDs for 2009 (but now are not) will not be treated as RMDs and not be subject to the normal 20% withholding. In addition, IRA owners can rollover these distributions to another traditional IRA or Roth IRA if they qualify to do so. Normally you cannot roll over a RMD, but now, since it is not required to take a distribution for 2009, it can be rolled over. This also means that what would have been an RMD can be converted to a Roth IRA, if the IRA owner qualifies under the $100,000 income eligibility limit for 2009. The would be RMD taken would be included in adjusted gross income counting toward the $100,000 income eligibility limit. However, the amount being converted will not count towards the $100,000 Roth IRA conversion income limit.

--By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC

Tap Into 401(k); move money to Roth IRA

Today, we want to point out an issue that has been front-and-center throughout the print media over the last several months. To avoid future tax hikes, Ed Slott advises retirees to move money out of a 401(k) into a Roth IRA.

To really hammer that point home, below is a February 17, 2009 interview with Janice Revell, senior writer at Money Magazine.

At the end of the interview, Janice talks about Ed's book Stay Rich for Life!: Growing and Protecting Your Money in Turbulent Times. Since that interview, the book has hit the market (you can purchase a copy by following the link at our website, http://www.irahelp.com/)

Embedded video from CNN Video

Ed Slott In the News: May 8th

Friday is the day to catch up on the week's biggest news.

The Slott Report keeps you abreast of the biggest news in the industry each and every Friday. Below are links and brief summaries of two articles from the first full week in May. The topics are pertinent to the times -- Roth IRA conversion and cracking into retirement accounts early.

• Syndicated financial columnist Eileen Ambrose, specifically from The Baltimore Sun, wrote a telling piece on the uncertanity consumer's face when thinking about Roth IRA conversions. As Ambrose wrote: "Tax rates are exceptionally low now. IRA account values have also fallen with the markets, so there are fewer gains to tax during a conversion. And the outlook for higher federal income taxes is good -- at least for those in the top two brackets. Even if Uncle Sam doesn't raise income taxes, cash-strapped states might do so, says IRA expert Ed Slott. " And the benefit to a Roth, you ask? Money goes into a Roth after tax, so it accumulates and comes out tax-free in retirement. You can do better with a Roth compared to a traditional IRA if you expect to be in a higher tax bracket come retirement. CLICK HERE to read the article in its entirety.

• They say that desperate times usually call for desperate measures. Financial writer Arden Dale likened tapping into a retirement account early to "...standing on a street corner burning $10 bills." Yet, people are doing it anyway according to a Watson Wyatt study that said companies are reporting 44% early withdrawals from 401(k) and 403(b) plans due to hardship, up from 15% in October 2008. These early withdrawls get hit with state taxes, other penalties and of course the 10% penalty -- UNLESS YOU KNOW THE EXCEPTIONS. CLICK HERE to read the entire article and write down the exceptions that ARE A MUST to know in this business.

--By Jared Trexler

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Slott Report Mailbag: May 7th

Let's get right to this week's Mailbag.

1.

Hi Ed and Company,

Quick rundown...

I'm 38 years old with no intention of retiring until into my late 60's. I have a traditional IRA with about 20K in it. I am recently transitioning to starting up my own business so money is a little
tight. Currently, I'm questioning whether or not I should start again on my own to make regular monthly deposits into my existing IRA or start a Roth from scratch through my bank.

Thoughts?

Regards,

Jason De Ruggiero
Ringwood, NJ

Answer:
Chances are that your contribution to a traditional IRA would be tax deductible. If your income is very low, starting your own business, then the deduction will not be that valuable. If you think income tax rates will go up in the future a Roth might be a good option. When you take any distribution for a traditional IRA it would be taxable. Any distribution from a Roth IRA will be tax free.

2.

Dear Ed and Company,

I inherited a beneficiary IRA and the decedent had an agreement to pay the IRS back taxes in monthly installments of the total owed, which was $26,000. The IRA owner died with no assets except this $80,000 IRA. Should I be concerned to invest the money because the IRS may come after that money. Can the IRS seize the assets in the beneficiary IRA because taxes weren't paid before his untimely death?

Sincerely,

Brad

Answer:
It appears that the estate owes the IRS $26,000. Since there are no other assets you will have to pay it. Perhaps you can pay it from your personal assets, if you have enough liquidity, so you don't have to take the money from the inherited IRA. Any distribution from the inherited traditional IRA will be taxable to you. The IRS can seize the IRA assets as a last resort.

3.

I have a survivorship insurance policy to fund a revocable living trust for the benefit of my son who has a disability. I have been advised that this policy should be set up as an ILIT that would be considered outside my estate and thus minimize taxes at the time when neither my spouse nor I are no longer living. My inquiry is how should this be done and who can I consult in my local area of Cincinnati, Ohio? Also what should I be considering if indeed this is advisable?

Thanks in advance for any consideration to this inquiry.

Al Kaled

Answer:
Al, this is a complicated issue for which the main advice should come face-to-face from a competent, educated financial advisor. We have several advisors in the Cincinnati, OH area that train with us. You can search for one of our advisors by CLICKING ON THIS LINK.

--By Marvin Rotenberg, IRA Technical Consultant, and Jared Trexler
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How to Tap Your Assets in a Tax-Sensitive Way

MarkertWatch's Robert Powell wrote a column based on Ed Slott's advice in the May 2009 issue of Ed Slott's IRA Advisor Newsletter.

The topic: how to tap into assets, if you desperately need them, in the most tax-efficient way. CLICK HERE to read Powell's full article, and look at the May 2009 issue of the newsletter for Ed's full take.

You can access your newsletter page by clicking on the newsletter icon along the left-hand side of the page.

Below are a few key points to reminder:

1. Look first at all available cash, whether it be in bank accounts, money-market funds or matured Treasury or municipal bonds.
2. Look to gain capital gain income from the sale of investment assets.
3. Money from an IRA or 401(k) is usually taxed at ordinary income rates, so it should be the last resort for cash!
4. Two ways to minimize a penalty on withdrawal from the IRA or 401(k) are the Age 55 exception and NUA (Net unrealized appreciation).

-- Compiled by Jared Trexler

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Retirement Fears: A Lack of Trust

Beginning today, you can read the key points of the consumer-advisor stories from Retirement Fears in this space. At the bottom of each post, we will provide a link to the full story that can be found in the Retirement Fears section of our website. You can search for previous stories at THIS LINK.


THE STRETCH -- a powerful, profitable tool to grow an inherited IRA into a million-dollar nest egg...if handled properly.

However, both advisors and consumers should know the key steps that MUST be taken to insure that your or your client's IRA trust is handled properly.

1) Make sure a copy of a trust that is the beneficiary of an IRA (or other Retirement Plan) is delivered to the IRA custodian (or plan custodian) by no later than October 31st of the year following the year of death.

2) Have family/group meetings with your beneficiaries, trustees, attorneys and other advisors to make sure everyone is on the same page and knows what to do.

3) Make sure to work with a qualified advisor who has specialized knowledge in this area who will proactively follow-up with you to make sure that all necessary actions are completed as required.

If you don't follow all of the above steps, you can find yourself in a situation just like "Matt", who's story is told in this week's installment of Retirement Fears.

CLICK HERE to access the entire story of Matt's "Lack of Trust".

-- Compiled by Jared Trexler
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Trusts as IRA Beneficiaries

The number one problem I see when a trust is named as an IRA beneficiary is that at some point, either during the account owner's lifetime or when the trust inherits the IRA, the IRA gets transferred into the trust. An IRA is an Individual Retirement Arrangement and it must be owned by an individual. The transfer into the trust is a taxable event and cannot be undone but it can be avoided.

If the trust is a qualifying trust - and that is a subject for another day - then at the death of the IRA owner, required distributions can be made from the IRA to the trust. The IRA is retitled as an inherited IRA for the benefit of the trust and it remains outside of the trust. Only distributions requested by the trustee go into the trust. For required distributions, the age of the oldest trust beneficiary is used and the IRA can be stretched over that life expectancy.

An IRA cannot be transferred or assigned to another individual or to an entity except upon the death of the IRA owner or a beneficiary who had inherited the IRA. (It can also be transferred to an ex-spouse of the IRA owner as part of a divorce decree or separation agreement.) Any transfer during lifetime is a taxable event and it means the end of the IRA.

--By Beverly DeVeny, IRA Technical Consultant; edited by Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC

IRA Fees May be Tax Deductible

Ever wonder if the fees you pay your bank, broker or insurance company for your IRA could be income tax deductible?

Under certain circumstances you can deduct an IRA trustee's administrative fees that are billed separately, and paid by you, in connection with your IRA. These expenses must be ordinary and necessary. You cannot separately deduct disguised IRA contributions or capital expenditures such as brokers commissions that you must add to the cost of securities you buy through brokers. Deductible trustee fees are not subject to the annual dollar limit on contributions you can make to an IRA. You can deduct them as a miscellaneous deduction on Schedule A (Form 1040). The deduction is subject to the 2% of adjusted gross income limit.

This applies to both traditional and Roth IRAs.

--By Marvin Rotenberg, IRA Technical Consultant; edited by Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC

Slott Report Mailbag: April 30th

The last day of April showers brings The Slott Report Mailbag and a heap of sun when the calendar flips to May.

1.
Ed,

I saw your program on PBS in February, and I thought you brought great information! However, I have forgotten the one most important point you made about the inheritance of my IRA by my children after my and my wife's death. It had something to do with a "pour-over"? statement that had to be made within the IRAs beneficiary designation form.

Could you be kind enough to refresh my memory on this point?

Terry E Brand

Answer:
You would name your wife as primary beneficiary and your children as contingent beneficiaries. If your wife survives you she would take your IRA and make it her own. She would then name your children as primary beneficiaries. At her death your children as beneficiaries can elect to inherit her IRA and take required minimum distributions out over their own life expectancies commencing a year after your wife's death.

You could also name your children as your primary beneficiary instead of your wife. In that case at your death the children can inherit.

2.

Hi Ed and Company,

We saw you recently on PBS and you really helped us put some ducks in a row. One question that we were wondering about were 401ks.

Is there a way to convert a 401k into a ROTH IRA in 2010? I've accumulated a fair size nest egg so it won't be cheap .... but I'm not sure if it is possible to do so in 2010.

Any insight would be greatly appreciated.

Best,

Randy

Answer:
If you are still working and contributing to your 401(k) plan, the plan must have an in-service withdrawal provision to withdraw money without penalty.

If you are retired or not participating in the 401(k) plan you can roll your plan assets into a Roth IRA. In year 2009 your modified adjusted gross income can not exceed $100,000. Starting in year 2010 the $100,000 limit will not apply. Yes, you will pay income tax on the conversion.

3.
Ed et al,

I'm confused.

1. Is the conversion allowable on the amount ONLY in the traditional IRA as of the year 2010?

OR

2. Can I convert non-deductible traditional IRA contributions I make in 2011 and 2012 as well?

Thank you in advance,

Jane Krueger

Answer:
No both deductible and non-deductible IRAs can be converted to a Roth IRA in 2009 if your modified adjusted gross income does not exceed $100,000. In converting you would have to consider both the after-tax and the pre-tax dollars to calculate the income tax.

In years 2011 & 2012 you may be able to contribute directly to a Roth IRA depending on your income. However, yes you can convert from a traditional IRA to a Roth IRA at anytime.

--By Marvin Rotenberg, IRA Technical Consultant; edited by Jared Trexler
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