This blog post comes on site from the Ed Slott's Elite and Master Elite IRA Advisor Group Workshop at the Westin Galleria in Dallas, Texas. CLICK HERE for more information on Ed Slott's Elite IRA Advisor Group.
Core inflation, which excludes the short-term ups and downs in energy and food, has fallen more than a percentage point over the past year, to 1.5% in June of 2009. Many economists believe the rate will continue to drop in the coming months.
Social Security has announced that there will be no cost of living increase in Social Security beneficiaries for 2010.
The contribution limits for defined contribution and defined benefit plans are adjusted each year according to a statutory formula based on inflation. It is possible there can be a decrease in the statutory limits on qualified retirement plan contributions and benefits for 2010.
Presently, in 2009, you can defer up to $16,500 in your employer plan (401(k), 403(b), etc.) or $22,000 if you are age 50 and older. However, based on current trends, Uncle Sam may have to reduce the amount you can contribute in 2010. Later this year the contribution limits for 2010 for plans and IRAs will be announced. Currently the limits for IRAs, based on earned income, are $5,000 plus an additional $1,000 if age 50 or older on 12/31/2009.
If the contribution rates are reduced in 2010 and individuals reach the employer plan deferral limit, they could still consider contributing to IRAs if they qualify, even if they are non-deductible contributions.
As soon as the contribution limits are announced for 2010 we will publish them here. Stay tuned.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Wednesday, September 30, 2009
Friday, September 25, 2009
New IRS Ruling Allows Relief on Unwanted 2009 RMDs
ALERT!! RMDs were waived for 2009, but the relief came late in 2008 causing some people to take withdrawals that were not required. This Notice provides retroactive relief for IRA owners and spouse beneficiaries by allowing them to rollover (put back) 2009 RMDs received earlier this year.
IRS is waiving the 60-day rollover deadline to permit any IRA owner, plan participant, or their spouse beneficiary to undo the 2009 RMD, regardless of when in 2009 they took the unwanted RMD.
The deadline has been extended to November 30, 2009 or 60 days from the date the funds were received, whichever is later. This means your client who received an RMD (which was not required) in January or March, for example, now has the option of rolling those funds back into a tax-deferred account.
This relief does NOT apply to non-spouse beneficiaries who are prohibited by the tax code from ever doing a rollover.
CAUTION: The one rollover per year rule is still in effect.
Compiled by Ed Slott and Company, LLC
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IRS is waiving the 60-day rollover deadline to permit any IRA owner, plan participant, or their spouse beneficiary to undo the 2009 RMD, regardless of when in 2009 they took the unwanted RMD.
The deadline has been extended to November 30, 2009 or 60 days from the date the funds were received, whichever is later. This means your client who received an RMD (which was not required) in January or March, for example, now has the option of rolling those funds back into a tax-deferred account.
This relief does NOT apply to non-spouse beneficiaries who are prohibited by the tax code from ever doing a rollover.
CAUTION: The one rollover per year rule is still in effect.
Compiled by Ed Slott and Company, LLC
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*Copyright 2009 Ed Slott and Company, LLC
Dicussion Forum Topic: 5-Year Clock
For years now, Financial Advisors, CPAs and taxpayers just like you have realized the incredible benefit that Roth IRAs can provide. After-tax money (money you did not take a deduction on) can be invested and can grow tax deferred for years. Later, that money, along with all the earnings can be withdrawn tax-free!!
Of course though, like most benefits afforded to you by the tax code, Roth IRAs are subject to a variety of rules and restrictions. One of these rules is commonly known as the "5 year clock."
So what exactly is this infamous clock? In order for all Roth IRA distributions (contributions and their earnings) to be withdrawn tax and penalty-free, you must be 59 ½ AND you must have held a Roth IRA for least 5 years.
But why does this 5 year rule exist? Well, believe it or not, our government doesn't always trust us! They think we might say we are putting the money away for retirement, but just use the account as a way to avoid taxes. For example, say you are 60 years old and invested $6,000 in a Roth IRA at the market lows in February this year. Now that account is worth $10,000. If it wasn't for the 5 year rule you could just take the whole $10,000 out now tax-free. But, since the 5 year clock hasn't been reached, only your initial $6,000 would be tax free (getting your own money back). The $4,000 of gain would still be taxed at ordinary income rates, plus, if you were under age 59 ½, you would also be hit with a 10% early withdrawal penalty on that $4,000.
It’s not all bad though. Roth IRA contributions can be made up until April 15th 2010 for the 2009 tax year. And even if you make the contribution on that last day (April 15th), if the contribution is made for the 2009 tax year, your 5 year clock will actually have started January 1, 2009! - in effect, a 4 year clock.
More good news? The Roth IRA clock is for all of your Roth IRAs. If you later open a new Roth IRA, or rollover or transfer the first Roth IRA to a new institution, the original 5 year clock applies. In fact, you could have as little as one penny in a Roth account now, but your clock would be ticking.
The Roth IRA is truly one of the biggest benefits of the tax code, but only if you follow all the rules. Think of it this way though - You may have to work 25, 30 or even 40 years to get your gold watch when you retire, but the IRS gives you your “golden clock” after only 5 years. Not so bad!
Remember, this is only one of the many Roth IRA rules. If you have a specific question, it’s best to consult with a knowledgeable advisor first to make sure you are aware of all the rules.
Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Of course though, like most benefits afforded to you by the tax code, Roth IRAs are subject to a variety of rules and restrictions. One of these rules is commonly known as the "5 year clock."
So what exactly is this infamous clock? In order for all Roth IRA distributions (contributions and their earnings) to be withdrawn tax and penalty-free, you must be 59 ½ AND you must have held a Roth IRA for least 5 years.
But why does this 5 year rule exist? Well, believe it or not, our government doesn't always trust us! They think we might say we are putting the money away for retirement, but just use the account as a way to avoid taxes. For example, say you are 60 years old and invested $6,000 in a Roth IRA at the market lows in February this year. Now that account is worth $10,000. If it wasn't for the 5 year rule you could just take the whole $10,000 out now tax-free. But, since the 5 year clock hasn't been reached, only your initial $6,000 would be tax free (getting your own money back). The $4,000 of gain would still be taxed at ordinary income rates, plus, if you were under age 59 ½, you would also be hit with a 10% early withdrawal penalty on that $4,000.
It’s not all bad though. Roth IRA contributions can be made up until April 15th 2010 for the 2009 tax year. And even if you make the contribution on that last day (April 15th), if the contribution is made for the 2009 tax year, your 5 year clock will actually have started January 1, 2009! - in effect, a 4 year clock.
More good news? The Roth IRA clock is for all of your Roth IRAs. If you later open a new Roth IRA, or rollover or transfer the first Roth IRA to a new institution, the original 5 year clock applies. In fact, you could have as little as one penny in a Roth account now, but your clock would be ticking.
The Roth IRA is truly one of the biggest benefits of the tax code, but only if you follow all the rules. Think of it this way though - You may have to work 25, 30 or even 40 years to get your gold watch when you retire, but the IRS gives you your “golden clock” after only 5 years. Not so bad!
Remember, this is only one of the many Roth IRA rules. If you have a specific question, it’s best to consult with a knowledgeable advisor first to make sure you are aware of all the rules.
Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company 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
Thursday, September 24, 2009
Slott Report Mailbag: September 24th
Below is this week's advisor-consumer mailbag.
1.
Ed and Company,
Earlier this year, I incurred a considerable loss in my traditional IRA rollover portfolio due to the decline in value of GM bonds and common stock.Is there any way that I can "transfer" this loss outside the IRA account, and utilize it as a tax loss on my regular tax return?In the event that age may be a factor in your response, I am 83 years old.
Cordially,
Frank Muir
Answer:
Unfortunately, there is no way to transfer the loss in your IRA and use it on your personal tax return. The only way you might be able to receive any benefit of the loss is to fully liquidate all your IRAs. But that will only work if your basis, your after-tax contributions, in all your IRAs is greater than the liquidation value. Keep in mind that contributions to IRAs that were income tax deductible would have no basis.
2.
If one has multiple Roth IRAs (perhaps so that conversions can be more judiciously recharacterized), for purposes of determining when the earnings can be withdrawn after 5 years, do all Roth IRAs relate back to the earliest one opened?
Answer:
If you have several Roth IRAs you can use the date of the establishment of the oldest Roth IRA as your beginning date for the 5-year period. Keep in mind that the 5-year rule applies to the earnings (amount over what was converted). If you are age 59 1/2 or older you can always take out the basis without penalty. However, when you have several Roth IRAs from conversions of traditional IRAs each Roth IRA will also have its own 5-year period, but only for determining if the early distribution penalty applies to withdrawals of the converted amount.
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.
Ed and Company,
Earlier this year, I incurred a considerable loss in my traditional IRA rollover portfolio due to the decline in value of GM bonds and common stock.Is there any way that I can "transfer" this loss outside the IRA account, and utilize it as a tax loss on my regular tax return?In the event that age may be a factor in your response, I am 83 years old.
Cordially,
Frank Muir
Answer:
Unfortunately, there is no way to transfer the loss in your IRA and use it on your personal tax return. The only way you might be able to receive any benefit of the loss is to fully liquidate all your IRAs. But that will only work if your basis, your after-tax contributions, in all your IRAs is greater than the liquidation value. Keep in mind that contributions to IRAs that were income tax deductible would have no basis.
2.
If one has multiple Roth IRAs (perhaps so that conversions can be more judiciously recharacterized), for purposes of determining when the earnings can be withdrawn after 5 years, do all Roth IRAs relate back to the earliest one opened?
Answer:
If you have several Roth IRAs you can use the date of the establishment of the oldest Roth IRA as your beginning date for the 5-year period. Keep in mind that the 5-year rule applies to the earnings (amount over what was converted). If you are age 59 1/2 or older you can always take out the basis without penalty. However, when you have several Roth IRAs from conversions of traditional IRAs each Roth IRA will also have its own 5-year period, but only for determining if the early distribution penalty applies to withdrawals of the converted amount.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Wednesday, September 23, 2009
Roth IRA Confusion
We have written extensively about the changes taking place starting January 1, 2010. In 2009, if your modified adjusted gross income (MAGI) exceeds $100,000 you cannot convert your traditional IRA to a Roth IRA. In addition, if you are married and filing separate tax returns you will not qualify for conversion in 2009. Both of these restrictions will be permanently eliminated on January 1, 2010.
There will still be an income test for determining who can contribute to a Roth IRA. We will not know the exact 2010 limits until later this year, but for 2009, a single individual with MAGI of $105,000 or less, and married couples filing a joint return with MAGI of $166,000 or less, can contribute the full $5,00 per person in a Roth IRA. If you are age 50 or over on December 31, 2009 you can contribute an additional $1,000, for a total of $6,000 for 2009. This is, of course, assuming you have earned income equal to or exceeding these limits.
One of the advantages of a Roth IRA is that in retirement your withdrawals, if you decide to take any, will be income tax-free. With a traditional IRA you will pay income tax on your withdrawals, including mandatory withdrawals, at age 70 ½ and older.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
There will still be an income test for determining who can contribute to a Roth IRA. We will not know the exact 2010 limits until later this year, but for 2009, a single individual with MAGI of $105,000 or less, and married couples filing a joint return with MAGI of $166,000 or less, can contribute the full $5,00 per person in a Roth IRA. If you are age 50 or over on December 31, 2009 you can contribute an additional $1,000, for a total of $6,000 for 2009. This is, of course, assuming you have earned income equal to or exceeding these limits.
One of the advantages of a Roth IRA is that in retirement your withdrawals, if you decide to take any, will be income tax-free. With a traditional IRA you will pay income tax on your withdrawals, including mandatory withdrawals, at age 70 ½ and older.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Tuesday, September 22, 2009
Had Any Good Phising Lately?
I recently received an email that purported to be from IRS. The subject line was "Notice of Underreported Income." That is guaranteed to get anyone’s attention! In addition to my "tax ID," which by the way was not my Social Security number, the email contained the following:
Tax Type: INCOME TAX
Issue: Unreported/Underreported Income (Fraud Application)
Please review your tax statement on Internal Revenue Service (IRS) website (click on the link below):
(I have not included the link as I do not want any of you to fall into their trap.)
According to their website, IRS does NOT initiate contacts with taxpayers through email. This is what is called a "phishing" email. The senders hope you will click on the link (which will take you to a very real looking website) and that you will then voluntarily, if unwittingly, give them your personal information so that they can steal your ID. DON’T DO IT. If you get this email or anything like it from "IRS," you can go to their website, http://www.irs.gov/, and report it.
By Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Tax Type: INCOME TAX
Issue: Unreported/Underreported Income (Fraud Application)
Please review your tax statement on Internal Revenue Service (IRS) website (click on the link below):
(I have not included the link as I do not want any of you to fall into their trap.)
According to their website, IRS does NOT initiate contacts with taxpayers through email. This is what is called a "phishing" email. The senders hope you will click on the link (which will take you to a very real looking website) and that you will then voluntarily, if unwittingly, give them your personal information so that they can steal your ID. DON’T DO IT. If you get this email or anything like it from "IRS," you can go to their website, http://www.irs.gov/, and report it.
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
Monday, September 21, 2009
Ed Slott and Company Training Opportunities
This is a good time to update all financial advisors on our upcoming training opportunities. Mark your calendar for the following programs and webcasts in the next several months.
Tuesday, September 22nd: eSeminar Series Session, Roth IRAs
Thursday, September 24th: FREE 1-Hour Webcast, Win Big in ANY Crisis!
Tuesday, October 6th: eSeminar Series Session, IRA Updates
Wednesday, October 7th: FREE 1-Hour Webcast, Win Big in ANY Crisis!
Tuesday, October 20th: 25 IRA Distribution Rules You Must Know -- Part 1
Thursday and Friday, November 5-6: Ed Slott's 2-Day IRA Workshop, Instant IRA Success
CLICK HERE to register for Ed Slott's FREE 1-Hour Webcast. CLICK HERE for more information on Ed Slott and Company's eSeminar Series.
CLICK HERE for more information on Ed Slott's upcoming 2-Day IRA Workshop at the Biltmore in Phoenix, Arizona.
Friday, September 18, 2009
Life Events
We have been saying it for a long time and now IRS is saying it too. When you have a life event occur in your life, it is time to check your retirement plan decisions. IRS now has a webpage devoted to “Life Events That Can Affect Retirement Savings.” It can be found here: http://www.irs.gov/retirement/article/0,,id=211119,00.html
They have the page divided into four categories:
Starting a New Job
Life Changes
Retirement
Death
Some of the topics listed under the four categories are very timely, such as:
Hardship Distributions
Loans
When your employer terminates the plan or goes bankrupt
Others are more standard, such as:
Catch-up Contributions
Marriage or Births
Divorce
Required Distributions
Beneficiaries
So check out the information provided by IRS. After all, you paid for it with your tax dollars.
By Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
They have the page divided into four categories:
Starting a New Job
Life Changes
Retirement
Death
Some of the topics listed under the four categories are very timely, such as:
Hardship Distributions
Loans
When your employer terminates the plan or goes bankrupt
Others are more standard, such as:
Catch-up Contributions
Marriage or Births
Divorce
Required Distributions
Beneficiaries
So check out the information provided by IRS. After all, you paid for it with your tax dollars.
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
Thursday, September 17, 2009
Slott Report Mailbag: September 17th
Here is this week's consumer question-and-answer Mailbag.
1.
Dear Ed and Company,
Is there any tax advantage of converting a "non-deductible" IRA to a Roth IRA vs. a traditional deductible IRA to a Roth IRA? I'm asking because the non-deductible has "original" cost basis, which is tax-free, and it would seem to make sense to convert as much non-deductible IRA as possible, but only if the conversion implies no taxation. Can you clarify please?
Thanks!
Answer:
You have a good idea - convert a non-deductible IRA to a Roth IRA. Unfortunately it does not work that way unless that is the only IRA you have and all the money in that IRA is non-deductible. There is a little known rule called the "pro-rata rule", which states that when an IRA contains both non-deductible and deductible funds, then each dollar withdrawn or converted from the IRA will contain a percentage of tax free and taxable funds. The same is true even if you have separate IRAs with non-deductible and deductible contributions. All IRAs must be considered for the pro-rata rule, including SEP and SIMPLE IRAs. Bottom line is you cannot just withdraw or convert the non-deductible funds and pay no income tax even if the non-deductible IRA contributions were kept in a separate IRA.
2.
In Bottom Line Retirement, you describe taking company stock from a 401(k) "in kind", also known, I think, as "unrealized net appreciation", whereby you are taxed on the stock's value when the company gave it to you. I am encountering various interpretations of this, can you clarify? My company says that any prior distribution from the plan disqualifies this advantage. The actual wording just says that the entire plan must be rolled over within one calendar year. This means that even a previous RMD would disqualify if my company is right. Even the IRS does not seem to know the answer; talked to them on the phone. Seems to me that whatever is in fund during a taxable year constitutes the entire plan, regardless of a past year partial withdraw. Can you help?
Answer:
It sounds like your company is giving you good advice. If you have low cost basis in your company stock held in your 401(k) plan versus the current market value, using net unrealized appreciation (NUA) could be beneficial. However, the rules regarding NUA are a little tricky. First of all, you need a triggering event, such as separation from service, and the company stock comes out as part of a lump-sum distribution in one tax year to use the NUA advantage. The problem is the definition of a lump-sum distribution. All funds must be withdrawn within one tax year. Distributions in prior years mean that you cannot meet the criteria of doing the withdrawal in one year. If you are 70 1/2 or older and taking required minimum distributions, there would need to be a new triggering event and unfortunately death would be the only triggering event left, assuming you have already separated from service. In that case your heirs would be able to use the NUA advantage.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Wednesday, September 16, 2009
Need to Know: Roth Conversions and Pro-Rata Rule
One of the rules to consider when thinking about making a Roth conversion is the pro-rata rule. When an IRA contains both non-deductible and deductible funds then each dollar withdrawn from the IRA will contain a percentage of tax-free and taxable funds. All IRAs will be considered in this calculation, including SEP and SIMPLE IRAs.
This is an important rule that all financial advisors should know when discussing the pros and cons of Roth conversions with their clients.
By Jared Trexler; input from IRA Technical Consultant Beverly DeVeny
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*Copyright 2009 Ed Slott and Company, LLC
This is an important rule that all financial advisors should know when discussing the pros and cons of Roth conversions with their clients.
By Jared Trexler; input from IRA Technical Consultant Beverly DeVeny
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*Copyright 2009 Ed Slott and Company, LLC
Tuesday, September 15, 2009
Pros & Cons of Roth Conversion
There has been a lot written about converting from a traditional IRA to a Roth IRA particularly in light of the law change taking effect on January 1, 2010, which will permanently eliminate the conversion restrictions and allow everyone to convert. You have read about this in past articles at The Slott Report.
We thought we would provide some simple pros and cons for you to consider.
Reasons to consider conversions:
We thought we would provide some simple pros and cons for you to consider.
Reasons to consider conversions:
- Your income tax bracket may be the same or higher in retirement
- You have special favorable tax attributes in the year of the conversion. Attributes include: large charitable deductions, carry forward losses, and investment tax credits. If you have the ability to report lower income in any given year converting in that year could lower your income tax on the conversion.
- Suspension of the minimum distribution rules at age 70 1/2 for those individuals not needing IRA funds to live on.
- Ability to make contributions even after age 70 1/2 (if there is eligible earned compensation).
- Provide an income-tax-free inheritance to heirs.
Reasons NOT to consider conversions:
- If there is going to be an immediate need for the money.
- Your income tax bracket will be much lower in retirement.
- Having an aversion to paying the income tax up front and not trusting the government to keep the tax-free deal.
- There is no liquidity to pay the tax due on the conversion from non-retirement assets.
- If charity is the ultimate beneficiary, they will not have to pay income taxes on the money they receive, so why should you?
By Jared Trexler; input from IRA Technical Consultant Marvin Rotenberg
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*Copyright 2009 Ed Slott and Company, LLC
Monday, September 14, 2009
New Rollover Plan From The IRS
On September 4, 2009, IRS released a new version of the notice that will be given to employer plan participants who will be receiving eligible rollover distributions.
What's an Eligible Rollover Distribution?
Generally, it's a distribution you take from your employer plan (such as a 401(k) or 403(b) plan) after you have retired or are no longer working for that employer or a distribution taken by your beneficiary. You usually have the option of taking the money and spending it, or, better yet, you can move the funds to another employer plan or to an IRA account and keep saving those funds for your retirement.
The notice provides very clear explanations of the options a plan participant or a beneficiary has and the tax implications of each option. It covers early distributions, distributions due to a divorce, 60-day rollovers, after-tax funds, plan loans and more.
One thing the notice makes absolutely crystal clear is that a spouse has the option of moving plan funds into an inherited IRA rather than an owned IRA.
What's the difference? A younger spouse is likely to need those funds for living expenses. If the funds come out of their own IRA, they will owe the 10% early distribution penalty on all distributions. If the funds come out of an inherited IRA, they will not owe the penalty. This option has been allowed by IRS, but not all employers or IRA providers were aware of it. Some spouses have even been forced to get a private letter ruling from IRS (at an IRS cost of $9,000) to be allowed to do what the tax code already allowed. Hopefully, that will not longer happen when this notice is provided to plan beneficiaries.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
What's an Eligible Rollover Distribution?
Generally, it's a distribution you take from your employer plan (such as a 401(k) or 403(b) plan) after you have retired or are no longer working for that employer or a distribution taken by your beneficiary. You usually have the option of taking the money and spending it, or, better yet, you can move the funds to another employer plan or to an IRA account and keep saving those funds for your retirement.
The notice provides very clear explanations of the options a plan participant or a beneficiary has and the tax implications of each option. It covers early distributions, distributions due to a divorce, 60-day rollovers, after-tax funds, plan loans and more.
One thing the notice makes absolutely crystal clear is that a spouse has the option of moving plan funds into an inherited IRA rather than an owned IRA.
What's the difference? A younger spouse is likely to need those funds for living expenses. If the funds come out of their own IRA, they will owe the 10% early distribution penalty on all distributions. If the funds come out of an inherited IRA, they will not owe the penalty. This option has been allowed by IRS, but not all employers or IRA providers were aware of it. Some spouses have even been forced to get a private letter ruling from IRS (at an IRS cost of $9,000) to be allowed to do what the tax code already allowed. Hopefully, that will not longer happen when this notice is provided to plan beneficiaries.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Friday, September 11, 2009
Distributions From Traditional IRAs Prior to Age 59 1/2
We get technical on a rainy Friday in the Northeast with this blog from IRA Technical Consultant Marvin Rotenberg.
If you lost your job or just need additional money to provide for your family and you absolutely must take it from your traditional IRA before you reach age 59 1/2, you may be able to take the money out penalty free. The general rule for traditional IRAs is that if you take money out before age 59 1/2, there is a 10% penalty. However, there is an exemption found in the Internal Revenue Code in Section 72(t)-(2)-(A)-(iv). Thus, it is referred to as the 72(t) exemption.
Section 72(t) allows you to set up substantially equal payments from your IRA for five years or until age 59 1/2, whichever period is longer, using one of three IRS approved methods. You can begin taking a 72(t) payment schedule at any age, even if you are still working. During the payment period, withdrawals cannot be modified, meaning the payments cannot be changed. They cannot be increased or decreased other than by a provision under Revenue Ruling 2002-62 that allows an irrevocable one-time switch to the required minimum distribution (RMD) method.
If the payment schedule is stopped during the 72(t) term due to death or disability, no 10% penalty will apply. For the disability exemption to apply, the disability must be serious and qualify under IRS guidelines.
If you have several IRAs, you can apply any one of these methods to only one IRA if that gives you the amount you are looking for. If you have one large IRA, it can be split into smaller IRAs before the 72(t) distributions start to get the amount you are looking for.
The 3 methods are:
Minimum Distribution Method: Uses the same method as calculating RMDs at age 70 1/2 and older. Annual payments can increase or decrease each year depending on the year-end balance in the account.
Amortization Method: Amortizes the IRA, similar to a home mortgage. Payments are calculated once for the first year, and the annual payments remain the same for all years.
Annuity Factor Method: Payments are based on the 2003 annuity table in Revenue Ruling 2002-62. This method generally produces the largest 72(t) payment from the smallest amount o IRA funds. The payments remain fixed throughout the 72(t) term.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
If you lost your job or just need additional money to provide for your family and you absolutely must take it from your traditional IRA before you reach age 59 1/2, you may be able to take the money out penalty free. The general rule for traditional IRAs is that if you take money out before age 59 1/2, there is a 10% penalty. However, there is an exemption found in the Internal Revenue Code in Section 72(t)-(2)-(A)-(iv). Thus, it is referred to as the 72(t) exemption.
Section 72(t) allows you to set up substantially equal payments from your IRA for five years or until age 59 1/2, whichever period is longer, using one of three IRS approved methods. You can begin taking a 72(t) payment schedule at any age, even if you are still working. During the payment period, withdrawals cannot be modified, meaning the payments cannot be changed. They cannot be increased or decreased other than by a provision under Revenue Ruling 2002-62 that allows an irrevocable one-time switch to the required minimum distribution (RMD) method.
If the payment schedule is stopped during the 72(t) term due to death or disability, no 10% penalty will apply. For the disability exemption to apply, the disability must be serious and qualify under IRS guidelines.
If you have several IRAs, you can apply any one of these methods to only one IRA if that gives you the amount you are looking for. If you have one large IRA, it can be split into smaller IRAs before the 72(t) distributions start to get the amount you are looking for.
The 3 methods are:
Minimum Distribution Method: Uses the same method as calculating RMDs at age 70 1/2 and older. Annual payments can increase or decrease each year depending on the year-end balance in the account.
Amortization Method: Amortizes the IRA, similar to a home mortgage. Payments are calculated once for the first year, and the annual payments remain the same for all years.
Annuity Factor Method: Payments are based on the 2003 annuity table in Revenue Ruling 2002-62. This method generally produces the largest 72(t) payment from the smallest amount o IRA funds. The payments remain fixed throughout the 72(t) term.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Thursday, September 10, 2009
Slott Report Mailbag: September 10th
It is time for another installment of the Slott Report Mailbag. If you are visiting this blog for the first time, the Slott Report Mailbag is a question-and-answer forum where America's IRA Experts answer questions posed by consumers from around the country each and every Thursday.
1.
The following language was posted in an article on http://www.schwab.com/:
"If you're not eligible to contribute to a Roth IRA and your employer's plan doesn't allow you to make Roth-designated contributions to your 401(k) plan (a fairly recent development that not every employer plan allows), then another way to take advantage of a Roth IRA's potential benefits is to convert some or all or your traditional IRA money to a Roth."
I read this in two ways: the first is that you are precluded from converting if you do either of the above, the second (and vastly different) is that the conversion is just another way in addition to the Roth IRA and Roth 401(k).
Does a contribution to a Roth IRA or Roth 401(k) preclude (or have any other effect on) a conversion? Could you illustrate how all three could be used together?
Thanks,
LS
Answer:
If you cannot contribute to a Roth IRA it means that either you don't have earned income or your earned income exceeds the limits. If you are married and filing jointly, then your earned income of less than $166,000 would allow you a full Roth IRA contribution. $5,000 and an additional $1,000 if you are age 50 or older by December 31st. From $166,000 but less than $176,000 your contribution will begin to phase out and at $176,000 or more you will not be able to contribute to a Roth IRA.
Generally your contribution to a Roth IRA or a Roth 401(k) will not have an effect on converting a traditional IRA to a Roth IRA. In 2009, if your modified adjusted gross income (MAGI) exceeds $100,000 or you are married and filing separately you cannot convert. In 2010, both these restrictions will be eliminated permanently. Remember, however, there is a "pro-rata rule" which states that if you have both deductible and non-deductible funds in your traditional IRAs you will not be able to convert just the non-deductible IRA funds. You must pro-rate, meaning some money must come from both the deductible and the non-deductible IRA funds based on a formula.
You can make a full contribution to a Roth IRA, and a full contribution to a Roth 401(k), and still convert funds to a Roth IRA. Each limit is separate from the others.
2.
How is Schedule C income treated relative to the Roth conversion? I thought I heard that it can somehow not be included?
Thanks,
Terri
Answer:
Schedule C of your personal income tax return is self-employed income. That income or loss will be part of your modified adjusted gross income (MAGI). In 2009, if your MAGI exceeds $100,000, and if you are married and filing separately, you will not qualify for a Roth IRA conversion. In 2010, both of these restrictions will be permanently eliminated.
3.
Ed and Company,
Earlier this year, I incurred a considerable loss in my traditional IRA rollover portfolio due to the decline in value of GM bonds and common stock.
Is there any way that I can "transfer" this loss outside the IRA account, and utilize it as a tax loss on my regular tax return?
In the event that age may be a factor in your response, I am 83 years old.
Frank Muir
Answer:
Unfortunately, there is no way to transfer the loss in your IRA and use it on your personal tax return. The only way you might be able to receive any benefit of the loss is to fully liquidate all your IRAs. But that will only work if your basis, your after-tax contributions, in all your IRAs is greater than the liquidation value. Keep in mind that contributions to IRAs that were income tax deductible would have no basis.
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.
The following language was posted in an article on http://www.schwab.com/:
"If you're not eligible to contribute to a Roth IRA and your employer's plan doesn't allow you to make Roth-designated contributions to your 401(k) plan (a fairly recent development that not every employer plan allows), then another way to take advantage of a Roth IRA's potential benefits is to convert some or all or your traditional IRA money to a Roth."
I read this in two ways: the first is that you are precluded from converting if you do either of the above, the second (and vastly different) is that the conversion is just another way in addition to the Roth IRA and Roth 401(k).
Does a contribution to a Roth IRA or Roth 401(k) preclude (or have any other effect on) a conversion? Could you illustrate how all three could be used together?
Thanks,
LS
Answer:
If you cannot contribute to a Roth IRA it means that either you don't have earned income or your earned income exceeds the limits. If you are married and filing jointly, then your earned income of less than $166,000 would allow you a full Roth IRA contribution. $5,000 and an additional $1,000 if you are age 50 or older by December 31st. From $166,000 but less than $176,000 your contribution will begin to phase out and at $176,000 or more you will not be able to contribute to a Roth IRA.
Generally your contribution to a Roth IRA or a Roth 401(k) will not have an effect on converting a traditional IRA to a Roth IRA. In 2009, if your modified adjusted gross income (MAGI) exceeds $100,000 or you are married and filing separately you cannot convert. In 2010, both these restrictions will be eliminated permanently. Remember, however, there is a "pro-rata rule" which states that if you have both deductible and non-deductible funds in your traditional IRAs you will not be able to convert just the non-deductible IRA funds. You must pro-rate, meaning some money must come from both the deductible and the non-deductible IRA funds based on a formula.
You can make a full contribution to a Roth IRA, and a full contribution to a Roth 401(k), and still convert funds to a Roth IRA. Each limit is separate from the others.
2.
How is Schedule C income treated relative to the Roth conversion? I thought I heard that it can somehow not be included?
Thanks,
Terri
Answer:
Schedule C of your personal income tax return is self-employed income. That income or loss will be part of your modified adjusted gross income (MAGI). In 2009, if your MAGI exceeds $100,000, and if you are married and filing separately, you will not qualify for a Roth IRA conversion. In 2010, both of these restrictions will be permanently eliminated.
3.
Ed and Company,
Earlier this year, I incurred a considerable loss in my traditional IRA rollover portfolio due to the decline in value of GM bonds and common stock.
Is there any way that I can "transfer" this loss outside the IRA account, and utilize it as a tax loss on my regular tax return?
In the event that age may be a factor in your response, I am 83 years old.
Frank Muir
Answer:
Unfortunately, there is no way to transfer the loss in your IRA and use it on your personal tax return. The only way you might be able to receive any benefit of the loss is to fully liquidate all your IRAs. But that will only work if your basis, your after-tax contributions, in all your IRAs is greater than the liquidation value. Keep in mind that contributions to IRAs that were income tax deductible would have no basis.
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
Win Big in ANY Crisis: Today at 4 PM ET
Ed Slott, America's IRA Expert, will detail 2010 Roth Conversion Planning Opportunities in today's FREE 1-Hour Webcast titled, "Win Big in ANY Crisis: Make These Turbulent Times Your Greatest Opportunity".
The Webcast will begin at 4 PM ET.
It is not too late to register for this information-packed Webcast. Just go to www.irahelp.com/webcast to register.
If you have any questions, feel free to give us a call at 215-557-7022.
The Webcast will begin at 4 PM ET.
It is not too late to register for this information-packed Webcast. Just go to www.irahelp.com/webcast to register.
If you have any questions, feel free to give us a call at 215-557-7022.
Wednesday, September 9, 2009
Early Distributions - Miscellaneous Exceptions - apply to both employer plans and IRAs
We continue with our series on Early Distributions. Four parts of this series were already posted so scroll down to read each installment.
IRS Tax Levy
The bad new is that IRS can levy your retirement account. The good news is, if they do that, you do not have to pay the 10% early distribution penalty. Isn't that nice? Don't count on IRS to actually know that you do not have to pay the penalty. Several years ago we had to explain this to an IRS agent and their response was oh well - if you say so. If you look at the instructions for filing Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, there is an exception code for this type of distribution. So don't compound your money problems by paying an extra 10% on a levy from your retirement plan.
Rollovers
When you move assets that are eligible for rollover from one retirement plan to another, the transaction is generally not subject to tax. The only exception is a Roth conversion. However, a Roth conversion is not subject to the early distribution penalty, even if you are under age 59 ½. This applies only to the funds actually converted. If you take $100,000 out of the traditional IRA when you are under age 59 ½ and convert $80,000 to the Roth and use the remaining $20,000 to pay the income tax on the conversion, you will owe the early distribution penalty on the $20,000 that did not go to the Roth IRA.
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
IRS Tax Levy
The bad new is that IRS can levy your retirement account. The good news is, if they do that, you do not have to pay the 10% early distribution penalty. Isn't that nice? Don't count on IRS to actually know that you do not have to pay the penalty. Several years ago we had to explain this to an IRS agent and their response was oh well - if you say so. If you look at the instructions for filing Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, there is an exception code for this type of distribution. So don't compound your money problems by paying an extra 10% on a levy from your retirement plan.
Rollovers
When you move assets that are eligible for rollover from one retirement plan to another, the transaction is generally not subject to tax. The only exception is a Roth conversion. However, a Roth conversion is not subject to the early distribution penalty, even if you are under age 59 ½. This applies only to the funds actually converted. If you take $100,000 out of the traditional IRA when you are under age 59 ½ and convert $80,000 to the Roth and use the remaining $20,000 to pay the income tax on the conversion, you will owe the early distribution penalty on the $20,000 that did not go to the Roth IRA.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Tuesday, September 8, 2009
Early Distributions - Medical Expenses - applies to both employer plans and IRAs
We continue with our series on Early Distributions. Three parts of this series were posted last week so scroll down to read each installment.
If you are under the age of 59 ½, you can take a distribution from your employer plan (if the plan allows) or from your IRA to pay certain medical expenses. You will still owe taxes on the distribution, but not the 10% early distribution penalty when you meet the following requirements.
The distribution cannot be more than you could deduct on your tax return, if you were itemizing deductions. You don’t actually have to itemize your deductions to be exempt from the early distribution penalty. Generally, you can deduct medical expenses that are in excess of 7 ½% of your adjusted gross income. You must take the distribution in the year you pay the expenses. You cannot put the expenses on a credit card in one year and take the distribution in the following year to pay off the credit card. This has been tested in court, and the individuals (and there have been many) did not win.
The expenses can be for the account owner or plan participant, the spouse, or dependants. Medical expenses include dental bills, prescription drug expenses, and health insurance premiums.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
If you are under the age of 59 ½, you can take a distribution from your employer plan (if the plan allows) or from your IRA to pay certain medical expenses. You will still owe taxes on the distribution, but not the 10% early distribution penalty when you meet the following requirements.
The distribution cannot be more than you could deduct on your tax return, if you were itemizing deductions. You don’t actually have to itemize your deductions to be exempt from the early distribution penalty. Generally, you can deduct medical expenses that are in excess of 7 ½% of your adjusted gross income. You must take the distribution in the year you pay the expenses. You cannot put the expenses on a credit card in one year and take the distribution in the following year to pay off the credit card. This has been tested in court, and the individuals (and there have been many) did not win.
The expenses can be for the account owner or plan participant, the spouse, or dependants. Medical expenses include dental bills, prescription drug expenses, and health insurance premiums.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Friday, September 4, 2009
Ed Slott and Company In The News
It's been a busy time for financial advisors as summer unofficially comes to a close with the upcoming Labor Day weekend.
Ed Slott and Company has been in the press several times over the past week or so, and now is the perfect time to recap the articles you may have missed.
You can also track the articles Ed and our IRA Technical Consultants write or are quoted in on a daily basis. CLICK HERE to follow us "In The News".
Ed Slott and Company has been in the press several times over the past week or so, and now is the perfect time to recap the articles you may have missed.
You can also track the articles Ed and our IRA Technical Consultants write or are quoted in on a daily basis. CLICK HERE to follow us "In The News".
- Newsday wrote an interesting piece on the retirement planning of adults without children. Financial advisor Jeffrey Levine advocates that adults and/or couples without kids plan aggressively for their retirement. "One of the most important safeguards that can be put into place is long-term-care insurance," said Levine. CLICK HERE to read the article in its entirety.
- Keep Alert When It's Time to Convert. Humberto Cruz wrote a late August article on the Chicago Tribune's website about Roth IRA conversions (a topic covered in-depth at our November 2-Day IRA Workshop). CLICK HERE to read the article and Ed's take on the 2010 Roth Conversion rules.
- Roth Recharacterizations are another IMPORTANT topic in this day with a deep recession costing individuals a heavy tax burden IF NOT for one of the great breaks in the tax code. CLICK HERE to read Ed Slott's article in Financial Planning about Roth Recharacterizations.
- Confused about pumping money into a retirement account? What is the best asset? "Young people have the best asset of all -- time," said Slott. "There is no greater moneymaking asset than time." CLICK HERE to read the entire Newsday article on retirement planning.
Compiled by Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
Thursday, September 3, 2009
Slott Report Mailbag: September 3rd
It is time for another installment of The Slott Report Mailbag.
1.
I read in the Orange County (CA) Register, if I transfer my regular IRA to a Roth IRA and I am over 59 1/2 ,(I am 81) if I choose, during the first 5 years, I can withdraw any amount without a (10 %) penalty. Is this correct? Thanks for your help.
Answer:
The 10% early distribution penalty only applies to a distribution taken before age 59 1/2. It can never apply to someone who is age 81. The 5-year rule applies to the Roth IRA earnings (amount in excess over the converted amount). It is, however, assumed that each dollar you take out comes first from the basis (contributions and converted amounts) and not earnings.
Therefore, the earnings come out last. Under normal circumstances if you are taking money out over a period of years you will probably not get to the earnings until 5 years or later. If you take out the earnings prior to 5 years from the beginning date of the Roth IRA, you will have to pay income tax on them and -- if you are under age 59 1/2 -- incur a 10% penalty.
2.
If one has multiple Roth IRAs (perhaps so that conversions can be more judiciously recharacterized), for purposes of determining when the earnings can be withdrawn after 5 years, do all Roth IRAs relate back to the earliest one opened?
Answer:
If you have several Roth IRAs you can use the date of the establishment of the oldest Roth IRA as your beginning date for the 5-year period. Keep in mind that the 5-year rule applies to the earnings (amount over what was converted). If you are age 59 1/2 or older you can always take out the basis without penalty.
However, when you have several Roth IRAs from conversions of traditional IRAs each Roth IRA will also have its own 5-year period, but only for determining if the early distribution penalty applies to withdrawals of the converted amount.
3.
Does the government allow a traditional IRA holder to convert his minimum annual required distribution, after paying tax on this money, into his Roth IRA account?
Answer:
Yes. If you would otherwise qualify to contribute to a Roth IRA. To qualify you must have eligible compensation and your income in the year of contribution cannot exceed certain limits. The required minimum distribution cannot go directly from your IRA to a Roth IRA because it would have to be paid to you first.
If you are married and filing jointly the income limits for 2009 are:
$166,000 or less = 100% contribution
$166,001 - $176,000 = partial contribution (phase out)
$176,001 or more = no contribution
Remember, in 2009 there is no RMD and the contribution limits if you qualify are $5,000 and if you are age 50 or older by the end of the year, you can add an additional $1,000 for a total of $6,000.
4.
My brother named his estate as beneficiary of his regular IRA. He died March 23, 2007 before he had to take RMD. Probate in Nevada was just completed on June 26, 2009. Per his will, my sister and I inherited his estate. The probate lawyer transferred the funds from Wells Fargo (the custodian of the IRA) to the Estate account on April 30, 2009. We had requested all along that we wanted to spread out the tax consequences over the five-year period which I thought we were entitled to.
The lawyer took out over $10,000 from the IRA to pay their fees as there was no other cash available in the estate. The remaining funds were then divided between my sister and I and
transferred from the estate institution to each of our own financial institutions. I had put my funds into an IRA in my brother’s name for my benefit.
After a visit to my local IRS office and numerous phone calls to their 800 number, I was informed that I could not put the funds into an IRA and would have to pay a penalty on any interest earned in an IRA account with those funds. I have since taken the money out of IRA status.
I am still not convinced that I could not keep those funds in IRA status and spread the distribution out over the five-year period (Three years now that it took the lawyer two years to complete probate) as I got conflicting information from the IRS depending on who I was speaking with.
The question is, must the tax consequences be paid all at once? Is the amount due based on the estate value or our individual tax rate?
Thank you,
E. Waltrip
Answer:
When IRA funds were transferred from the IRA to the estate account, at that point, it became an income taxable event. Form 1099R will be issued to the estate an a Form K1 should be issued by the estate to the beneficiaries.
The income tax will be due for 2009. If the IRA had remained an inherited IRA for the benefit of your brother's estate, then after the $10,000 was taken out for the attorney's fees, it could have been split as an inherited IRA for both beneficiaries. Then it could have been taken out over the remainder of the 5-year period. However, that was not done.
The IRS was correct in stating that you could not set up an inherited IRA, as you did, and the money had to come out. The penalty would be on the amount contribute to that IRA and not on the earnings.
This is a good example of why we strongly recommend that an estate never be named as beneficiary of an IRA and that an IRA expert be consulted before doing anything with an inherited 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
1.
I read in the Orange County (CA) Register, if I transfer my regular IRA to a Roth IRA and I am over 59 1/2 ,(I am 81) if I choose, during the first 5 years, I can withdraw any amount without a (10 %) penalty. Is this correct? Thanks for your help.
Answer:
The 10% early distribution penalty only applies to a distribution taken before age 59 1/2. It can never apply to someone who is age 81. The 5-year rule applies to the Roth IRA earnings (amount in excess over the converted amount). It is, however, assumed that each dollar you take out comes first from the basis (contributions and converted amounts) and not earnings.
Therefore, the earnings come out last. Under normal circumstances if you are taking money out over a period of years you will probably not get to the earnings until 5 years or later. If you take out the earnings prior to 5 years from the beginning date of the Roth IRA, you will have to pay income tax on them and -- if you are under age 59 1/2 -- incur a 10% penalty.
2.
If one has multiple Roth IRAs (perhaps so that conversions can be more judiciously recharacterized), for purposes of determining when the earnings can be withdrawn after 5 years, do all Roth IRAs relate back to the earliest one opened?
Answer:
If you have several Roth IRAs you can use the date of the establishment of the oldest Roth IRA as your beginning date for the 5-year period. Keep in mind that the 5-year rule applies to the earnings (amount over what was converted). If you are age 59 1/2 or older you can always take out the basis without penalty.
However, when you have several Roth IRAs from conversions of traditional IRAs each Roth IRA will also have its own 5-year period, but only for determining if the early distribution penalty applies to withdrawals of the converted amount.
3.
Does the government allow a traditional IRA holder to convert his minimum annual required distribution, after paying tax on this money, into his Roth IRA account?
Answer:
Yes. If you would otherwise qualify to contribute to a Roth IRA. To qualify you must have eligible compensation and your income in the year of contribution cannot exceed certain limits. The required minimum distribution cannot go directly from your IRA to a Roth IRA because it would have to be paid to you first.
If you are married and filing jointly the income limits for 2009 are:
$166,000 or less = 100% contribution
$166,001 - $176,000 = partial contribution (phase out)
$176,001 or more = no contribution
Remember, in 2009 there is no RMD and the contribution limits if you qualify are $5,000 and if you are age 50 or older by the end of the year, you can add an additional $1,000 for a total of $6,000.
4.
My brother named his estate as beneficiary of his regular IRA. He died March 23, 2007 before he had to take RMD. Probate in Nevada was just completed on June 26, 2009. Per his will, my sister and I inherited his estate. The probate lawyer transferred the funds from Wells Fargo (the custodian of the IRA) to the Estate account on April 30, 2009. We had requested all along that we wanted to spread out the tax consequences over the five-year period which I thought we were entitled to.
The lawyer took out over $10,000 from the IRA to pay their fees as there was no other cash available in the estate. The remaining funds were then divided between my sister and I and
transferred from the estate institution to each of our own financial institutions. I had put my funds into an IRA in my brother’s name for my benefit.
After a visit to my local IRS office and numerous phone calls to their 800 number, I was informed that I could not put the funds into an IRA and would have to pay a penalty on any interest earned in an IRA account with those funds. I have since taken the money out of IRA status.
I am still not convinced that I could not keep those funds in IRA status and spread the distribution out over the five-year period (Three years now that it took the lawyer two years to complete probate) as I got conflicting information from the IRS depending on who I was speaking with.
The question is, must the tax consequences be paid all at once? Is the amount due based on the estate value or our individual tax rate?
Thank you,
E. Waltrip
Answer:
When IRA funds were transferred from the IRA to the estate account, at that point, it became an income taxable event. Form 1099R will be issued to the estate an a Form K1 should be issued by the estate to the beneficiaries.
The income tax will be due for 2009. If the IRA had remained an inherited IRA for the benefit of your brother's estate, then after the $10,000 was taken out for the attorney's fees, it could have been split as an inherited IRA for both beneficiaries. Then it could have been taken out over the remainder of the 5-year period. However, that was not done.
The IRS was correct in stating that you could not set up an inherited IRA, as you did, and the money had to come out. The penalty would be on the amount contribute to that IRA and not on the earnings.
This is a good example of why we strongly recommend that an estate never be named as beneficiary of an IRA and that an IRA expert be consulted before doing anything with an inherited 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
Wednesday, September 2, 2009
Retirement Fears: Tax-Free Conversion From Loss
We have another Retirement Fears article today. CLICK HERE to read the entire article.
Planning isn't always perfect. Sometimes it is making the best of a bad situation.
In early 2008, Bill decided that he had been an employee at his Internet technology company for long enough. After 20 plus years on the job, Bill believed that he had the knowledge, relationships and financial wherewithal to do it himself - and to do it better. So after talking it over with his family, he decided it was time to start his own company.
However, just 3 months after Bill started his business, the stock market crashed and took the economy down with it. His business plummeted into the red, and his job -- and hopes of high income -- were gone.
Yet, all was not lost. He had accumulated several hundred thousand dollars in his old employer's 401(k) plan. He always liked the idea of a Roth IRA, but had never pulled the trigger.
Why now, did it suddenly make more sense than ever?
CLICK HERE to read the entire article.
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
Planning isn't always perfect. Sometimes it is making the best of a bad situation.
In early 2008, Bill decided that he had been an employee at his Internet technology company for long enough. After 20 plus years on the job, Bill believed that he had the knowledge, relationships and financial wherewithal to do it himself - and to do it better. So after talking it over with his family, he decided it was time to start his own company.
However, just 3 months after Bill started his business, the stock market crashed and took the economy down with it. His business plummeted into the red, and his job -- and hopes of high income -- were gone.
Yet, all was not lost. He had accumulated several hundred thousand dollars in his old employer's 401(k) plan. He always liked the idea of a Roth IRA, but had never pulled the trigger.
Why now, did it suddenly make more sense than ever?
CLICK HERE to read the entire article.
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
Tuesday, September 1, 2009
Early Distributions - Disability Exception - applies to both employer plans and IRAs
This is part of a series of blogs on the rules regarding taking early distributions from your retirement funds. In certain employer plan situations the age at which the penalty applies could be age 50 or 55, but for ease of reading I will only use age 59½.
If you become disabled before age 59½, you can take penalty free distributions of retirement funds and not be subject to the early distribution penalty. This exception applies to distributions from employer plans as well as IRAs.
However, the definition of disability is a very narrow one. In order to qualify, the individual must be unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which is expected to end in death or to be of a long-term or indefinite duration. There have been tax court cases where individuals have been out of work on disability yet they did not qualify for this exception to the 10% penalty. Carpal tunnel syndrome, chronic fatigue syndrome, post traumatic stress disorder, are examples of what generally will not qualify for this exception.
One question that does come up frequently is whether a spouse in good health can take a distribution from their retirement plan because their spouse is disabled and use this exception. Unfortunately, the answer is no. The individual taking the distribution must be the individual that is disabled in order to qualify for the exemption.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2009 Ed Slott and Company, LLC
If you become disabled before age 59½, you can take penalty free distributions of retirement funds and not be subject to the early distribution penalty. This exception applies to distributions from employer plans as well as IRAs.
However, the definition of disability is a very narrow one. In order to qualify, the individual must be unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which is expected to end in death or to be of a long-term or indefinite duration. There have been tax court cases where individuals have been out of work on disability yet they did not qualify for this exception to the 10% penalty. Carpal tunnel syndrome, chronic fatigue syndrome, post traumatic stress disorder, are examples of what generally will not qualify for this exception.
One question that does come up frequently is whether a spouse in good health can take a distribution from their retirement plan because their spouse is disabled and use this exception. Unfortunately, the answer is no. The individual taking the distribution must be the individual that is disabled in order to qualify for the exemption.
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
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