This is part of a series of blogs on the rules regarding taking early distributions from your retirement funds.
Generally your retirement funds are pre-tax dollars, money you have earned but not paid tax on - yet. Since you get a tax break on those contributions, there are strings attached to those funds. One of those strings is a limitation on taking distributions too early.
In general, a distribution you take from your non-taxed retirement accounts before age 59½ will be included in your income for the year of the distribution, but, it will also be subject to an additional tax, a penalty of 10% of the taxable amount withdrawn.
For example, you are age 52, have been laid off from your job, and you need to take a distribution of $10,000 to pay some pressing bills. The $10,000 will become part of your income for the year and will be subject to income tax. Let’s say your tax rate is 15%. That means that you do not really have $10,000 to pay those pressing bills; you only have a net amount of $8,500 ($10,000 minus the tax due of $1,500). But you don’t even have $8,500 to pay those bills because you also owe the 10% early distribution penalty which is calculated on the $10,000. So you owe an additional $1,000 in taxes leaving you with a net amount of only $7,500 to pay your bills. And, you may also have to pay state income taxes and/or early distribution penalties as well.
There are a couple of exceptions to the age 59½ rule for certain individuals who participate in employer plans. If you have separated from service (been laid off, retired, quit, been fired) with your employer in the year you turn age 55 or later, you can take distributions from the plan and not be subject to the 10% penalty. You will still owe income taxes on any taxable amounts distributed.
For public safety employees who are participants in governmental defined benefit pension plans, the age drops even further to age 50. Once those employer plan funds are transferred to an IRA you lose that exception; it is only for funds distributed from a plan.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Monday, August 31, 2009
Friday, August 28, 2009
Discussion Forum Topic: Taxable Account vs. Inherited IRA (Part 2)
CLICK HERE for Part 1 from last Friday.
There is no step-up in basis for inherited IRAs. This is always the case, regardless of the IRA's investments. If, though, the IRA owner had made after-tax contributions to the account during their life, there can be existing basis that would pass to you. Simply put, basis can be transferred at death, but basis cannot be created.
Inherited IRAs are taxed in a similar manner as Traditional IRAs. As long as assets are held in the account, they grow tax-deferred. When the assets are distributed (either as required minimum distributions or elective withdrawals), they are added to your taxable income for the year and are taxed at your marginal rate.
For example, say your Uncle had contributed the same $100 to a traditional IRA during his life that had grown to $1,000 by the time of his death. Three months later the account was worth $1,200 when you withdrew the proceeds. This time, you would owe regular income tax on the entire amount. That's a pretty stark contrast to our previous example!
It's a good idea to remember that IRAs are different from other types of accounts in many ways. The treatment they receive after death is just one example that highlights those differences. If you have a specific question, it's always best to consult with a knowledgeable advisor first to make sure you are aware of all the rules.
Do you have any more questions? Want to see what other people are asking? Check out the Ed Slott IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
---------------------------------------------------------------------
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
There is no step-up in basis for inherited IRAs. This is always the case, regardless of the IRA's investments. If, though, the IRA owner had made after-tax contributions to the account during their life, there can be existing basis that would pass to you. Simply put, basis can be transferred at death, but basis cannot be created.
Inherited IRAs are taxed in a similar manner as Traditional IRAs. As long as assets are held in the account, they grow tax-deferred. When the assets are distributed (either as required minimum distributions or elective withdrawals), they are added to your taxable income for the year and are taxed at your marginal rate.
For example, say your Uncle had contributed the same $100 to a traditional IRA during his life that had grown to $1,000 by the time of his death. Three months later the account was worth $1,200 when you withdrew the proceeds. This time, you would owe regular income tax on the entire amount. That's a pretty stark contrast to our previous example!
It's a good idea to remember that IRAs are different from other types of accounts in many ways. The treatment they receive after death is just one example that highlights those differences. If you have a specific question, it's always best to consult with a knowledgeable advisor first to make sure you are aware of all the rules.
Do you have any more questions? Want to see what other people are asking? Check out the Ed Slott IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
---------------------------------------------------------------------
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
Thursday, August 27, 2009
Slott Report Mailbag: August 27th
Here is this week's Slott Report Mailbag.
1.
Hi Ed and Company,
Several years ago , I set up a Roth IRA for my wife. She does not work outside of the home and has no earned income. I contributed to this IRA for several years.
The past several years I did not contribute to her IRA. I have earned income. Can I still contribute to her Roth IRA and how many years back can I make up? We are both over 65 and file a joint income tax return.
Thanks,
W. Kelley
Answer:
If you and your spouse are filing a joint tax return and you have earned income, you and your spouse can contribute $5,000 each to a traditional IRA in 2009. Here is an example: let's say you have earned income, taxable compensation, of $30,000 for the year. You can contribute $5,000 to your traditional IRA and $5,000 to your non-working spouse's traditional IRA ( $6,000 each if you were both age 50 or older). Because your spouse has no compensation, you add your compensation, reduced by the amount of your IRA contribution ($30,000-$5,000 =$25,000) to her own compensation (0) to figure her maximum contribution to a traditional IRA. In this example $5,000 is her contribution limit, because $5,000 is less than $25,000 (her compensation for purposes of figuring the contribution limit.)
You can not contribute for prior years. The applicable regulation states: IRA contributions for a specific year must be made during the period beginning with the first day of the individual's tax year (generally January 1) and ending with the tax return due date for the applicable year (excluding extensions), which is generally April 15. In a traditional IRA you can not contribute after age 70 1/2. However, if you have earned income you can continue to contribute to a Roth IRA.
2.
It's likely that, with Social Security and pensions, my husband and I will have an income at age 70 that's less than our adjusted gross income now. Does it make sense to draw down the amount of a variable annuity in an IRA to pay taxes for a conversion to a Roth come January? (It's about half the 2007 value.)
Answer:
If your modified adjusted income (MAGI) in 2009 is less than $100,000, you qualify for conversion. Or you can wait until 2010. If you convert in year 2010, the income tax due on the conversion could be paid ratably over tax years 2011 and 2012 or paid in full in 2010. It is always a good idea to pay the tax from other assets rather than from the IRA if you can afford to do so. The fact that your IRA is half of what it was in 2007, converting now, you will pay less income taxes on the conversion. The taxes are based on the market value upon conversion. But does it make sense to convert? Only you can make that decision. It will depend on many other factors. You should discuss this decision with your financial advisor.
3.
Ed and Company,
Thanks for adding me to your mailing list. I will be 70 on May 28, 2010 and don't know if I can make these conversions in 2010 from my ING fixed annuities, one is 403(b) and the other is IRA. (403(b) has 150K and IRA has 83K) I had already planned to take a withdrawal from the IRA in late 2009 and was fretting that it would mean that I'd have over 25,000 income and have to pay some tax on my Social Security for the first time. Last year I only owed 240 in tax. If I did this conversion or even a partial conversion would I have to take the same amount from both the 403B and the IRA?
Also, what if President Obama follows through on his campaign promise to relieve those seniors making less than 50,000 of their tax burden? Even with RMD, I won't be making 50,000 taxable income so shouldn't I take the gamble and wait and see? Also, will the RMD tables be adjusted soon for even longer spans for single adults or will it remain at 27.4 for age 70?
Thank you for any help you may give.
Carol Looney
Answer:
Your decision to convert your 403(b) plan and IRA are separate decisions. If you qualify you can convert your traditional IRA to a Roth IRA and not convert your 403(b) plan to a Roth IRA or vice versa. Unfortunately we do not have a crystal ball to determine where income tax rates will be in the future or whether seniors earning less than $50,000 will benefit.
4.
Could it be advantageous to convert an IRA to a Roth IRA and pay the taxes as a means to reduce estate taxes for the benefit of non-spousal beneficiaries?
Thanks!
Joe
Answer:
The answer is perhaps. The amount of income tax you pay upon conversion will reduce your total estate by that amount. Also consider that the top federal income tax rate in 2009 is 35% and the top federal estate rate is 45%. The reason the answer is perhaps is that in year 2010 and only 2010, the estate tax is scheduled to expire. Whether this will ever happen will remain to be seen.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
1.
Hi Ed and Company,
Several years ago , I set up a Roth IRA for my wife. She does not work outside of the home and has no earned income. I contributed to this IRA for several years.
The past several years I did not contribute to her IRA. I have earned income. Can I still contribute to her Roth IRA and how many years back can I make up? We are both over 65 and file a joint income tax return.
Thanks,
W. Kelley
Answer:
If you and your spouse are filing a joint tax return and you have earned income, you and your spouse can contribute $5,000 each to a traditional IRA in 2009. Here is an example: let's say you have earned income, taxable compensation, of $30,000 for the year. You can contribute $5,000 to your traditional IRA and $5,000 to your non-working spouse's traditional IRA ( $6,000 each if you were both age 50 or older). Because your spouse has no compensation, you add your compensation, reduced by the amount of your IRA contribution ($30,000-$5,000 =$25,000) to her own compensation (0) to figure her maximum contribution to a traditional IRA. In this example $5,000 is her contribution limit, because $5,000 is less than $25,000 (her compensation for purposes of figuring the contribution limit.)
You can not contribute for prior years. The applicable regulation states: IRA contributions for a specific year must be made during the period beginning with the first day of the individual's tax year (generally January 1) and ending with the tax return due date for the applicable year (excluding extensions), which is generally April 15. In a traditional IRA you can not contribute after age 70 1/2. However, if you have earned income you can continue to contribute to a Roth IRA.
2.
It's likely that, with Social Security and pensions, my husband and I will have an income at age 70 that's less than our adjusted gross income now. Does it make sense to draw down the amount of a variable annuity in an IRA to pay taxes for a conversion to a Roth come January? (It's about half the 2007 value.)
Answer:
If your modified adjusted income (MAGI) in 2009 is less than $100,000, you qualify for conversion. Or you can wait until 2010. If you convert in year 2010, the income tax due on the conversion could be paid ratably over tax years 2011 and 2012 or paid in full in 2010. It is always a good idea to pay the tax from other assets rather than from the IRA if you can afford to do so. The fact that your IRA is half of what it was in 2007, converting now, you will pay less income taxes on the conversion. The taxes are based on the market value upon conversion. But does it make sense to convert? Only you can make that decision. It will depend on many other factors. You should discuss this decision with your financial advisor.
3.
Ed and Company,
Thanks for adding me to your mailing list. I will be 70 on May 28, 2010 and don't know if I can make these conversions in 2010 from my ING fixed annuities, one is 403(b) and the other is IRA. (403(b) has 150K and IRA has 83K) I had already planned to take a withdrawal from the IRA in late 2009 and was fretting that it would mean that I'd have over 25,000 income and have to pay some tax on my Social Security for the first time. Last year I only owed 240 in tax. If I did this conversion or even a partial conversion would I have to take the same amount from both the 403B and the IRA?
Also, what if President Obama follows through on his campaign promise to relieve those seniors making less than 50,000 of their tax burden? Even with RMD, I won't be making 50,000 taxable income so shouldn't I take the gamble and wait and see? Also, will the RMD tables be adjusted soon for even longer spans for single adults or will it remain at 27.4 for age 70?
Thank you for any help you may give.
Carol Looney
Answer:
Your decision to convert your 403(b) plan and IRA are separate decisions. If you qualify you can convert your traditional IRA to a Roth IRA and not convert your 403(b) plan to a Roth IRA or vice versa. Unfortunately we do not have a crystal ball to determine where income tax rates will be in the future or whether seniors earning less than $50,000 will benefit.
4.
Could it be advantageous to convert an IRA to a Roth IRA and pay the taxes as a means to reduce estate taxes for the benefit of non-spousal beneficiaries?
Thanks!
Joe
Answer:
The answer is perhaps. The amount of income tax you pay upon conversion will reduce your total estate by that amount. Also consider that the top federal income tax rate in 2009 is 35% and the top federal estate rate is 45%. The reason the answer is perhaps is that in year 2010 and only 2010, the estate tax is scheduled to expire. Whether this will ever happen will remain to be seen.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
Tuesday, August 25, 2009
Re-Thinking Social Security
Many Americans are living on the edge these days, and that means more are opting to take Social Security early. The Social Security Administration reports a large spike, up 23% from a year ago, in early retirement claims for Social Security. Part of the increase is attributed to the baby boomers and the increasing percentage of women reaching retirement age after joining the workforce en masse only a few decades ago.
The average age when people start collecting Social Security is 63.6, based on the most recent calculation by the Social Security Administration. This may drop after this year's barrage of claims is factored in.
Social Security checks are about 25% less for each year you start taking benefits before full retirement age, which is age 66 for those born from 1943 to 1954. After full retirement age, the monthly benefit will increase by about 8% for each year you delay taking your benefit.
The Social Security Administration has established a useful web site (www.socialsecurity.gov/estimator) that has a discussion on when to start receiving benefits as well as a retirement calculator to help you make your decision.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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 average age when people start collecting Social Security is 63.6, based on the most recent calculation by the Social Security Administration. This may drop after this year's barrage of claims is factored in.
Social Security checks are about 25% less for each year you start taking benefits before full retirement age, which is age 66 for those born from 1943 to 1954. After full retirement age, the monthly benefit will increase by about 8% for each year you delay taking your benefit.
The Social Security Administration has established a useful web site (www.socialsecurity.gov/estimator) that has a discussion on when to start receiving benefits as well as a retirement calculator to help you make your decision.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
Monday, August 24, 2009
My Beneficiary Form
I have written about checking your IRA beneficiary forms before. But something occurred recently that highlights the importance of this topic.
I recently got a letter from my IRA custodian telling me that I had no beneficiary form on file with them for my IRA. Now, do you really think that I opened an IRA and did not fill out a beneficiary form? Not me! I had named my spouse as my primary beneficiary and my grown children as the contingent beneficiaries. As late as last year, the IRA custodian had this information. This bank has not gone through a merger in the last four years (they are now so big they cannot merge with anyone else), they have not relocated although they have had layoffs, so what could have happened to my beneficiary form?
Since they apparently had no idea, they had enclosed a blank form with the letter and requested that I complete it and return it to them as soon as possible. Once that is done (and I have kept a copy of the form for myself), how do I make sure that they actually have the form and have recorded it for posterity this time? I always recommend that you either send a letter or an email to the IRA custodian asking them who is the beneficiary on file. This way you get a written response and if the answer is wrong, you have a chance to correct it.
This incident sharply illustrates why we keep telling IRA owners and advisors that it is so important to check on those beneficiary forms. You just never know when it will “disappear” for no known reason. I was lucky and was able to correct the problem. Others are not so lucky and their beneficiaries end up paying the price.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
---------------------------------------------------------------------
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
I recently got a letter from my IRA custodian telling me that I had no beneficiary form on file with them for my IRA. Now, do you really think that I opened an IRA and did not fill out a beneficiary form? Not me! I had named my spouse as my primary beneficiary and my grown children as the contingent beneficiaries. As late as last year, the IRA custodian had this information. This bank has not gone through a merger in the last four years (they are now so big they cannot merge with anyone else), they have not relocated although they have had layoffs, so what could have happened to my beneficiary form?
Since they apparently had no idea, they had enclosed a blank form with the letter and requested that I complete it and return it to them as soon as possible. Once that is done (and I have kept a copy of the form for myself), how do I make sure that they actually have the form and have recorded it for posterity this time? I always recommend that you either send a letter or an email to the IRA custodian asking them who is the beneficiary on file. This way you get a written response and if the answer is wrong, you have a chance to correct it.
This incident sharply illustrates why we keep telling IRA owners and advisors that it is so important to check on those beneficiary forms. You just never know when it will “disappear” for no known reason. I was lucky and was able to correct the problem. Others are not so lucky and their beneficiaries end up paying the price.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
---------------------------------------------------------------------
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
Friday, August 21, 2009
Discussion Forum Topic: Taxable Account vs. Inherited IRA (Part 1)
This week the Ed Slott IRA Discussion Forum featured a question about how inherited assets are taxed and treated. But are all inherited items the same? Does an IRA receive the same tax treatment as a taxable account? Read on to find out.
In general, when you inherit property (including taxable investment accounts) from a decedent, the tax provisions are very favorable. One benefit that you usually receive is a step-up in basis. The step-up in basis essentially looks at the asset as if you purchased it on the date of death. If those assets have appreciated since their original purchase, this can significantly reduce the tax owed when those assets are sold.
For example, let's say you inherited ABC stock from your uncle. When your uncle bought the stock, it was worth $100, but when he died it was worth $1,000. If you sold the stock three months later for $1,200, you would owe capital gains tax only on $200! ($1,200 sale price - $1,000 value when inherited).
You've only owed the stock 3 months though, so it must be a short-term capital gain right? Nope!! Another favorable tax break for most inherited property is that it's automatically given long-term capital gain treatment. These long-term gains are taxed at a maximum of 15%, while short-term capital gains are taxed at ordinary income rates (currently as high as 35%).
But what about IRAs? Do they get the same treatment? Find out next Friday in Part II.
By IRA Technical Consultant Jeffrey Levine 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
In general, when you inherit property (including taxable investment accounts) from a decedent, the tax provisions are very favorable. One benefit that you usually receive is a step-up in basis. The step-up in basis essentially looks at the asset as if you purchased it on the date of death. If those assets have appreciated since their original purchase, this can significantly reduce the tax owed when those assets are sold.
For example, let's say you inherited ABC stock from your uncle. When your uncle bought the stock, it was worth $100, but when he died it was worth $1,000. If you sold the stock three months later for $1,200, you would owe capital gains tax only on $200! ($1,200 sale price - $1,000 value when inherited).
You've only owed the stock 3 months though, so it must be a short-term capital gain right? Nope!! Another favorable tax break for most inherited property is that it's automatically given long-term capital gain treatment. These long-term gains are taxed at a maximum of 15%, while short-term capital gains are taxed at ordinary income rates (currently as high as 35%).
But what about IRAs? Do they get the same treatment? Find out next Friday in Part II.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
---------------------------------------------------------------------
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
Thursday, August 20, 2009
Slott Report Mailbag: August 20th, 2009
Here is this week's Slott Report Mailbag.
1. Dear Ed Slott and Company,
I am going to be 68 and most of my retirement accumulation is in 403(b) accounts. I am currently in the 15% tax bracket. Should I change my 403(b) accumulation into IRAs in order to convert them into Roth IRA accounts as soon as possible, paying the tax up front right away, so as to avoid the Required Minimum Distribution that kicks in at 70 1/2? (Can I go directly from 403(b) into the Roth, skipping the IRA step, as long as I pay the required tax now for conversion?)
If I don't do something fast I will owe the government many thousands in RMD starting in three years.
Best regards,
Janet Hilowitz
Answer: You are correct that a required minimum distribution (RMD) will commence at age 70 1/2 from your 403(b) plan. There is however an exception for 403(b) plan RMDs. If your provider can determine your balance in your 403(b) plan prior to year 1987, assuming you were a participant prior to 1987, that amount will not have to be used in calculating your RMD at age 70 1/2. At age 75 the amount that was not used at age 70 1/2 will be added in to calculate your RMDs. You can go directly from a 403(b) plan to a Roth IRA.
2.
Ed and Company,
In July 2008, I converted $25,000 from my TIRA to a Roth. I was advised to recharaterize back to the TIRA. My Roth lost value and is now worth $12,673. My thinking is, I've already paid taxes on the conversion and regardless of what the market does, this $25,000 is already paid for and is now tax free for life. Am I right in how I'm thinking or is my advisor right?
Thank you,
Bob
Answer: You can then reconvert back to a Roth IRA. As a rule, you must wait more than 30 days from the date of recharacterization or until the calendar year following your initial conversion - whichever is latter. In your case, since the original conversion was done in 2008, you can reconvert the funds back to a Roth IRA on the 31st day after recharacterizing.
3.
I am a 28-year-old trying to plan for my retirement and take advantage of the 2010 changes to IRA contributions. If my income is currently below the maximum amount for ROTH IRA contributions, should I or can I contribute the max in a Roth IRA and a Traditional IRA? Would it benefit me to contribute to a traditional and Roth IRA (since I currently can) and then try to convert the traditional to a Roth? Or would I not be allowed to do this because my current year's investment would be greater than the allowed amount? I also have about $60,000 I have saved in mutual funds post-tax dollars. Can I put this into a Roth account with no tax implications since I have already paid taxes on this money?
Thank you!
Answer: The maximum you can contribute to a traditional and Roth IRA this year is $5,000 combined assuming your earned income equals or exceeds that amount. You can contribute to both but the total amount can not exceed $5,000. You can not take the $60,000 you have in your personal assets, non IRA assets, and put it in a Roth IRA. You of course can take $5,000 of that money, as discussed above, and contribute to an IRA.
4.
At present, I have an traditional IRA that was funded by a rollover of a 401(k) plan from my previous employer. I also have a 401(k) plan through my current employer. I have no Roth IRA, as I have never been able to convert to a Roth because of income restrictions, that I understand will be eliminated in 2010. I will likely work through the end of 2010 and then retire. I have a couple of questions:
1.) If I understand the new rules correctly, I can convert a portion of my existing traditional IRA to a Roth IRA in 2010 and elect not to claim it as income in 2010, but rather elect to claim half of the conversion amount on my 2011 tax return, and the other half on my 2012 return. Since I will likely be retired by 2011, and I use this method for paying the taxes, it would allow me to convert more money at very favorable tax rates, as opposed to claiming the conversion on my 2010 tax return and having all of the conversion taxed at my marginal rate in 2010. It seems as though this would be very beneficial for someone in my particular situation to do. Can you confirm that my interpretation of these new rules are in fact correct, or have I missed something?
2.) In essence, what happens to these conversion rules after 2010?
Tim Schneider
Answer: You are correct that if you convert to a Roth IRA in 2010 you can spread it over 2 years, 2011 & 2012. One half in 2011 and the other half in 2012. You will pay the tax on the conversion based on your tax brackets in 2011 and 2012. The $100,000 limit and the married fillings separately not able to convert will be eliminated permanently.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
1. Dear Ed Slott and Company,
I am going to be 68 and most of my retirement accumulation is in 403(b) accounts. I am currently in the 15% tax bracket. Should I change my 403(b) accumulation into IRAs in order to convert them into Roth IRA accounts as soon as possible, paying the tax up front right away, so as to avoid the Required Minimum Distribution that kicks in at 70 1/2? (Can I go directly from 403(b) into the Roth, skipping the IRA step, as long as I pay the required tax now for conversion?)
If I don't do something fast I will owe the government many thousands in RMD starting in three years.
Best regards,
Janet Hilowitz
Answer: You are correct that a required minimum distribution (RMD) will commence at age 70 1/2 from your 403(b) plan. There is however an exception for 403(b) plan RMDs. If your provider can determine your balance in your 403(b) plan prior to year 1987, assuming you were a participant prior to 1987, that amount will not have to be used in calculating your RMD at age 70 1/2. At age 75 the amount that was not used at age 70 1/2 will be added in to calculate your RMDs. You can go directly from a 403(b) plan to a Roth IRA.
2.
Ed and Company,
In July 2008, I converted $25,000 from my TIRA to a Roth. I was advised to recharaterize back to the TIRA. My Roth lost value and is now worth $12,673. My thinking is, I've already paid taxes on the conversion and regardless of what the market does, this $25,000 is already paid for and is now tax free for life. Am I right in how I'm thinking or is my advisor right?
Thank you,
Bob
Answer: You can then reconvert back to a Roth IRA. As a rule, you must wait more than 30 days from the date of recharacterization or until the calendar year following your initial conversion - whichever is latter. In your case, since the original conversion was done in 2008, you can reconvert the funds back to a Roth IRA on the 31st day after recharacterizing.
3.
I am a 28-year-old trying to plan for my retirement and take advantage of the 2010 changes to IRA contributions. If my income is currently below the maximum amount for ROTH IRA contributions, should I or can I contribute the max in a Roth IRA and a Traditional IRA? Would it benefit me to contribute to a traditional and Roth IRA (since I currently can) and then try to convert the traditional to a Roth? Or would I not be allowed to do this because my current year's investment would be greater than the allowed amount? I also have about $60,000 I have saved in mutual funds post-tax dollars. Can I put this into a Roth account with no tax implications since I have already paid taxes on this money?
Thank you!
Answer: The maximum you can contribute to a traditional and Roth IRA this year is $5,000 combined assuming your earned income equals or exceeds that amount. You can contribute to both but the total amount can not exceed $5,000. You can not take the $60,000 you have in your personal assets, non IRA assets, and put it in a Roth IRA. You of course can take $5,000 of that money, as discussed above, and contribute to an IRA.
4.
At present, I have an traditional IRA that was funded by a rollover of a 401(k) plan from my previous employer. I also have a 401(k) plan through my current employer. I have no Roth IRA, as I have never been able to convert to a Roth because of income restrictions, that I understand will be eliminated in 2010. I will likely work through the end of 2010 and then retire. I have a couple of questions:
1.) If I understand the new rules correctly, I can convert a portion of my existing traditional IRA to a Roth IRA in 2010 and elect not to claim it as income in 2010, but rather elect to claim half of the conversion amount on my 2011 tax return, and the other half on my 2012 return. Since I will likely be retired by 2011, and I use this method for paying the taxes, it would allow me to convert more money at very favorable tax rates, as opposed to claiming the conversion on my 2010 tax return and having all of the conversion taxed at my marginal rate in 2010. It seems as though this would be very beneficial for someone in my particular situation to do. Can you confirm that my interpretation of these new rules are in fact correct, or have I missed something?
2.) In essence, what happens to these conversion rules after 2010?
Tim Schneider
Answer: You are correct that if you convert to a Roth IRA in 2010 you can spread it over 2 years, 2011 & 2012. One half in 2011 and the other half in 2012. You will pay the tax on the conversion based on your tax brackets in 2011 and 2012. The $100,000 limit and the married fillings separately not able to convert will be eliminated permanently.
By IRA Technical Consultant Marvin Rotenberg 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
Wednesday, August 19, 2009
FREE 1-Hour Webcast: Win Big in ANY Crisis
Our FREE 1-Hour Webcast, "Win Big in ANY Crisis: Make These Turbulent Times Your Greatest Opportunity" will take place on 5 separate dates from August through October:
Wednesday, August 26th
Tuesday, September 1st
Thursday, September 10th
Thursday, September 24th
Wednesday, October 7th
All Webcasts begin at 4:00 PM ET
During this webcast, Ed Slott will touch on a "hot button" issue in our industry today and get you prepared for an onslaught of client questions about 2010 Roth Conversions. You will learn about 2010 Roth Conversion Planning Opportunities during this webcast.
CLICK HERE to register for Ed Slott's 1-Hour Webcast: Win Big in ANY Crisis
You can also register by clicking on the blue webcast banner in the upper left-hand side of The Slott Report.
If you have any questions, give us a call at 215-557-7022.
Wednesday, August 26th
Tuesday, September 1st
Thursday, September 10th
Thursday, September 24th
Wednesday, October 7th
All Webcasts begin at 4:00 PM ET
During this webcast, Ed Slott will touch on a "hot button" issue in our industry today and get you prepared for an onslaught of client questions about 2010 Roth Conversions. You will learn about 2010 Roth Conversion Planning Opportunities during this webcast.
CLICK HERE to register for Ed Slott's 1-Hour Webcast: Win Big in ANY Crisis
You can also register by clicking on the blue webcast banner in the upper left-hand side of The Slott Report.
If you have any questions, give us a call at 215-557-7022.
Splitting Retirement Assets in a Divorce - Part 4
You needed funds from your IRA and you were under age 59 ½ so you set up a payment schedule that would allow you to take equal periodic payments and not have to pay the 10% early distribution penalty. Now you are getting divorced and the IRA will be split as part of the divorce. What will happen to your payment plan now?
IRS has released several private letter rulings (PLRs) that have allowed individuals in these circumstances to reduce their payments. Each ruling has been a little bit different but in general the IRA owner was allowed to reduce his payments to make up for the amount that was awarded to the ex-spouse. For instance, if the ex-spouse was awarded one-half of the IRA, then the IRA owner could reduce his payments by one-half.
In addition, IRS ruled that the ex-spouse would not have to continue the payment plan on the funds she was awarded. And, in one case, IRS said it would be ok for the ex-spouse to establish her own payment plan, independent of the original plan, once the ex-spouse had the funds established in her own IRA.
PLRs are intended to give guidance only to the individual who requests the PLR, but they do give us an indication of how IRS would treat a similar situation. You should consult with your own tax advisor before making modifications to a 72(t) payment plan.
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
IRS has released several private letter rulings (PLRs) that have allowed individuals in these circumstances to reduce their payments. Each ruling has been a little bit different but in general the IRA owner was allowed to reduce his payments to make up for the amount that was awarded to the ex-spouse. For instance, if the ex-spouse was awarded one-half of the IRA, then the IRA owner could reduce his payments by one-half.
In addition, IRS ruled that the ex-spouse would not have to continue the payment plan on the funds she was awarded. And, in one case, IRS said it would be ok for the ex-spouse to establish her own payment plan, independent of the original plan, once the ex-spouse had the funds established in her own IRA.
PLRs are intended to give guidance only to the individual who requests the PLR, but they do give us an indication of how IRS would treat a similar situation. You should consult with your own tax advisor before making modifications to a 72(t) payment plan.
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
Tuesday, August 18, 2009
Splitting Retirement Assets in a Divorce-Part 3
Most attorneys and judges treat retirement assets the same as they treat any other asset. They are not familiar with all of the unique aspects of these assets. You need to know the following information to protect yourself if you find yourself in the midst of a divorce.
You have an IRA you inherited from someone. You are taking required distributions each year as a beneficiary. Now you are getting divorced and your soon-to-be ex-spouse is demanding that they get half of your inherited IRA. Can they do that? Of course they can. They just won't get an inherited IRA.
An inherited IRA is an item of IRD - income in respect of a decedent. This is money that was never taxed that was owed to someone who died. The beneficiary who inherits this income will have to pay the income tax owed. You can inherit IRD, but you cannot transfer it, gift it, or assign it. If you do, you will owe the income tax on it.
To get back to our inherited IRA and the ex-spouse, let’s say the ex-spouse was successful and was awarded one-half of the IRA in the divorce decree. What happens now? You have to request a distribution of one-half of the IRA, you have to pay the income tax on the distribution, and you give the funds to the ex-spouse. The ex-spouse now has cash - but no retirement plan. You have a tax bill, perhaps at a higher tax bracket, and you have lost one-half of your inherited IRA.
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
You have an IRA you inherited from someone. You are taking required distributions each year as a beneficiary. Now you are getting divorced and your soon-to-be ex-spouse is demanding that they get half of your inherited IRA. Can they do that? Of course they can. They just won't get an inherited IRA.
An inherited IRA is an item of IRD - income in respect of a decedent. This is money that was never taxed that was owed to someone who died. The beneficiary who inherits this income will have to pay the income tax owed. You can inherit IRD, but you cannot transfer it, gift it, or assign it. If you do, you will owe the income tax on it.
To get back to our inherited IRA and the ex-spouse, let’s say the ex-spouse was successful and was awarded one-half of the IRA in the divorce decree. What happens now? You have to request a distribution of one-half of the IRA, you have to pay the income tax on the distribution, and you give the funds to the ex-spouse. The ex-spouse now has cash - but no retirement plan. You have a tax bill, perhaps at a higher tax bracket, and you have lost one-half of your inherited IRA.
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
Monday, August 17, 2009
20% Withholding
Generally, when rollover eligible assets are distributed from a qualified retirement plan, 403(b), 401(k) or 457(b), to the participant, instead of a direct rollover to an eligible retirement plan, the payer must withhold 20% for federal income tax. And if applicable any state withholding tax. The amount withheld will be remitted (by the payer) to the federal and or state government as an advance payment of taxes on the individual's behalf. 20% withholding does not apply to IRAs.
If the plan participant wants to rollover the entire distributed amount upon receipt (minus 20%) they will need to make up the amount withheld for taxes out of pocket. When they file their income tax return they can apply for a refund for the amount withheld. The withheld taxes will either increase their federal tax refund or reduce federal taxes owed for the year. The same would apply to any state income tax withheld.
Keep in mind that money distributed from a qualified retirement plan may also be subject to an early distribution penalty of 10%, if under age 59 ½, or in some cases age 55, when the distribution occurred. If you intend to rollover the distribution to an IRA it is always better to do a direct transfer. Have the plan distribute the money directly to your IRA. This is called a trustee-to-trustee transfer. This will eliminate any mandatory withholding.
By IRA Technical Consultant Marvin Rotenberg 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
If the plan participant wants to rollover the entire distributed amount upon receipt (minus 20%) they will need to make up the amount withheld for taxes out of pocket. When they file their income tax return they can apply for a refund for the amount withheld. The withheld taxes will either increase their federal tax refund or reduce federal taxes owed for the year. The same would apply to any state income tax withheld.
Keep in mind that money distributed from a qualified retirement plan may also be subject to an early distribution penalty of 10%, if under age 59 ½, or in some cases age 55, when the distribution occurred. If you intend to rollover the distribution to an IRA it is always better to do a direct transfer. Have the plan distribute the money directly to your IRA. This is called a trustee-to-trustee transfer. This will eliminate any mandatory withholding.
By IRA Technical Consultant Marvin Rotenberg 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
Friday, August 14, 2009
Discussion Forum Topic: Form 8606
This week, the Ed Slott IRA Discussion Forum featured multiple questions about IRS form 8606. But what is this form and why is it so important? Read on to find out the Who, What, When, Where, Why and How of form 8606.
Who needs to file?
Any taxpayer that makes a non-deductible IRA contribution should make sure they file form 8606. The form must also be filled out by taxpayers who converted traditional IRA, SEP IRA or SIMPLE IRA funds to a Roth IRA. Taxpayers who received distributions from a Roth IRA or another IRA account already containing non-deductible contributions must also file (Other circumstances may require the filing of form 8606 as well. Make sure to consult your tax advisor).
What does it do?
Form 8606 keeps track of taxpayers' non-deductible IRA contributions. The form is cumulative, so if you made $3,000 of non-deductible contributions in 2007 and $4,000 of non-deductible in 2008, the 8606 submitted with your 2008 return should show $7,000 of total non-deductible contributions.
When should I file?
Form 8606 should be filed each year when you file your return as long as there are non-deductible contributions inside your IRA. So even if you contributed nothing to an IRA this year, if you have non-deductible contributions from past years, it's a good idea to have your tax professional include form 8606.
Where can I get a copy of this form?
The form is available at the IRS' website or you can CLICK HERE.
Why do I need to file this form?
Non-deductible contributions have already been taxed. If you don't properly keep track of them using form 8606, you may end up paying tax on the same money twice!!
How can I avoid double taxation?
Make sure to alert your tax advisor of any contributions you made during the year to IRAs. Most custodians will issue you a "year-end important tax information" notice that you may want to provide. You should also keep copies of any checks that you have sent. If you can't (or don't) claim a deduction for those contributions, the non-deducted total should be added to form 8606.
Got more questions?? Want to see what other people are asking? Check out the Ed Slott IRA Discussion Forum
By IRA Technical Consultant Jeffrey Levine 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
Who needs to file?
Any taxpayer that makes a non-deductible IRA contribution should make sure they file form 8606. The form must also be filled out by taxpayers who converted traditional IRA, SEP IRA or SIMPLE IRA funds to a Roth IRA. Taxpayers who received distributions from a Roth IRA or another IRA account already containing non-deductible contributions must also file (Other circumstances may require the filing of form 8606 as well. Make sure to consult your tax advisor).
What does it do?
Form 8606 keeps track of taxpayers' non-deductible IRA contributions. The form is cumulative, so if you made $3,000 of non-deductible contributions in 2007 and $4,000 of non-deductible in 2008, the 8606 submitted with your 2008 return should show $7,000 of total non-deductible contributions.
When should I file?
Form 8606 should be filed each year when you file your return as long as there are non-deductible contributions inside your IRA. So even if you contributed nothing to an IRA this year, if you have non-deductible contributions from past years, it's a good idea to have your tax professional include form 8606.
Where can I get a copy of this form?
The form is available at the IRS' website or you can CLICK HERE.
Why do I need to file this form?
Non-deductible contributions have already been taxed. If you don't properly keep track of them using form 8606, you may end up paying tax on the same money twice!!
How can I avoid double taxation?
Make sure to alert your tax advisor of any contributions you made during the year to IRAs. Most custodians will issue you a "year-end important tax information" notice that you may want to provide. You should also keep copies of any checks that you have sent. If you can't (or don't) claim a deduction for those contributions, the non-deducted total should be added to form 8606.
Got more questions?? Want to see what other people are asking? Check out the Ed Slott IRA Discussion Forum
By IRA Technical Consultant Jeffrey Levine 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
September Kiplinger's Personal Finance
If you don't already subscribe to Kiplinger's Personal Finance, here is a heads up for September's issue.
Ed Slott is quoted in an article titled, "Switching to a Roth Makes Sense Now."
The article discusses the story of 46-year-old Oregon resident Mark Crossler, his wife Sandy and son Jacob. The question Mark poses is, "What's a good strategy for dealing with the likelihood that my tax bracket will go up?"
Pick up the September issue of Kiplinger's Personal Finance to get the answer from Ed and others.
CLICK HERE for more information.
Ed Slott is quoted in an article titled, "Switching to a Roth Makes Sense Now."
The article discusses the story of 46-year-old Oregon resident Mark Crossler, his wife Sandy and son Jacob. The question Mark poses is, "What's a good strategy for dealing with the likelihood that my tax bracket will go up?"
Pick up the September issue of Kiplinger's Personal Finance to get the answer from Ed and others.
CLICK HERE for more information.
Thursday, August 13, 2009
The Slott Report Mailbag: August 13th
This edition of The Slott Report Mailbag includes an important question about if and how unemployment affects a Roth conversion. Enjoy!
1.
My wife is the sole primary beneficiary for both my IRAs and 401K. My children are named as secondary beneficiaries.
My will has a provision for my wife to be able to disclaim any right as a beneficiary for an IRA or 401K in order that the IRA or 401K may become part of my estate and then be used to fund a marital bypass trust. If she does not disclaim her rights as beneficiary, there will not be sufficient assets to fund the marital bypass trust.
If my wife disclaims her rights as beneficiary for my IRAs and 401K and the funds are used to fund the Marital Bypass Trust, does that make the trust the beneficiary and cause the accelerated payout schedule (5 years) to come into effect? If so, is there anyway I can get around this problem?
I am also planning on converting my IRAs and 401K to Roth IRAs over the next few years. If all my retirement savings are in the form of Roth IRAs, how would the fact of my wife disclaiming her rights as beneficiary in order to fund the Marital Bypass Trust effect the withdrawal schedule for the Roth IRAs?
Leon Norton
Answer:
If you wife is the primary beneficiary and your children are the secondary beneficiary and your wife disclaims it will then go to the secondary beneficiary. To accomplish the funding of the by- pass trust consider naming your wife as primary beneficiary and the by-pass trust as secondary beneficiary. If your wife disclaims within nine months of your death it will then go to the by-pass trust. She can also disclaim only part of the IRA to fully fund the by-pass trust. If there are other assets, non IRA or retirement, consider using those assets first. What she does not disclaim she can put in her own IRA and name your children beneficiary.
A Roth IRA would be beneficial in this scenario because the Roth distributions to the trust would be tax free.
2.
A Decedent left her IRA to her Estate, and the IRA had securities in it. The Executor established an Inherited IRA and all assets were transferred into it. The Executor then gave instruction to transfer in-kind shares of the securities into the Estate's brokerage account. I understand that the tax basis for the shares will be the value on the date of distribution into the brokerage account. Please confirm (or correct) that the "holding" period for those shares will similarly be
measured from the date of distribution of the Inherited IRA shares into the brokerage account, and not from the beneficial "inherited" or "long-term" holding period which a more-typical brokerage account would get incident to a decedent's death.
Thank you,
Lisa L. Halbert
Northampton, MA
Answer:
The cost basis of the securities being transferred from the inherited IRA to the estate brokerage account would be the market value at the time of distribution. In order to receive the long term capital gain tax benefit the holding period is one year from when it was distributed from the IRA.
3.
If someone has just currently become unemployed but they have a tax deferred IRA they'd like to convert into a Roth IRA, are they able to do that this year 2009? Will the job seeking factor make the procedure ineligible?
Answer:
As long as their modified adjusted gross income (MAGI) in year 2009 does not exceed $100,000 they will be eligible to convert to a Roth IRA. The job seeking factor will have no implication on the conversion.
By IRA Technical Consultant Marvin Rotenberg 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
1.
My wife is the sole primary beneficiary for both my IRAs and 401K. My children are named as secondary beneficiaries.
My will has a provision for my wife to be able to disclaim any right as a beneficiary for an IRA or 401K in order that the IRA or 401K may become part of my estate and then be used to fund a marital bypass trust. If she does not disclaim her rights as beneficiary, there will not be sufficient assets to fund the marital bypass trust.
If my wife disclaims her rights as beneficiary for my IRAs and 401K and the funds are used to fund the Marital Bypass Trust, does that make the trust the beneficiary and cause the accelerated payout schedule (5 years) to come into effect? If so, is there anyway I can get around this problem?
I am also planning on converting my IRAs and 401K to Roth IRAs over the next few years. If all my retirement savings are in the form of Roth IRAs, how would the fact of my wife disclaiming her rights as beneficiary in order to fund the Marital Bypass Trust effect the withdrawal schedule for the Roth IRAs?
Leon Norton
Answer:
If you wife is the primary beneficiary and your children are the secondary beneficiary and your wife disclaims it will then go to the secondary beneficiary. To accomplish the funding of the by- pass trust consider naming your wife as primary beneficiary and the by-pass trust as secondary beneficiary. If your wife disclaims within nine months of your death it will then go to the by-pass trust. She can also disclaim only part of the IRA to fully fund the by-pass trust. If there are other assets, non IRA or retirement, consider using those assets first. What she does not disclaim she can put in her own IRA and name your children beneficiary.
A Roth IRA would be beneficial in this scenario because the Roth distributions to the trust would be tax free.
2.
A Decedent left her IRA to her Estate, and the IRA had securities in it. The Executor established an Inherited IRA and all assets were transferred into it. The Executor then gave instruction to transfer in-kind shares of the securities into the Estate's brokerage account. I understand that the tax basis for the shares will be the value on the date of distribution into the brokerage account. Please confirm (or correct) that the "holding" period for those shares will similarly be
measured from the date of distribution of the Inherited IRA shares into the brokerage account, and not from the beneficial "inherited" or "long-term" holding period which a more-typical brokerage account would get incident to a decedent's death.
Thank you,
Lisa L. Halbert
Northampton, MA
Answer:
The cost basis of the securities being transferred from the inherited IRA to the estate brokerage account would be the market value at the time of distribution. In order to receive the long term capital gain tax benefit the holding period is one year from when it was distributed from the IRA.
3.
If someone has just currently become unemployed but they have a tax deferred IRA they'd like to convert into a Roth IRA, are they able to do that this year 2009? Will the job seeking factor make the procedure ineligible?
Answer:
As long as their modified adjusted gross income (MAGI) in year 2009 does not exceed $100,000 they will be eligible to convert to a Roth IRA. The job seeking factor will have no implication on the conversion.
By IRA Technical Consultant Marvin Rotenberg 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
Wednesday, August 12, 2009
Splitting Retirement Assets in a Divorce-Part 2
**Over the next two weeks, we will be posting four different parts of a detailed look at splitting retirement assets in a divorce. The first part was posted yesterday; the second part is posted below; the third section next Tuesday, August 18th; and the final part Wednesday, August 19th.**
Most attorneys and judges treat retirement assets the same as they treat any other asset. They are not familiar with all of the unique aspects of these assets. You need to know the following information to protect yourself if you find yourself in the midst of a divorce.
A plan participant or IRA owner who needs to come up with funds to pay off an ex-spouse should not take a distribution from the employer plan or the IRA and then turn around and give the funds to the ex-spouse. This creates a taxable distribution to the account owner and the ex-spouse ends up with cash - but not a retirement account.
One plan participant took IRS to court on the issue of paying taxes on a distribution. He said he was told by the judge to take the funds from his employer plan so he felt he should not be liable for the taxes on the distribution. He lost.
The same holds true if the divorcing parties have an understanding that the employer plan or the IRA will be split but they do not bother getting the QDRO or having the split detailed in the divorce decree or separation agreement. In general, retirement accounts cannot be transferred, assigned or gifted during lifetime. To get an income tax free split as part of the divorce, you need the proper paperwork, either the QDRO or specific language in the divorce decree or separation agreement.
By Jared Trexler; material provided by IRA Technical Consultant Beverly DeVeny
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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
Most attorneys and judges treat retirement assets the same as they treat any other asset. They are not familiar with all of the unique aspects of these assets. You need to know the following information to protect yourself if you find yourself in the midst of a divorce.
A plan participant or IRA owner who needs to come up with funds to pay off an ex-spouse should not take a distribution from the employer plan or the IRA and then turn around and give the funds to the ex-spouse. This creates a taxable distribution to the account owner and the ex-spouse ends up with cash - but not a retirement account.
One plan participant took IRS to court on the issue of paying taxes on a distribution. He said he was told by the judge to take the funds from his employer plan so he felt he should not be liable for the taxes on the distribution. He lost.
The same holds true if the divorcing parties have an understanding that the employer plan or the IRA will be split but they do not bother getting the QDRO or having the split detailed in the divorce decree or separation agreement. In general, retirement accounts cannot be transferred, assigned or gifted during lifetime. To get an income tax free split as part of the divorce, you need the proper paperwork, either the QDRO or specific language in the divorce decree or separation agreement.
By Jared Trexler; material provided by IRA Technical Consultant Beverly DeVeny
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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
Tuesday, August 11, 2009
Splitting Retirement Assets in a Divorce- Part 1
**Over the next two weeks, we will be posting four different parts of a detailed look at splitting retirement assets in a divorce. The first part is posted below; the second part will be posted tomorrow (Wednesday); the third section next Tuesday, August 18th; and the final part Wednesday, August 19th.**
Most attorneys and judges treat retirement assets the same as they treat any other asset. They are not familiar with all of the unique aspects of these assets. You need to know the following information to protect yourself if you find yourself in the midst of a divorce.
Employer plan assets are split using a QDRO (qualified domestic relations order). An attorney needs to draft the QDRO which is then submitted to the employer for approval. Having a QDRO does not mean that the ex-spouse will have access to the funds. Employer plans will have provisions detailing when plan participants can have access to the funds and the QDRO cannot force a distribution that the plan does not otherwise allow. Once a distribution is allowed, the funds can be directly transferred to an IRA for the ex-spouse. A taxable distribution of funds to an ex-spouse under age 59 ½ is not subject to the 10% early distribution penalty.
An IRA is not split using a QDRO. It is split in accordance with the terms of the divorce decree or separation agreement. You will most likely need to present this document to the IRA custodian prior to the account being split. The funds can be directly transferred from your IRA to an IRA for the ex-spouse. A taxable distribution to an ex-spouse under age 59 ½ will be subject to the 10% early distribution penalty.
By Jared Trexler; material provided by IRA Technical Consultant Beverly DeVeny
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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
Most attorneys and judges treat retirement assets the same as they treat any other asset. They are not familiar with all of the unique aspects of these assets. You need to know the following information to protect yourself if you find yourself in the midst of a divorce.
Employer plan assets are split using a QDRO (qualified domestic relations order). An attorney needs to draft the QDRO which is then submitted to the employer for approval. Having a QDRO does not mean that the ex-spouse will have access to the funds. Employer plans will have provisions detailing when plan participants can have access to the funds and the QDRO cannot force a distribution that the plan does not otherwise allow. Once a distribution is allowed, the funds can be directly transferred to an IRA for the ex-spouse. A taxable distribution of funds to an ex-spouse under age 59 ½ is not subject to the 10% early distribution penalty.
An IRA is not split using a QDRO. It is split in accordance with the terms of the divorce decree or separation agreement. You will most likely need to present this document to the IRA custodian prior to the account being split. The funds can be directly transferred from your IRA to an IRA for the ex-spouse. A taxable distribution to an ex-spouse under age 59 ½ will be subject to the 10% early distribution penalty.
By Jared Trexler; material provided by IRA Technical Consultant Beverly DeVeny
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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
eSeminar Series Session TODAY at 3:00 pm ET
Our 7th eSeminar Series session, Naming Trusts as IRA Beneficiaries, will take place TODAY, August 11th at 3:00 pm ET.
As always, the LIVE webcast will last 90 minutes and include Q&A with our IRA Technical Consultants. For all registrants who are interested in becoming a member of Ed Slott's Elite IRA Advisor Group, you will have to pass a short quiz immediately following the session.
All registrants should receive an e-mail with access instructions shortly.
If you haven't registered for today's webcast, CLICK HERE for more information and to register.
If you have any questions, feel free to give us a call at 215-557-7022.
As always, the LIVE webcast will last 90 minutes and include Q&A with our IRA Technical Consultants. For all registrants who are interested in becoming a member of Ed Slott's Elite IRA Advisor Group, you will have to pass a short quiz immediately following the session.
All registrants should receive an e-mail with access instructions shortly.
If you haven't registered for today's webcast, CLICK HERE for more information and to register.
If you have any questions, feel free to give us a call at 215-557-7022.
Monday, August 10, 2009
Income Tax Rates
In year 2010, the restrictions on Roth IRA conversions will permanently be eliminated. One of the considerations in deciding whether converting to a Roth IRA is income tax rates. If you convert a traditional IRA to a Roth IRA in year 2010 the income tax due on the conversion could be paid in 2011 and 2012 or it could all be paid in 2010. Will income tax rates be the same, lower or higher in 2011 & 2012?
Today the top income tax bracket is 35%. As recently as 1980, the top bracket was 70% and in 1950 it was 90%.
We have all read about the federal budget deficit but not much has been written about individual states budget deficits.
The Nelson A. Rockefeller institute reported that state personal income tax collections dropped 26% nationwide through the first four months of this year compared with a year ago, putting many state's already shaky budgets into deeper trouble. State income tax collections in the first four months of this year fell about $28.8 billion, compared with the same period last year, the institute said.
States will likely be forced to consider further spending and revenue actions in 2010 and will confront large gaps when federal stimulus assistance ends in 2011.
When making a tax decision on converting a traditional IRA to a Roth IRA you should consider your personal income tax situation, will your tax rate be the same, lower or higher in the future. If the answer is the same or higher, conversion might be appropriate for you. If conversion is appropriate for you in 2010, then you must consider what tax rates will be in 2011 & 2012 and what your personal income tax bracket may be. Will they be higher?
Income tax rates, however, are only one important consideration in deciding to convert from a traditional IRA to a Roth IRA.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
Today the top income tax bracket is 35%. As recently as 1980, the top bracket was 70% and in 1950 it was 90%.
We have all read about the federal budget deficit but not much has been written about individual states budget deficits.
The Nelson A. Rockefeller institute reported that state personal income tax collections dropped 26% nationwide through the first four months of this year compared with a year ago, putting many state's already shaky budgets into deeper trouble. State income tax collections in the first four months of this year fell about $28.8 billion, compared with the same period last year, the institute said.
States will likely be forced to consider further spending and revenue actions in 2010 and will confront large gaps when federal stimulus assistance ends in 2011.
When making a tax decision on converting a traditional IRA to a Roth IRA you should consider your personal income tax situation, will your tax rate be the same, lower or higher in the future. If the answer is the same or higher, conversion might be appropriate for you. If conversion is appropriate for you in 2010, then you must consider what tax rates will be in 2011 & 2012 and what your personal income tax bracket may be. Will they be higher?
Income tax rates, however, are only one important consideration in deciding to convert from a traditional IRA to a Roth IRA.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Friday, August 7, 2009
Slott: Converting Traditional IRA to Roth Could be Wise in 2010
Humberto Cruz, a columnist for Tribune Media Services, penned an August 7th piece about converting a traditional IRA to a Roth IRA in 2010.
Here is what Ed Slott says: "The Roth IRA conversion will be a big issue, especially when 2010 hits and everyone qualifies for a conversion."
Slott also states: "It is likely income tax rates will increase in future years, making tax-free Roth IRA income more valuable."
CLICK HERE to read the entire article.
By 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
Here is what Ed Slott says: "The Roth IRA conversion will be a big issue, especially when 2010 hits and everyone qualifies for a conversion."
Slott also states: "It is likely income tax rates will increase in future years, making tax-free Roth IRA income more valuable."
CLICK HERE to read the entire article.
By Jared Trexler
---------------------------------------------------------------------
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
Thursday, August 6, 2009
Slott Report Mailbag: August 6th
This is the Slott Report Mailbag. We have included 5 questions and answers this week. Enjoy!
1.
Dear Ed and Company -
Is there a window of 60 days in a Roth IRA to withdraw funds and then re-deposit them into the same account? I know one can do this with Traditional IRA. If so, how does the bank report this?
The reason for this, is that bank CD's come due at different times, and it would be helpful for those coming due within 60 days of each other to be combined.
I have asked all our local banks if they have a Roth-savings or Roth-MM to park funds without making a withdrawal while waiting for the CD's to become due, but none of them have this option. They have this only for the Traditional IRA.
Many thanks!
Barbara
Answer:
Yes, the 60-day rule applies to the Roth IRA. In cases you have more than one CD per account you will be governed by the one rollover per year per account rule.
When the money comes out of the CD you will receive form 1099R from the bank. You will also receive form 5498 showing the money going back in. Form 5498 usually does not get issued until May of the following year, but that will not be a problem.
2.
Can a Roth Conversion be made in 2009 without first taking the "skippable" RMD? If so, this would allow one to convert at a much lower tax cost than in those years when an RMD is required.
Thank you,
Lloyd Sutfin
Answer:
Yes. In 2009 there is no required minimum distribution (RMD) therefore, you can convert your entire balance to a Roth IRA. In addition, because there is no RMD in 2009, it may put you in a lower tax bracket which may save you income taxes on the conversion. Once the money is in the Roth IRA there are no RMDs.
3.
Question for Ed and Company on 401K direct rollover to Roth IRA:
Example: Total value of 401k is $1.3 million; $150 thousand of the total value is after-tax contributions. Paperwork from 401k fund is available to show the pre and post '86 after contributions. In 2010, can the after tax contributions ($150,000) be rolled directly to a Roth IRA(s) and the remainder to a Traditional IRA(s) without any taxes?
Thank you for your thoughts.
Jerry
Answer:
Yes, the after-tax contribution can be rolled into a Roth IRA. What generally happens in this case is you will receive two checks: one check payable to your IRA for the pre-tax money, this is called a direct rollover, and the second check will be payable to you, for the pre-tax money, and you will have 60 days to deposit it into a Roth IRA.
4.
I am 56. I separated from the company when I was 42. I am eligible to take a LSD and take advantage of the NUA. Will the 10% tax apply?
Answer:
Since you separated from service at age 42 you will incur a 10% penalty on the NUA. The 10% penalty will only apply to the cost basis of your employer stock and not on the fair marked value.
5.
A retired employee has a non-deductible IRA that will be converted to a Roth IRA in 2010. If the retired employee has a company sponsored pre-tax 401k account and a company-sponsored Roth 401k account, can the employee roll the company-sponsored Roth 401k account balance into the Roth IRA in 2010 and leave the company-sponsored pre-tax 401k account balance undisturbed?
Can the pre-tax 401k account balance subsequently be rolled into a new-pre-tax IRA without adversely affecting the Roth IRA?
Answer:
The plan document will govern exactly what you can do. Please consult with the plan administrator or the summary plan description.
The pre tax balance can be rolled into a new pre tax IRA. However, you will be subject to the "pro-rata rule".
Which means you must consider all your IRAs pre tax and after tax and then pro rate the amount. For example: if you have a total of $300,000 in all your IRAs and $30,000 of that total is pre tax (non deductible) the percentage is 10% pre tax and 90% after tax. 10% of every dollar withdrawn will be tax free and 90% will be taxable.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
1.
Dear Ed and Company -
Is there a window of 60 days in a Roth IRA to withdraw funds and then re-deposit them into the same account? I know one can do this with Traditional IRA. If so, how does the bank report this?
The reason for this, is that bank CD's come due at different times, and it would be helpful for those coming due within 60 days of each other to be combined.
I have asked all our local banks if they have a Roth-savings or Roth-MM to park funds without making a withdrawal while waiting for the CD's to become due, but none of them have this option. They have this only for the Traditional IRA.
Many thanks!
Barbara
Answer:
Yes, the 60-day rule applies to the Roth IRA. In cases you have more than one CD per account you will be governed by the one rollover per year per account rule.
When the money comes out of the CD you will receive form 1099R from the bank. You will also receive form 5498 showing the money going back in. Form 5498 usually does not get issued until May of the following year, but that will not be a problem.
2.
Can a Roth Conversion be made in 2009 without first taking the "skippable" RMD? If so, this would allow one to convert at a much lower tax cost than in those years when an RMD is required.
Thank you,
Lloyd Sutfin
Answer:
Yes. In 2009 there is no required minimum distribution (RMD) therefore, you can convert your entire balance to a Roth IRA. In addition, because there is no RMD in 2009, it may put you in a lower tax bracket which may save you income taxes on the conversion. Once the money is in the Roth IRA there are no RMDs.
3.
Question for Ed and Company on 401K direct rollover to Roth IRA:
Example: Total value of 401k is $1.3 million; $150 thousand of the total value is after-tax contributions. Paperwork from 401k fund is available to show the pre and post '86 after contributions. In 2010, can the after tax contributions ($150,000) be rolled directly to a Roth IRA(s) and the remainder to a Traditional IRA(s) without any taxes?
Thank you for your thoughts.
Jerry
Answer:
Yes, the after-tax contribution can be rolled into a Roth IRA. What generally happens in this case is you will receive two checks: one check payable to your IRA for the pre-tax money, this is called a direct rollover, and the second check will be payable to you, for the pre-tax money, and you will have 60 days to deposit it into a Roth IRA.
4.
I am 56. I separated from the company when I was 42. I am eligible to take a LSD and take advantage of the NUA. Will the 10% tax apply?
Answer:
Since you separated from service at age 42 you will incur a 10% penalty on the NUA. The 10% penalty will only apply to the cost basis of your employer stock and not on the fair marked value.
5.
A retired employee has a non-deductible IRA that will be converted to a Roth IRA in 2010. If the retired employee has a company sponsored pre-tax 401k account and a company-sponsored Roth 401k account, can the employee roll the company-sponsored Roth 401k account balance into the Roth IRA in 2010 and leave the company-sponsored pre-tax 401k account balance undisturbed?
Can the pre-tax 401k account balance subsequently be rolled into a new-pre-tax IRA without adversely affecting the Roth IRA?
Answer:
The plan document will govern exactly what you can do. Please consult with the plan administrator or the summary plan description.
The pre tax balance can be rolled into a new pre tax IRA. However, you will be subject to the "pro-rata rule".
Which means you must consider all your IRAs pre tax and after tax and then pro rate the amount. For example: if you have a total of $300,000 in all your IRAs and $30,000 of that total is pre tax (non deductible) the percentage is 10% pre tax and 90% after tax. 10% of every dollar withdrawn will be tax free and 90% will be taxable.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
Wednesday, August 5, 2009
Roth IRA Limits
This issue came up again this week. There are two different Roth IRA income limits. There is one income limit for Roth IRA contributions and there is a different income limit for Roth IRA conversions. (Somewhere in Congress, there is a gremlin whose job it is to make things complicated.)
In order to make a Roth IRA contribution, you must first have earned income. The safe harbor is W-2 income. But you cannot have too much earned income. If you are married, filing jointly, you can make a Roth contribution as long as your modified adjusted gross income (MAGI) is under $166,000. Between $166,000 and $176,000 you can make a partial contribution and when MAGI is over $176,000 you cannot make a Roth contribution. This limit is indexed for inflation each year.
If you want to do a Roth conversion, your MAGI cannot exceed $100,000. This limit applies to everyone except those who are married, filing separate. They cannot do a Roth conversion at all. This limit is not indexed, but it is permanently repealed in 2010 as is the restriction on those married, filing separate.
For more information on Roth income limits, see IRS Publication 590. It is available in IRS offices, many public libraries, and on the IRS web site, http://www.irs.gov/. On the left hand side of the screen click on Forms and Publications.
Our home page -- www.IRAhelp.com -- has a clickable button titled "Recommend That Your Advisor Train With Ed Slott and Company".If consumers would like their advisor to increase their knowledge on retirement distribution planning, they can input the advisor's contact information into the fields on the web page, and we will send them an e-mail outlining the many programs and resources Ed Slott and Company offers.This is just another avenue for consumers to make sure their financial advisor is knowledgeable and up to date on the latest IRA distribution planning information!If you have any questions, you can e-mail us at [email protected].
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
---------------------------------------------------------------------
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
In order to make a Roth IRA contribution, you must first have earned income. The safe harbor is W-2 income. But you cannot have too much earned income. If you are married, filing jointly, you can make a Roth contribution as long as your modified adjusted gross income (MAGI) is under $166,000. Between $166,000 and $176,000 you can make a partial contribution and when MAGI is over $176,000 you cannot make a Roth contribution. This limit is indexed for inflation each year.
If you want to do a Roth conversion, your MAGI cannot exceed $100,000. This limit applies to everyone except those who are married, filing separate. They cannot do a Roth conversion at all. This limit is not indexed, but it is permanently repealed in 2010 as is the restriction on those married, filing separate.
For more information on Roth income limits, see IRS Publication 590. It is available in IRS offices, many public libraries, and on the IRS web site, http://www.irs.gov/. On the left hand side of the screen click on Forms and Publications.
Our home page -- www.IRAhelp.com -- has a clickable button titled "Recommend That Your Advisor Train With Ed Slott and Company".If consumers would like their advisor to increase their knowledge on retirement distribution planning, they can input the advisor's contact information into the fields on the web page, and we will send them an e-mail outlining the many programs and resources Ed Slott and Company offers.This is just another avenue for consumers to make sure their financial advisor is knowledgeable and up to date on the latest IRA distribution planning information!If you have any questions, you can e-mail us at [email protected].
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
---------------------------------------------------------------------
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
Tuesday, August 4, 2009
Retirement Fears: A 94-year-old with NEW Life
The IRS took a 93-year-old beneficiary named “Archie” to the fountain of youth - all thanks to an obscure tax provision.
“Jack”, Archie’s nephew and 20 years his junior, named his uncle as the designated beneficiary of his IRA. Generally speaking, when an IRA owner dies, if he or she has named a (designated) beneficiary, that beneficiary can extend distributions out over their life expectancy (as determined by the IRS). Distributions for non-spouse beneficiaries begin in the year following the year of death, and the percentage that must be withdrawn each year increases as the beneficiary ages.
That’s where the math - and the staggering story - come in. CLICK HERE to the read the conclusion to the story.
Most people want to make sure every penny counts, but it is sometimes tough to realize that a series of small, smart steps build wealth, not one bold decision. Below are a series of steps to follow if you come into the same situation as Archie.
1. If you inherit an IRA from someone who died after April 1st of the year after they turned 70 ½ and you are older than that person, you can use their life expectancy to determine your “factor.” This allows you to stretch out distributions over a longer time, allowing for more tax-deferred growth.
2. Once you inherit an IRA, name your OWN beneficiaries. They would not be able to use their own life expectancy to determine the “factor”, but they can take distributions on your schedule.
3. After you read the conclusion to the story (CLICK HERE) you will understand the many complexities in IRA rules and guidelines. Make sure to consult a qualified advisor who specializes in the area.
“Jack”, Archie’s nephew and 20 years his junior, named his uncle as the designated beneficiary of his IRA. Generally speaking, when an IRA owner dies, if he or she has named a (designated) beneficiary, that beneficiary can extend distributions out over their life expectancy (as determined by the IRS). Distributions for non-spouse beneficiaries begin in the year following the year of death, and the percentage that must be withdrawn each year increases as the beneficiary ages.
That’s where the math - and the staggering story - come in. CLICK HERE to the read the conclusion to the story.
Most people want to make sure every penny counts, but it is sometimes tough to realize that a series of small, smart steps build wealth, not one bold decision. Below are a series of steps to follow if you come into the same situation as Archie.
1. If you inherit an IRA from someone who died after April 1st of the year after they turned 70 ½ and you are older than that person, you can use their life expectancy to determine your “factor.” This allows you to stretch out distributions over a longer time, allowing for more tax-deferred growth.
2. Once you inherit an IRA, name your OWN beneficiaries. They would not be able to use their own life expectancy to determine the “factor”, but they can take distributions on your schedule.
3. After you read the conclusion to the story (CLICK HERE) you will understand the many complexities in IRA rules and guidelines. Make sure to consult a qualified advisor who specializes in the area.
Recommend Your Advisor
Our home page -- www.IRAhelp.com -- has a clickable button titled "Recommend That Your Advisor Train With Ed Slott and Company".
If consumers would like their advisor to increase their knowledge on retirement distribution planning, they can input the advisor's contact information into the fields on the web page, and we will send them an e-mail outlining the many programs and resources Ed Slott and Company offers.
This is just another avenue for consumers to make sure their financial advisor is knowledgeable and up to date on the latest IRA distribution planning information!
If you have any questions, you can e-mail us at [email protected].
By Jared Trexler
---------------------------------------------------------------------
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
If consumers would like their advisor to increase their knowledge on retirement distribution planning, they can input the advisor's contact information into the fields on the web page, and we will send them an e-mail outlining the many programs and resources Ed Slott and Company offers.
This is just another avenue for consumers to make sure their financial advisor is knowledgeable and up to date on the latest IRA distribution planning information!
If you have any questions, you can e-mail us at [email protected].
By Jared Trexler
---------------------------------------------------------------------
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
Monday, August 3, 2009
Use of Life Insurance to Protect IRA Assets
Time to Get Technical.
Life insurance may perhaps be not only the single biggest benefit in the tax code, but it is also the most cost effective way to protect a large IRA. If set up correctly, life insurance proceeds (death benefits) could come into the estate sans estate and income tax.
Life insurance premiums should be paid by the beneficiaries or by the trustee of an irrevocable life insurance trust so that life insurance proceeds will be estate and income tax free. After the death of the IRA owner, the life insurance proceeds could be used to pay estate tax so that the IRA does not have to be used for that purpose. All money withdrawn from IRAs will first incur income tax. The idea is to keep as much as possible (or all) of the IRA money intact at death so that the maximum amount can be stretched by beneficiaries. Having enough insurance money available to cover the estimated estate tax will avoid having to invade the IRA to pay the tax.
What if, however, there is no estate tax? This is not an option you can plan on. You should not assume that there would not be an estate tax. Insurance policies should also not be canceled because you think the estate tax will be repealed. If insurance is not purchased and it turns out that there is an estate tax, which is very likely, you may no longer be insurable or it you qualify, it may be more expensive.
Life insurance is a valuable asset, especially for older individuals. No one can be confident that the estate tax will be repealed. If however, there is no estate tax, you may become subject to a capital gains tax in which the insurance proceeds would provide the cash. In addition, life insurance can also be used simply to create wealth or replace wealth used to fund vehicles such as charitable remainder trusts. And if you don’t have a retirement account, the life insurance can be a pension alternative providing beneficiaries a tax-free stream of cash for the rest of their lives.
There are plenty of other uses of life insurance but needless to say, tax-free cash is always the best source of money and also solves lots of non-tax problems.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
Life insurance may perhaps be not only the single biggest benefit in the tax code, but it is also the most cost effective way to protect a large IRA. If set up correctly, life insurance proceeds (death benefits) could come into the estate sans estate and income tax.
Life insurance premiums should be paid by the beneficiaries or by the trustee of an irrevocable life insurance trust so that life insurance proceeds will be estate and income tax free. After the death of the IRA owner, the life insurance proceeds could be used to pay estate tax so that the IRA does not have to be used for that purpose. All money withdrawn from IRAs will first incur income tax. The idea is to keep as much as possible (or all) of the IRA money intact at death so that the maximum amount can be stretched by beneficiaries. Having enough insurance money available to cover the estimated estate tax will avoid having to invade the IRA to pay the tax.
What if, however, there is no estate tax? This is not an option you can plan on. You should not assume that there would not be an estate tax. Insurance policies should also not be canceled because you think the estate tax will be repealed. If insurance is not purchased and it turns out that there is an estate tax, which is very likely, you may no longer be insurable or it you qualify, it may be more expensive.
Life insurance is a valuable asset, especially for older individuals. No one can be confident that the estate tax will be repealed. If however, there is no estate tax, you may become subject to a capital gains tax in which the insurance proceeds would provide the cash. In addition, life insurance can also be used simply to create wealth or replace wealth used to fund vehicles such as charitable remainder trusts. And if you don’t have a retirement account, the life insurance can be a pension alternative providing beneficiaries a tax-free stream of cash for the rest of their lives.
There are plenty of other uses of life insurance but needless to say, tax-free cash is always the best source of money and also solves lots of non-tax problems.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
---------------------------------------------------------------------
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
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