We wish everyone a Happy Holidays from Ed Slott and Company! Just remember, that a NEW Year brings NEW Opportunities to keep more money for you and your clients TAX FREE!
Happy Holidays!
Wednesday, December 23, 2009
Contributions to IRAs
As we approach year-end we're often asked about the deadline for making IRA contributions. This is an excellent question in view of the multitude of dates associated with various IRA transactions. Missing the deadline for an IRA contribution can be costly, not only in the short-term due to a potentially missed income tax deduction but also in the long run when the power of tax-deferred compounding is considered.
Contributions to an IRA for a tax year may be made to a new or existing traditional or Roth IRA up to the deadline (NOT including extensions) for filing the individual's federal income tax return. The deadline for calendar year taxpayers is usually April 15. If April 15 falls on a Saturday, Sunday, or a legal holiday, the deadline is the following business day. A contribution that is received after the tax-filing deadline may be accepted for the prior year if the contribution was either:
An individual may file an income tax return claiming an IRA contribution (deductible or non-deductible) before actually making the contribution. However, an amended return will have to be filed if an IRA deduction was claimed but the contribution was not made by the tax-filing deadline. Also, a corrected Form 8606 will have to be submitted if the missed contribution was originally reported as a non-deductible deposit to a traditional IRA.
Contributions to a traditional IRA are no longer allowed beginning with the year in which the IRA owner attains age 70 1/2. There is no age limit for making a contribution to a Roth IRA. However, the amount of an individual's income may limit or prohibit them from making a Roth IRA contribution or could phase-out a deduction for a traditional IRA contribution if they or their spouse participates in an employer-sponsored retirement plan. A contribution may not be made on behalf of a deceased individual, even though such individual had compensation prior to death.
The maximum IRA contribution for both 2009 and 2010 is the lesser of 100% of an individual's taxable compensation or $5,000 ($6,000 for individuals who are age 50 or older during the year for which the contribution is made.) For joint filers, the compensation of a working spouse can be used as the basis for a contribution on behalf of a spouse who does not work or who earns very little compensation. These are typically known as "Spousal IRA" contributions. Check IRS Publication 590 for further details on what constitutes eligible compensation for IRA contribution purposes.
Finally, for the purpose of annual contribution limits, Traditional IRA contributions and Roth IRA contributions are aggregated.
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
Contributions to an IRA for a tax year may be made to a new or existing traditional or Roth IRA up to the deadline (NOT including extensions) for filing the individual's federal income tax return. The deadline for calendar year taxpayers is usually April 15. If April 15 falls on a Saturday, Sunday, or a legal holiday, the deadline is the following business day. A contribution that is received after the tax-filing deadline may be accepted for the prior year if the contribution was either:
- Mailed in an envelope that has a timely US Postal Service postmark or
- Sent through an IRS designated private delivery service i.e. Federal Express, United Parcel Service and DHL Express and it has a timely postmark.
An individual may file an income tax return claiming an IRA contribution (deductible or non-deductible) before actually making the contribution. However, an amended return will have to be filed if an IRA deduction was claimed but the contribution was not made by the tax-filing deadline. Also, a corrected Form 8606 will have to be submitted if the missed contribution was originally reported as a non-deductible deposit to a traditional IRA.
Contributions to a traditional IRA are no longer allowed beginning with the year in which the IRA owner attains age 70 1/2. There is no age limit for making a contribution to a Roth IRA. However, the amount of an individual's income may limit or prohibit them from making a Roth IRA contribution or could phase-out a deduction for a traditional IRA contribution if they or their spouse participates in an employer-sponsored retirement plan. A contribution may not be made on behalf of a deceased individual, even though such individual had compensation prior to death.
The maximum IRA contribution for both 2009 and 2010 is the lesser of 100% of an individual's taxable compensation or $5,000 ($6,000 for individuals who are age 50 or older during the year for which the contribution is made.) For joint filers, the compensation of a working spouse can be used as the basis for a contribution on behalf of a spouse who does not work or who earns very little compensation. These are typically known as "Spousal IRA" contributions. Check IRS Publication 590 for further details on what constitutes eligible compensation for IRA contribution purposes.
Finally, for the purpose of annual contribution limits, Traditional IRA contributions and Roth IRA contributions are aggregated.
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, December 22, 2009
The Slott Report in 2010
The holiday season is upon us, and while we will be updating The Slott Report from time to time until the New Year, below is a navigational guide to our company blog in 2010.
The Slott Report should be any financial advisor's or consumer's one-stop home for IRA information, company and webcast updates and links to social media outlets in 2010!
Have a happy and healthy New Year!
- Technical information from our IRA Technical Consultants twice a week
- The Slott Report Mailbag with consumer questions answered by IRA Technical Consultants
- Company workshop and webcast information
- Links to articles written by Ed Slott and articles that include pertinent IRA information
- Links to our Facebook and Twitter accounts -- where you can connect with like-minded advisors and get real-time IRA information from America's IRA Experts
The Slott Report should be any financial advisor's or consumer's one-stop home for IRA information, company and webcast updates and links to social media outlets in 2010!
Have a happy and healthy New Year!
Wall St. Journal: Roths (Your Questions, Our Answers)
This is one article you should read before 2009 turns into 2010.
2010 Roth Conversion Planning is an essential business opportunity. Individuals with modified adjusted gross incomes of more than $100,000 will, for the first time, be allowed to move assets held in traditional IRAs to Roth IRAs.
Many readers of The Wall Street Journal had questions about Roth conversions in 2010. Ed Slott helped provide the answers.
Again, this is a MUST READ for advisors and consumers before year-end.
CLICK HERE to read the full question-and-answer article.
Compiled 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
2010 Roth Conversion Planning is an essential business opportunity. Individuals with modified adjusted gross incomes of more than $100,000 will, for the first time, be allowed to move assets held in traditional IRAs to Roth IRAs.
Many readers of The Wall Street Journal had questions about Roth conversions in 2010. Ed Slott helped provide the answers.
Again, this is a MUST READ for advisors and consumers before year-end.
CLICK HERE to read the full question-and-answer article.
Compiled 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
Friday, December 18, 2009
Investment News: Roth Conversion Tools
Investment News printed a December 15th article on Roth conversion tools, which included a calculator from Brentmark Software.
Ed Slott and Company IRA Technical Consultant Beverly DeVeny talked about Brentmark Software, saying its flexibility best suits her. Users can manually change tax rates -- one of many factors -- and measure the effects on those changes on the outcome.
CLICK HERE to read the entire article.
Compiled 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
Ed Slott and Company IRA Technical Consultant Beverly DeVeny talked about Brentmark Software, saying its flexibility best suits her. Users can manually change tax rates -- one of many factors -- and measure the effects on those changes on the outcome.
CLICK HERE to read the entire article.
Compiled 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, December 17, 2009
Slott Report Mailbag: December 17th
Here is the last Slott Report Mailbag of 2009. Don't forget to meet with your financial advisor and go through a year-end checklist.
See you in 2010!
1.
My wife recently changed jobs and we would like to know what would be the best way to handle her 401(k) retirement savings plan. Should we leave it alone or should be move it into a different account like a rollover to a Roth IRA.
Thanks you,
Juan Acevedo
Answer:
Generally, we do favor doing a rollover from a company plan to an IRA when you leave the company, assuming the money will not be needed to live on. An IRA will allow many different investment options and not be subject to any company rules that they may have for their 401(k) plan. The one exception to this advice is when there is low basis company stock in the employer plan. In that case, you might want to consider taking the stock out in kind and paying income tax on the cost basis only. When the shares are sold, the difference between the cost basis and the market value at the time of distribution, the net unrealized appreciation (NUA), is taxed at long-term capital gains rates. You should work with a financial advisor if you qualify to do an NUA transaction.
Any assets going from the plan to an IRA should be done as a trustee-to-trustee transfer to an IRA. The money should go directly from the 401(k) plan to the trustee or custodian of the IRA. The custodian or the trustee will work with the plan administrator to make the transfer.
Rolling the funds over to an IRA will not incur any income tax and the money will continue to grow on a tax deferred basis. When establishing her IRA rollover don't forget to name a primary and contingent beneficiary on the designation of beneficiary form.
2.
Can I set up several different Roth IRA accounts in 2010 to convert all of my traditional IRA assets that's 100% deducted from previous income and decide to recharacterize before October 2011, only the accounts which have gone down in value?
If all assets are rolled over into one Roth IRA account can I selectively recharacterize only those assets which have decreased in value?
Thank you in advance for your answers!
Nicole
Answer:
If you think there is a possibility of a recharacterization, yes, you should create separate IRAs as you suggested. After the time of recharacterization expires, October 15 of the year following the conversion, you can then combine all of the accounts. If you had one account and wanted to do a partial recharacterization, you would have to do a net income calculation based on all the assets in the account and then pro-rate the net amount so that the proportionate share of the gains and losses are allocated to the amount being recharacterized. This could be very difficult.
3.
Ed and Company,
I am an owner of your books.
Background: I am 85 and happily married. I have a sizable IRA and estate. We have enough personal funds outside the IRA to pay the taxes. My AGI this year will be less than $100,000 and I have made a small Roth conversion to reduce the mandatory distribution next year and to bring my 2009 income to a medium taxable level.
Early next year, I plan to make a total conversion, leaving enough in the IRA to cover the mandatory distribution, to take advantage of the extended 2011 and 2012 tax payments. I plan to take a chance on increased taxes because they may more than offset by interim earnings.
Question: I am aware of the mandatory distribution "which is supposed to come first". Do they really mean that? Can I make the Roth conversion early in the year, leaving just enough in the IRA for the mandatory distribution later in the year? Is that permissible? Do you see a tax delay advantage to that?
Thank you,
Peter Seckel
Answer:
I trust you enjoyed Ed's book.
Your questions are very interesting. First, we don't know where the income tax rates will be in 2011 and 2012. There is a good possibility they could be higher in 2010. You might, if you can, try to estimate what your income will be in 2011 and 2012. If your income tax bracket in 2011 and 2012 will be much less than 2010, your reduced tax bracket could offset any tax increase. Keep in mind that you can elect to pay the income tax on the Roth conversion all in 2010.
Your second question: The tax code states that when you take money out of an IRA, including a Roth conversion, the first money out is considered a required minimum distribution (RMD). Therefore, you can not convert all the money except the RMD and then take the RMD later in the year. If you do put the RMD amount in the Roth IRA, it is considered an excess contribution. What you can do, however, is take the RMD when doing the conversion and invest it short term so you will have the money to pay the tax on the conversion. Don't forget that income tax will also be due on the RMD.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
See you in 2010!
1.
My wife recently changed jobs and we would like to know what would be the best way to handle her 401(k) retirement savings plan. Should we leave it alone or should be move it into a different account like a rollover to a Roth IRA.
Thanks you,
Juan Acevedo
Answer:
Generally, we do favor doing a rollover from a company plan to an IRA when you leave the company, assuming the money will not be needed to live on. An IRA will allow many different investment options and not be subject to any company rules that they may have for their 401(k) plan. The one exception to this advice is when there is low basis company stock in the employer plan. In that case, you might want to consider taking the stock out in kind and paying income tax on the cost basis only. When the shares are sold, the difference between the cost basis and the market value at the time of distribution, the net unrealized appreciation (NUA), is taxed at long-term capital gains rates. You should work with a financial advisor if you qualify to do an NUA transaction.
Any assets going from the plan to an IRA should be done as a trustee-to-trustee transfer to an IRA. The money should go directly from the 401(k) plan to the trustee or custodian of the IRA. The custodian or the trustee will work with the plan administrator to make the transfer.
Rolling the funds over to an IRA will not incur any income tax and the money will continue to grow on a tax deferred basis. When establishing her IRA rollover don't forget to name a primary and contingent beneficiary on the designation of beneficiary form.
2.
Can I set up several different Roth IRA accounts in 2010 to convert all of my traditional IRA assets that's 100% deducted from previous income and decide to recharacterize before October 2011, only the accounts which have gone down in value?
If all assets are rolled over into one Roth IRA account can I selectively recharacterize only those assets which have decreased in value?
Thank you in advance for your answers!
Nicole
Answer:
If you think there is a possibility of a recharacterization, yes, you should create separate IRAs as you suggested. After the time of recharacterization expires, October 15 of the year following the conversion, you can then combine all of the accounts. If you had one account and wanted to do a partial recharacterization, you would have to do a net income calculation based on all the assets in the account and then pro-rate the net amount so that the proportionate share of the gains and losses are allocated to the amount being recharacterized. This could be very difficult.
3.
Ed and Company,
I am an owner of your books.
Background: I am 85 and happily married. I have a sizable IRA and estate. We have enough personal funds outside the IRA to pay the taxes. My AGI this year will be less than $100,000 and I have made a small Roth conversion to reduce the mandatory distribution next year and to bring my 2009 income to a medium taxable level.
Early next year, I plan to make a total conversion, leaving enough in the IRA to cover the mandatory distribution, to take advantage of the extended 2011 and 2012 tax payments. I plan to take a chance on increased taxes because they may more than offset by interim earnings.
Question: I am aware of the mandatory distribution "which is supposed to come first". Do they really mean that? Can I make the Roth conversion early in the year, leaving just enough in the IRA for the mandatory distribution later in the year? Is that permissible? Do you see a tax delay advantage to that?
Thank you,
Peter Seckel
Answer:
I trust you enjoyed Ed's book.
Your questions are very interesting. First, we don't know where the income tax rates will be in 2011 and 2012. There is a good possibility they could be higher in 2010. You might, if you can, try to estimate what your income will be in 2011 and 2012. If your income tax bracket in 2011 and 2012 will be much less than 2010, your reduced tax bracket could offset any tax increase. Keep in mind that you can elect to pay the income tax on the Roth conversion all in 2010.
Your second question: The tax code states that when you take money out of an IRA, including a Roth conversion, the first money out is considered a required minimum distribution (RMD). Therefore, you can not convert all the money except the RMD and then take the RMD later in the year. If you do put the RMD amount in the Roth IRA, it is considered an excess contribution. What you can do, however, is take the RMD when doing the conversion and invest it short term so you will have the money to pay the tax on the conversion. Don't forget that income tax will also be due on the RMD.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Wednesday, December 16, 2009
Reminder: No RMDs for 2009
This is just a reminder that there are NO required minimum distributions (RMDs) for 2009 from defined contribution plans (401(k), 403(b), 457 type plans) and from IRAs.
This suspension of RMDs applies to IRA account owners and plan participants as well as to beneficiaries of those plans.
It also applies to individuals who are turning 70 1/2 in 2009. You have no RMD for 2009 and you do not have to take the RMD by April 1 of 2010. There is simply no RMD for 2009. The same is true for a plan participant who was using the still working exception to defer RMDs and who separated from service in 2009. On the other hand, if you turned 70 1/2 in 2009 and deferred your first distribution to 2009, you do still have to take that 2008 distribution. It is not suspended because it was not a 2009 distribution.
If the IRA custodian or employer plan does send you a distribution before the end of the year, you will have 60 days to roll that distribution back to the distributing plan or to any other IRA. The distribution could also be converted to a Roth IRA if you meet the Roth qualifications. IRA owners can only roll over a distribution to another IRA if they have not done another rollover from the distributing IRA in the past 12 months.
The rollover rules can be very confusing. You should consult with a financial advisor or tax professional with expertise in this area before doing a rollover. You can find a list of Ed Slott trained advisors on our website, www.irahelp.com.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
This suspension of RMDs applies to IRA account owners and plan participants as well as to beneficiaries of those plans.
It also applies to individuals who are turning 70 1/2 in 2009. You have no RMD for 2009 and you do not have to take the RMD by April 1 of 2010. There is simply no RMD for 2009. The same is true for a plan participant who was using the still working exception to defer RMDs and who separated from service in 2009. On the other hand, if you turned 70 1/2 in 2009 and deferred your first distribution to 2009, you do still have to take that 2008 distribution. It is not suspended because it was not a 2009 distribution.
If the IRA custodian or employer plan does send you a distribution before the end of the year, you will have 60 days to roll that distribution back to the distributing plan or to any other IRA. The distribution could also be converted to a Roth IRA if you meet the Roth qualifications. IRA owners can only roll over a distribution to another IRA if they have not done another rollover from the distributing IRA in the past 12 months.
The rollover rules can be very confusing. You should consult with a financial advisor or tax professional with expertise in this area before doing a rollover. You can find a list of Ed Slott trained advisors on our website, www.irahelp.com.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Monday, December 14, 2009
Wall St. Journal: Why It May Pay to Convert to a Roth IRA
Ed Slott was quoted in a December 12th article by Kelly Greene of The Wall Street Journal about why it may be of benefit to convert to a Roth IRA.
Greene went through the elimination of income restrictions on Roth IRAs in 2010 and also got quotes from two members of Ed Slott's Elite IRA Advisor Group: John Neyland and Deborah Linscott.
CLICK HERE to read the entire article.
Compiled 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
Greene went through the elimination of income restrictions on Roth IRAs in 2010 and also got quotes from two members of Ed Slott's Elite IRA Advisor Group: John Neyland and Deborah Linscott.
CLICK HERE to read the entire article.
Compiled 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
Friday, December 11, 2009
Slott Report Mailbag: December 10th
Here is this week's Slott Report Mailbag with three consumer questions and our answers.
1.
I just decided to convert my traditional IRA ($400K) to a Roth this month. However, I haven't made any estimated tax payments this year because my income is so low, I wouldn't have any taxes if I hadn't converted by IRAs in December. Do you know anyway I can avoid the IRS penalizing me for underpayment of taxes?
Answer:
You should consult your advisor or accountant about your situation. You could make an estimated tax payment for 2009 by January 15, 2010.
2.
I have an IRA account that has been paid for with after-tax dollars over the last several years. Can I now roll over my IRA to a Roth IRA and only pay tax on the investment gain and the after-tax contributions are tax-free? What tax form do I use to do the conversion?
Thank you,
Anthony Barone
Jensen Beach, FL
Answer:
Generally, you will not have to pay income tax on after-tax contributions to a traditional IRA that you are converting to a Roth IRA. You should have been filing Form 8606 with your tax return each year that you made those contributions so that IRS knows you have after-tax funds in your IRA. Any gains to the original amount contributed will be income taxed on the conversion. It is very important that when you are converting to a Roth IRA, you understand that you must consider all of your IRAs. You cannot just convert after-tax contributions if you have pre-tax money in that IRA or in other IRAs. There is a pro-rata rule that states all IRAs must be considered.
For example: if you had a total of $300,000 in all your IRAs and included in that total was $30,000 of after-tax money, then 10% of that amount you are converting will be tax free and 90% will be taxable. You would again use IRS Form 8606 for this calculation.
3.
A husband and wife are separated but not divorced. They do not have a "legal separation." They are just living separately.
The wife wants to change her IRA beneficiary form her husband (primary) and then to their trust (secondary), to a friend and a charity (equally). Can the wife designate her friend and her charity as beneficiaries without her husband's consent or knowledge? The wife doesn't want to talk with her estranged husband about the matter, but she wants to make sure he wouldn't get her IRA money if she were to die before they were divorced.
A divorce definitely will happen, but not soon, as much real estate is involved and both parties do not want to sell at the bottom of the market, but have not yet agreed when to sell. These people are in California, a community property state.
If it matters, neither husband nor wife has children. The wife had some money in her IRA before she married. The husband did not.
Thanks,
Eveyln
Answer:
An IRA owner generally does not have to have consent from a spouse in order to change the beneficiary of an IRA even to someone who is not a spouse. You are generally free to name a primary and contingent beneficiary without any problems. However, California is a community property state, which basically assumes that all the assets are joint.
In some circumstances, you are able to separate certain assets that were attained prior to the marriage. Some community property states require a waiver to name a beneficiary other than a spouse. You should consult professional advice in your state before making any changes. Your IRA provider should be able to tell you whether or not you need to have your husband sign a consent form.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
1.
I just decided to convert my traditional IRA ($400K) to a Roth this month. However, I haven't made any estimated tax payments this year because my income is so low, I wouldn't have any taxes if I hadn't converted by IRAs in December. Do you know anyway I can avoid the IRS penalizing me for underpayment of taxes?
Answer:
You should consult your advisor or accountant about your situation. You could make an estimated tax payment for 2009 by January 15, 2010.
2.
I have an IRA account that has been paid for with after-tax dollars over the last several years. Can I now roll over my IRA to a Roth IRA and only pay tax on the investment gain and the after-tax contributions are tax-free? What tax form do I use to do the conversion?
Thank you,
Anthony Barone
Jensen Beach, FL
Answer:
Generally, you will not have to pay income tax on after-tax contributions to a traditional IRA that you are converting to a Roth IRA. You should have been filing Form 8606 with your tax return each year that you made those contributions so that IRS knows you have after-tax funds in your IRA. Any gains to the original amount contributed will be income taxed on the conversion. It is very important that when you are converting to a Roth IRA, you understand that you must consider all of your IRAs. You cannot just convert after-tax contributions if you have pre-tax money in that IRA or in other IRAs. There is a pro-rata rule that states all IRAs must be considered.
For example: if you had a total of $300,000 in all your IRAs and included in that total was $30,000 of after-tax money, then 10% of that amount you are converting will be tax free and 90% will be taxable. You would again use IRS Form 8606 for this calculation.
3.
A husband and wife are separated but not divorced. They do not have a "legal separation." They are just living separately.
The wife wants to change her IRA beneficiary form her husband (primary) and then to their trust (secondary), to a friend and a charity (equally). Can the wife designate her friend and her charity as beneficiaries without her husband's consent or knowledge? The wife doesn't want to talk with her estranged husband about the matter, but she wants to make sure he wouldn't get her IRA money if she were to die before they were divorced.
A divorce definitely will happen, but not soon, as much real estate is involved and both parties do not want to sell at the bottom of the market, but have not yet agreed when to sell. These people are in California, a community property state.
If it matters, neither husband nor wife has children. The wife had some money in her IRA before she married. The husband did not.
Thanks,
Eveyln
Answer:
An IRA owner generally does not have to have consent from a spouse in order to change the beneficiary of an IRA even to someone who is not a spouse. You are generally free to name a primary and contingent beneficiary without any problems. However, California is a community property state, which basically assumes that all the assets are joint.
In some circumstances, you are able to separate certain assets that were attained prior to the marriage. Some community property states require a waiver to name a beneficiary other than a spouse. You should consult professional advice in your state before making any changes. Your IRA provider should be able to tell you whether or not you need to have your husband sign a consent form.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Wednesday, December 9, 2009
Last Chance for QCDs (Qualified Charitable Distributions) in 2009
The qualified charitable distribution provision of the tax code is once again set to expire. IRA owners and beneficiaries who are at least age 70 1/2 have until December 31, 2009 to make a non-taxable transfer of IRA funds to a qualifying trust.
Why would you want to do that, especially since there are no required minimum distributions this year? IRS statistics show that most taxpayers do not itemize deductions and the charitable deduction is not a dollar-for-dollar deduction. If you donate $100 from your IRA to charity, you do not have to include that $100 in income and you do not have to itemize deductions to reduce your income for the contribution. This is a great way to move funds that are ordinarily subject to income tax to a tax exempt charity and no one has to pay any income tax.
Some of the requirements are that the IRA owner or beneficiary must be 70 1/2 at the time of the transfer, it must be a direct transfer to a qualifying charity, the QCD is capped at $100,000 per account owner per year, there is no charitable deduction, and the charitable substantiation rules apply. The benefits to the IRA owner are that taxable assets are removed from the estate at no tax cost, the gift to charity does not increase income for the year, and you get the same tax benefit whether or not you itemize deductions.
If you are over 70 1/2 and are going to give money to charity anyway before year end, give the funds from your IRA. For more information, contact your advisor or contact one of the Ed Slott trained advisors listed on our website.
P.S. An extension of the QCD is included currently in proposed legislation in Congress.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Why would you want to do that, especially since there are no required minimum distributions this year? IRS statistics show that most taxpayers do not itemize deductions and the charitable deduction is not a dollar-for-dollar deduction. If you donate $100 from your IRA to charity, you do not have to include that $100 in income and you do not have to itemize deductions to reduce your income for the contribution. This is a great way to move funds that are ordinarily subject to income tax to a tax exempt charity and no one has to pay any income tax.
Some of the requirements are that the IRA owner or beneficiary must be 70 1/2 at the time of the transfer, it must be a direct transfer to a qualifying charity, the QCD is capped at $100,000 per account owner per year, there is no charitable deduction, and the charitable substantiation rules apply. The benefits to the IRA owner are that taxable assets are removed from the estate at no tax cost, the gift to charity does not increase income for the year, and you get the same tax benefit whether or not you itemize deductions.
If you are over 70 1/2 and are going to give money to charity anyway before year end, give the funds from your IRA. For more information, contact your advisor or contact one of the Ed Slott trained advisors listed on our website.
P.S. An extension of the QCD is included currently in proposed legislation in Congress.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Tuesday, December 8, 2009
Add to Your Year-End Checklist (Part 2)
Another item to keep in mind is qualified distributions (QCDs) for 2009. We have previously written about QCDs in this column. This tax law provision is due to expire on 12/31/2009. If you are age 70 1/2 or older you can have a maximum of $100,000 directly transferred from your IRA to your favorite charity. Withdrawing these funds will not be considered income and thus will not be taxable to you. You also will not receive a charitable deduction. This may prove to be the only time in history that you will be able to take money out of your traditional IRA without paying income tax.
If you have inherited an IRA in 2008 and you are one of several beneficiaries, you have until 12/31/ 2009 to split the inherited account into separate accounts for each beneficiary. For example: you and your sister and brother have inherited an IRA from your mother. You would want to establish three IRAs. These IRAs will all be in the name of your mother as inherited IRAs for the benefit of an individual child. If you do not split the account by 12/31 of the year following the death of your mother, all 3 children will be forced to use the life expectancy of the oldest sibling for required minimum distributions (RMDs). With separate accounts each child can use their own age to measure their life expectancy. If the ages of the 3 children were as follows: child one, age 50, child two, age 55, and child three, age 60, then the life expectancy of each child would be 34.2 years, 29.2 years and 25.2 years, respectively.
That means that child one has to take an RMD of 1/34.2, child two 1/29.6 and child three of 1/34.2. The younger siblings can stretch payments over a longer period rather than having to use the age of the oldest. Each of these life expectancy factors will be reduced by one in each subsequent year. There are no RMDs in 2009 for IRAs, including inherited IRAs, but the requirement that the accounts be split is not changed or extended.
Year-end is also a good time to check your beneficiary designation forms to see if any changes need to be made. Be sure to included both primary and contingent beneficiaries on all your beneficiary forms.
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 Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
If you have inherited an IRA in 2008 and you are one of several beneficiaries, you have until 12/31/ 2009 to split the inherited account into separate accounts for each beneficiary. For example: you and your sister and brother have inherited an IRA from your mother. You would want to establish three IRAs. These IRAs will all be in the name of your mother as inherited IRAs for the benefit of an individual child. If you do not split the account by 12/31 of the year following the death of your mother, all 3 children will be forced to use the life expectancy of the oldest sibling for required minimum distributions (RMDs). With separate accounts each child can use their own age to measure their life expectancy. If the ages of the 3 children were as follows: child one, age 50, child two, age 55, and child three, age 60, then the life expectancy of each child would be 34.2 years, 29.2 years and 25.2 years, respectively.
That means that child one has to take an RMD of 1/34.2, child two 1/29.6 and child three of 1/34.2. The younger siblings can stretch payments over a longer period rather than having to use the age of the oldest. Each of these life expectancy factors will be reduced by one in each subsequent year. There are no RMDs in 2009 for IRAs, including inherited IRAs, but the requirement that the accounts be split is not changed or extended.
Year-end is also a good time to check your beneficiary designation forms to see if any changes need to be made. Be sure to included both primary and contingent beneficiaries on all your beneficiary forms.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Add To Your Year-End Checklist (Part 1)
As we approach year-end, there are several retirement account items that you should review to insure you are taking full advantage of all funding and tax saving opportunities.
First and foremost, make sure you have fully funded your retirement plans, if you can afford to do so. This would include but not be limited to:
First and foremost, make sure you have fully funded your retirement plans, if you can afford to do so. This would include but not be limited to:
- 401(k) contributions
- Maximum contributions for 2009; $16,500 salary deferral and if age 50 or older by 12/31/2009 you can add an additional $5,500.
- You may also be entitled to a company match if the plan provides a match
IRA or Roth IRA contributions - maximum contributions for 2009, $5,000 if you earned income equal or greater than $5,000 plus an additional $1,000 if age 50 or older by 12/31/2009. To make a Roth IRA contribution, you income must not exceed certain levels that depend on your tax filing status.
IRA or Roth IRA contributions - for a spouse who has little or no income for the year. The same contribution rules as above will apply.
IRA contributions can be made up to 4/15/2010 for year 2009.
MORE ADDITIONS TO THE YEAR-END CHECKLIST WILL BE POSTED LATER ON TUESDAY.
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 Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Thursday, December 3, 2009
Slott Report Mailbag: December 3rd
Here is this week's Slott Report Mailbag.
1.
My wife and I have $600,000 (she has $500,000 and I have $100,000) in IRAs (403(b) originally). We do not need this money. We are both retired school teachers and have an annual income of $160,000, pensions and stock dividends. I also have $100,000 in a Roth. We have $1,700,000 in stocks, bonds, etc. with a brokerage account. We own three houses free and clear, including the one we live in. We rent one house and other is occupied by our two sons.
It is our desire to have this money for our grandsons, ages 23, 14 and 6. We are 71 and 68 and in fair health. We are considering converting the $600,000 to a Roth in 2010.
Questions: Should we convert all and pay tax in 2010 when tax rates will be lower or take advantage of reporting $300,000 each in 2011 and 2012 with possible higher tax rates? Or do we report $200,000 in 2010 and $200,000 each in 2011 and 2012 or do something else?
I would like to get this all over sooner rather than later as we will be subject to higher Medicare premiums during these years and I wish to make things as easy as possible for my wife as she does not manage the money in our household.
Best Regards!
Answer:
Congratulations on doing a good job in saving for retirement.
Unfortunately, no one knows for sure where tax rates may be in the next several years. Most experts conclude, however, that they will increase. You can pay the tax on the conversion in 2010 and be finished paying the tax. Or you can add half of the conversion amount to your income in 2011 and the other half in 2012. The tax will be due based on your tax bracket in those years. If you don't pay the tax in 2010 your only option is to pay it in 2011 and 2012. You can not pay part of it in 2010, 2011 and 2012 nor can you pay all of it in 2011 or 2012.
Yes, it is better to pay the tax due from other non-IRA assets.
2.
Regarding Roth IRA conversions for the purpose of estate planning, it's widely known that when the Roth account holder dies and the Roth gets passed on to his heirs (assuming that the deceased's spouse does not get the account instead, meaning the hopeful heirs will have to wait until he/she dies too), the heirs have to undertake mandatory distributions, which will at least be tax-free. In other words, they can't just let the Roth funds sit in the account and watch them continue to grow tax-free -- that's almost like having your cake and eating it too.
However, there's at lease one exception to that which I'm not clear on. It has to do with whether the party who originated the Roth IRA (such as from a traditional IRA conversion) dies within five years after the account was initially created. What happens in that case?
Also, I've heard that if the deceased indeed died within that five-year period, but he also had a second Roth IRA that was over five years old, then that can affect the situation too. Exactly how do these exceptions work?
Howard S. Sample
Toledo, Ohio
Answer:
You are correct in that required minimum distributions must commence to the beneficiary the year following the Roth IRA owner's death. The distributions will generally be tax free. The beneficiary can always take out the converted amount without income tax or penalty. If the beneficiary takes out the earnings before five years have passed since the Roth account was established, they will have to pay income tax on that amount. There is no 10% penalty because death is an exception to the 10% penalty. IRS considers the first money out as the converted amount and when that is all gone then the rest is considered earnings. The five-year clock for this rule starts when the Roth IRA owner establishes their first Roth IRA. It does not start over again when a subsequent Roth IRA is established.
3.
Hi Ed and Company,
I already have a Rollover IRA account from when I left a job in 2007, and rolled over my 401(k).
I've just resigned from my last job. Is it possible to take my existing 401(k) and roll it over into the existing Rollover IRA, or do I have to open a new Rollover IRA account?
Answer:
It is your option. You can roll over your existing 401(k) to an existing IRA or put it into a new IRA.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow 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 and I have $600,000 (she has $500,000 and I have $100,000) in IRAs (403(b) originally). We do not need this money. We are both retired school teachers and have an annual income of $160,000, pensions and stock dividends. I also have $100,000 in a Roth. We have $1,700,000 in stocks, bonds, etc. with a brokerage account. We own three houses free and clear, including the one we live in. We rent one house and other is occupied by our two sons.
It is our desire to have this money for our grandsons, ages 23, 14 and 6. We are 71 and 68 and in fair health. We are considering converting the $600,000 to a Roth in 2010.
Questions: Should we convert all and pay tax in 2010 when tax rates will be lower or take advantage of reporting $300,000 each in 2011 and 2012 with possible higher tax rates? Or do we report $200,000 in 2010 and $200,000 each in 2011 and 2012 or do something else?
I would like to get this all over sooner rather than later as we will be subject to higher Medicare premiums during these years and I wish to make things as easy as possible for my wife as she does not manage the money in our household.
Best Regards!
Answer:
Congratulations on doing a good job in saving for retirement.
Unfortunately, no one knows for sure where tax rates may be in the next several years. Most experts conclude, however, that they will increase. You can pay the tax on the conversion in 2010 and be finished paying the tax. Or you can add half of the conversion amount to your income in 2011 and the other half in 2012. The tax will be due based on your tax bracket in those years. If you don't pay the tax in 2010 your only option is to pay it in 2011 and 2012. You can not pay part of it in 2010, 2011 and 2012 nor can you pay all of it in 2011 or 2012.
Yes, it is better to pay the tax due from other non-IRA assets.
2.
Regarding Roth IRA conversions for the purpose of estate planning, it's widely known that when the Roth account holder dies and the Roth gets passed on to his heirs (assuming that the deceased's spouse does not get the account instead, meaning the hopeful heirs will have to wait until he/she dies too), the heirs have to undertake mandatory distributions, which will at least be tax-free. In other words, they can't just let the Roth funds sit in the account and watch them continue to grow tax-free -- that's almost like having your cake and eating it too.
However, there's at lease one exception to that which I'm not clear on. It has to do with whether the party who originated the Roth IRA (such as from a traditional IRA conversion) dies within five years after the account was initially created. What happens in that case?
Also, I've heard that if the deceased indeed died within that five-year period, but he also had a second Roth IRA that was over five years old, then that can affect the situation too. Exactly how do these exceptions work?
Howard S. Sample
Toledo, Ohio
Answer:
You are correct in that required minimum distributions must commence to the beneficiary the year following the Roth IRA owner's death. The distributions will generally be tax free. The beneficiary can always take out the converted amount without income tax or penalty. If the beneficiary takes out the earnings before five years have passed since the Roth account was established, they will have to pay income tax on that amount. There is no 10% penalty because death is an exception to the 10% penalty. IRS considers the first money out as the converted amount and when that is all gone then the rest is considered earnings. The five-year clock for this rule starts when the Roth IRA owner establishes their first Roth IRA. It does not start over again when a subsequent Roth IRA is established.
3.
Hi Ed and Company,
I already have a Rollover IRA account from when I left a job in 2007, and rolled over my 401(k).
I've just resigned from my last job. Is it possible to take my existing 401(k) and roll it over into the existing Rollover IRA, or do I have to open a new Rollover IRA account?
Answer:
It is your option. You can roll over your existing 401(k) to an existing IRA or put it into a new IRA.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Wednesday, December 2, 2009
Another Rollover Mistake
IRS recently released another Private Letter Ruling (PLR) granting a taxpayer an extension of time to complete a rollover. Why? Because the funds did not go back into an IRA account. Instead, they went into a regular account.
This happens all too frequently. Here's the general scenario. The IRA owner has an IRA that is invested in a CD (a certificate of deposit) or a money market account. The IRA owner decides to move the funds, usually to get a higher rate of interest. He, or she, closes out the account, takes a check payable to the account owner and then goes to a new institution to open a new account. Somewhere along the line, either they forget to mention that the funds came from an IRA or the individual opening the new account forgets to check off the box that indicates that the new account is to be an IRA account.
Bottom line, the funds go into a non-IRA account and the account owner leaves thinking the funds are in an IRA. No one checks to be sure the funds are in the correct type of account. It is usually the tax preparer who figures it out when they see the 1099-R showing the distribution. By then, it is too late to move the funds into an IRA as the 60-day rollover period has expired. The only remedy is for the account owner to apply to IRS, through a Private Letter Ruling, for an extension of time to complete the rollover. By the way, this process costs any where from $500 to $3,000 in fees to IRS in addition to the fees charged by someone to prepare the PLR.
The moral of the story, and there are so many of these stories, is that you need to check up on your IRA funds whenever you move them from one institution to another. You need to do this when you do a rollover and when you do a direct transfer. These mistakes are relatively easy to fix when you catch them right away. If you have done any transfers this year, please check up on them now, before year end.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
This happens all too frequently. Here's the general scenario. The IRA owner has an IRA that is invested in a CD (a certificate of deposit) or a money market account. The IRA owner decides to move the funds, usually to get a higher rate of interest. He, or she, closes out the account, takes a check payable to the account owner and then goes to a new institution to open a new account. Somewhere along the line, either they forget to mention that the funds came from an IRA or the individual opening the new account forgets to check off the box that indicates that the new account is to be an IRA account.
Bottom line, the funds go into a non-IRA account and the account owner leaves thinking the funds are in an IRA. No one checks to be sure the funds are in the correct type of account. It is usually the tax preparer who figures it out when they see the 1099-R showing the distribution. By then, it is too late to move the funds into an IRA as the 60-day rollover period has expired. The only remedy is for the account owner to apply to IRS, through a Private Letter Ruling, for an extension of time to complete the rollover. By the way, this process costs any where from $500 to $3,000 in fees to IRS in addition to the fees charged by someone to prepare the PLR.
The moral of the story, and there are so many of these stories, is that you need to check up on your IRA funds whenever you move them from one institution to another. You need to do this when you do a rollover and when you do a direct transfer. These mistakes are relatively easy to fix when you catch them right away. If you have done any transfers this year, please check up on them now, before year end.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Tuesday, December 1, 2009
Retirement Fears: Outliving Your Assets
George Burns summed it up well when he joked that had he known he was going to live to be 100, he would have taken better care of himself. Never has a punch line more profoundly put the aging process in the proper perspective.
Anyone who is 40 years of age today could live to be 100 years old and their grandchildren could live even longer than that. Many people express a reluctance to examine this possibility for fear they will outlive their assets.
CLICK HERE to read the entire Retirement Fears article.
Compiled by Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2009 Ed Slott and Company, LLC
Anyone who is 40 years of age today could live to be 100 years old and their grandchildren could live even longer than that. Many people express a reluctance to examine this possibility for fear they will outlive their assets.
CLICK HERE to read the entire Retirement Fears article.
Compiled by Jared Trexler
------------------------------------------------------------------------------
Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Linkbelow 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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