Here is Part 6 of an "Ask the Expert" series in The New York Times with Ed Slott, America's IRA Expert.
Slott answered three consumer questions on Roth IRAs and Roth conversions starting in 2010.
CLICK HERE to read the entire Q&A in the "Bucks" blog section of The New York Times.
Friday, January 29, 2010
Thursday, January 28, 2010
Slott Report Mailbag: January 28th
It is time for another edition of The Slott Report Mailbag.
1.
I have seen a lot of information regarding the options for folks to convert regular IRAs to Roth IRAs, and even vice versa. However, the reversion of Roth to regular seems to be only addressed IF the Roth IRA had been converted from a regular IRA to begin with. Are there opportunities for an IRA that was originally set up as a Roth IRA to be converted to a regular IRA? My wife allocated some funds in late 2009 into a Roth IRA, with the anticipation that the distribution of those funds would enjoy a lower tax rate when redeemed. However, the investment has deteriorated considerably in value in the short time that it has been in the Roth IRA and the thought is that if we convert that Roth to regular, we can--at least--write off the initial invested amount as an IRA contribution on the 2009 tax returns and take our chances in the future when the investment is distributed.
Thank you in advance for your reply.
Paul Cervenak
Oxford, Michigan
Answer:
Contributions made to a Roth IRA can be recharacterized (not converted) to a traditional IRA by October 15 of the year following the year for which such contributions are made. The recharacterization process treats the contribution as if it had been originally made to the traditional IRA instead of the Roth. If your wife has experienced a loss in the Roth IRA, the remaining balance is transferred to the traditional IRA via a trustee-to-trustee transfer, the loss is not recognized, and you record the original amount of the contribution for tax reporting purposes.
Keep in mind that if either you and/or your wife actively participates in an employer qualified pan, then the extent to which your wife's recharacterized contribution is tax deductible will be contingent on your combined modified adjusted gross income (Form W-2 issued by your employer for 2009 should note your active participant status). Take a look at the tables on page 15 in the IRS Publication 590 for the rules on Traditional IRA deduction eligibility. You can access the publication here: http://www.irs.gov/pub/irs-pdf/p590.pdf. If some or all of the recharacterized contribution is not deductible, your wife should file Form 8606 with your tax return to accurately account for the after-tax contribution to the traditional IRA.
These rules are very complicated (as you can tell) and we would certainly recommend you consult a competent, educated financial advisor.
2.
My wife and I have $100,000 in after-tax dollars in a CD. We are thinking about using that money to open a non-deductible IRA in my name. I have a rollover IRA, but I could transfer the entire IRA into my qualified plan at work. Will this make it possible for me to avoid paying any tax if I immediately convert the non-deductible IRA to a Roth IRA? My goal is to generate tax-free earnings.
Also, can I take out some of the basis tax free if I need to, or would any withdrawals be considered income? I'm 52 and my wife is 53.
Some other facts which may or may not be pertinent: My income will be $80,000 to $120,000 for the next few years, and deductions are such that I could qualify for a deductible IRA if I wanted to, but I have all the tax shelter I can afford through my 401(k). My wife's income will be about $12,000. She has a traditional IRA worth $17,000 but no plan at work to roll it into. I also have assets still in a qualified plan from a previous employer. My current plan is a sole proprietor 401(k)
Thanks,
Ralph
Answer:
Even your after-tax dollars are subject to the IRA and Roth IRA contribution rules. You can open a non-deductible IRA but the maximum you can contribute for 2009 & 2010 is $5,000 for each year plus the $1,000 catch-up contribution since you are over age 50. You could consider contributing $5,000 directly to a Roth IRA if you are filing a joint tax return and your combined income does not exceed $176,000.
From a Roth IRA you can always withdraw what you put into the Roth without income tax. After you have withdrawn all that money then you would be subject to income tax on the earnings unless you satisfy the requirements that would allow you to take tax-free and penalty-free distributions (i.e. age 59 1/2, and five years after your first Roth IRA was established).
3.
I am over 65. If I transfer my IRA account to a Roth, and pay taxes due, how long a period must I wait prior to removing funds from the Roth without incurring penalty?
Answer:
You can always take a distribution of basis from the Roth IRA. Basis is annual contributions and converted amounts. Those distributions will not be taxed when they are withdrawn as they were subject to income tax when they went into the Roth IRA (or they were already after-tax amounts).
There are what is referred to as ordering rules that apply to distributions from Roth IRAs.
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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 2010 Ed Slott and Company, LLC
1.
I have seen a lot of information regarding the options for folks to convert regular IRAs to Roth IRAs, and even vice versa. However, the reversion of Roth to regular seems to be only addressed IF the Roth IRA had been converted from a regular IRA to begin with. Are there opportunities for an IRA that was originally set up as a Roth IRA to be converted to a regular IRA? My wife allocated some funds in late 2009 into a Roth IRA, with the anticipation that the distribution of those funds would enjoy a lower tax rate when redeemed. However, the investment has deteriorated considerably in value in the short time that it has been in the Roth IRA and the thought is that if we convert that Roth to regular, we can--at least--write off the initial invested amount as an IRA contribution on the 2009 tax returns and take our chances in the future when the investment is distributed.
Thank you in advance for your reply.
Paul Cervenak
Oxford, Michigan
Answer:
Contributions made to a Roth IRA can be recharacterized (not converted) to a traditional IRA by October 15 of the year following the year for which such contributions are made. The recharacterization process treats the contribution as if it had been originally made to the traditional IRA instead of the Roth. If your wife has experienced a loss in the Roth IRA, the remaining balance is transferred to the traditional IRA via a trustee-to-trustee transfer, the loss is not recognized, and you record the original amount of the contribution for tax reporting purposes.
Keep in mind that if either you and/or your wife actively participates in an employer qualified pan, then the extent to which your wife's recharacterized contribution is tax deductible will be contingent on your combined modified adjusted gross income (Form W-2 issued by your employer for 2009 should note your active participant status). Take a look at the tables on page 15 in the IRS Publication 590 for the rules on Traditional IRA deduction eligibility. You can access the publication here: http://www.irs.gov/pub/irs-pdf/p590.pdf. If some or all of the recharacterized contribution is not deductible, your wife should file Form 8606 with your tax return to accurately account for the after-tax contribution to the traditional IRA.
These rules are very complicated (as you can tell) and we would certainly recommend you consult a competent, educated financial advisor.
2.
My wife and I have $100,000 in after-tax dollars in a CD. We are thinking about using that money to open a non-deductible IRA in my name. I have a rollover IRA, but I could transfer the entire IRA into my qualified plan at work. Will this make it possible for me to avoid paying any tax if I immediately convert the non-deductible IRA to a Roth IRA? My goal is to generate tax-free earnings.
Also, can I take out some of the basis tax free if I need to, or would any withdrawals be considered income? I'm 52 and my wife is 53.
Some other facts which may or may not be pertinent: My income will be $80,000 to $120,000 for the next few years, and deductions are such that I could qualify for a deductible IRA if I wanted to, but I have all the tax shelter I can afford through my 401(k). My wife's income will be about $12,000. She has a traditional IRA worth $17,000 but no plan at work to roll it into. I also have assets still in a qualified plan from a previous employer. My current plan is a sole proprietor 401(k)
Thanks,
Ralph
Answer:
Even your after-tax dollars are subject to the IRA and Roth IRA contribution rules. You can open a non-deductible IRA but the maximum you can contribute for 2009 & 2010 is $5,000 for each year plus the $1,000 catch-up contribution since you are over age 50. You could consider contributing $5,000 directly to a Roth IRA if you are filing a joint tax return and your combined income does not exceed $176,000.
From a Roth IRA you can always withdraw what you put into the Roth without income tax. After you have withdrawn all that money then you would be subject to income tax on the earnings unless you satisfy the requirements that would allow you to take tax-free and penalty-free distributions (i.e. age 59 1/2, and five years after your first Roth IRA was established).
3.
I am over 65. If I transfer my IRA account to a Roth, and pay taxes due, how long a period must I wait prior to removing funds from the Roth without incurring penalty?
Answer:
You can always take a distribution of basis from the Roth IRA. Basis is annual contributions and converted amounts. Those distributions will not be taxed when they are withdrawn as they were subject to income tax when they went into the Roth IRA (or they were already after-tax amounts).
There are what is referred to as ordering rules that apply to distributions from Roth IRAs.
- Contributions come out first.
- Converted amounts come out next.
- Earnings come out last.
In order for the distributions from the Roth IRA to be free of all tax and penalty they must be qualified distributions. Here are the requirements to be a qualified distribution:
You must have had a Roth IRA (any Roth IRA) open for five years AND:
- You must be age 59 1/2 or older OR
- The distribution is due to death OR
- The distribution is due to the disability of the account owner OR
- The distribution qualifies for the first-time homebuyer exception
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*Copyright 2010 Ed Slott and Company, LLC
SF Chronicle: Examining Impact of Obama's Plans
Barack Obama gave his first State of the Union Address last night to a joint session of Congress and to a worried public.
Kathleen Pender examined the impact on many of Obama's plans in a January 26th article.
One of Obama's ideas was to establish automatic IRAs. According to Pender's article, "The plan would require employers who do not offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out."
Ed Slott worries that the plan could put an unnecessary burden on small employers at a time when the Obama administration is trying to convince them to hire more workers. "It would be a horror to force small businesses to go down that road on top of all the other administrative burdens."
CLICK HERE to read Pender's complete analysis.
Kathleen Pender examined the impact on many of Obama's plans in a January 26th article.
One of Obama's ideas was to establish automatic IRAs. According to Pender's article, "The plan would require employers who do not offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out."
Ed Slott worries that the plan could put an unnecessary burden on small employers at a time when the Obama administration is trying to convince them to hire more workers. "It would be a horror to force small businesses to go down that road on top of all the other administrative burdens."
CLICK HERE to read Pender's complete analysis.
Market Watch: 3 simple steps to financially secure retirement
Everyone wants to know how to be more financially secure in their retirement.
MarketWatch's Jonathan Burton wrote a January 26th article about how investors have avoided stocks even after the market's climb back to somewhat respectability.
People are still suffering from "uncertainty, mistrust, cynicism", according to Burton.
One of the ways to build a financially secure retirement, according to the article, is a Roth conversion.
As Ed Slott said, "I did it. Now this money is going to grow for me tax-free forever. I think we are in the lowest tax rates we'll ever see for the rest of our lives. This is the deal of the century."
CLICK HERE to read the entire article.
MarketWatch's Jonathan Burton wrote a January 26th article about how investors have avoided stocks even after the market's climb back to somewhat respectability.
People are still suffering from "uncertainty, mistrust, cynicism", according to Burton.
One of the ways to build a financially secure retirement, according to the article, is a Roth conversion.
As Ed Slott said, "I did it. Now this money is going to grow for me tax-free forever. I think we are in the lowest tax rates we'll ever see for the rest of our lives. This is the deal of the century."
CLICK HERE to read the entire article.
Market Watch: 12 Traps to Avoid with Roth Conversions
This January 25th article in Market Watch is a great precursor to Ed Slott's FREE 1-Hour Webcast, 15 Roth IRA Conversion Traps, which will be accessible on our website in the next day or two through February 26th.
The Slott Report will have immediate information on that webcast, but in the meantime, Robert Powell of Market Watch talked about 12 traps to avoid when converting to a Roth and used the assistance of Ed Slott, America's IRA Expert.
CLICK HERE to read the article and find out the 12 traps Powell discussed.
The Slott Report will have immediate information on that webcast, but in the meantime, Robert Powell of Market Watch talked about 12 traps to avoid when converting to a Roth and used the assistance of Ed Slott, America's IRA Expert.
CLICK HERE to read the article and find out the 12 traps Powell discussed.
Tuesday, January 26, 2010
Roth Conversion of an Annuity May Hold a Surprise
Any IRA or employer plan can now be converted to a Roth IRA. But for owners of retirement assets that are invested in an annuity, there could be a little surprise come tax time.
Many individuals invest their tax-deferred retirement assets in a tax-deferred annuity. This seems counter-intuitive so why would anyone do this? Many times the answer is for the guarantees that are in the annuity. For example, you can have a guaranteed living benefit or a guaranteed death benefit. With the recent drops in the market, sometimes these guaranteed benefits are worth more than the annuity itself.
So, what happens if you convert this annuity to a Roth IRA? Many individuals, and many advisors, assume the value of the annuity for conversion purposes is its surrender or cash value only, but they would be wrong. At the time of the conversion, the value of the annuity will include a current value for any guaranteed benefits in the annuity. You can only find out this number from the insurance company holding the annuity. The company will report this value to IRS, and to the individual, on the Form 1099-R that they issue. This is the amount that will have to be included in income, not the cash surrender value, when the individual files their tax return for the year of conversion.
That's the bad news. The good news is, if you get a surprise like this, you can recharacterize the conversion up to October 15th of the year after the conversion.
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 2010 Ed Slott and Company, LLC
Many individuals invest their tax-deferred retirement assets in a tax-deferred annuity. This seems counter-intuitive so why would anyone do this? Many times the answer is for the guarantees that are in the annuity. For example, you can have a guaranteed living benefit or a guaranteed death benefit. With the recent drops in the market, sometimes these guaranteed benefits are worth more than the annuity itself.
So, what happens if you convert this annuity to a Roth IRA? Many individuals, and many advisors, assume the value of the annuity for conversion purposes is its surrender or cash value only, but they would be wrong. At the time of the conversion, the value of the annuity will include a current value for any guaranteed benefits in the annuity. You can only find out this number from the insurance company holding the annuity. The company will report this value to IRS, and to the individual, on the Form 1099-R that they issue. This is the amount that will have to be included in income, not the cash surrender value, when the individual files their tax return for the year of conversion.
That's the bad news. The good news is, if you get a surprise like this, you can recharacterize the conversion up to October 15th of the year after the conversion.
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 2010 Ed Slott and Company, LLC
Monday, January 25, 2010
Qualified Charitable Distributions (QCDs) Ended 12/31/09
As you may recall from previous articles appearing here, a provision in the Pension Protection Act of 2006 (PPA 06) allowed IRA owners and beneficiaries age 70 1/2 and older to make tax-free distributions of otherwise taxable dollars from traditional IRAs and Roth IRAs to qualified charitable organizations. Such distributions were also allowed to be made from SEP IRAs and SIMPLE IRAs provided no employer contributions were made for the same tax year. The QCDs were limited to $100,000 per year, per IRA owner or beneficiary, and the check had to be payable directly to the eligible charity. While this provision originally expired on December 31, 2007, it was retroactively extended through December 31, 2009 by the Emergency Stabilization Act of 2008. As of this writing, legislation that would allow QCDs to be made beyond 2009 has not been passed.
A bill currently under consideration in Congress would reactivate QCDs for 2010. There appears to be much support among legislators for bringing back QCDs this year, so perhaps the bill stands a good chance of being passed. Until then, if you are age 70 1/2 or older and want to give money to your favorite charity you may want to wait a bit to make that donation. If QCDs are resurrected this year, you will be able to use up to $100,000 of your IRA to make your charitable donation while completely avoiding income tax. The distribution will also satisfy your required minimum distribution (RMD), up to 100,000, for the year.
Keep in mind that if QCDs do not reappear in 2010, RMDs for traditional IRA owners in their second or later distribution year, and for inheriting beneficiaries, must be completely distributed by December 31st in order to avoid a 50% tax penalty.
We will continue to keep you updated on the status of QCDs for 2010. Stay tuned to The Slott Report for future commentary.
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 2010 Ed Slott and Company, LLC
A bill currently under consideration in Congress would reactivate QCDs for 2010. There appears to be much support among legislators for bringing back QCDs this year, so perhaps the bill stands a good chance of being passed. Until then, if you are age 70 1/2 or older and want to give money to your favorite charity you may want to wait a bit to make that donation. If QCDs are resurrected this year, you will be able to use up to $100,000 of your IRA to make your charitable donation while completely avoiding income tax. The distribution will also satisfy your required minimum distribution (RMD), up to 100,000, for the year.
Keep in mind that if QCDs do not reappear in 2010, RMDs for traditional IRA owners in their second or later distribution year, and for inheriting beneficiaries, must be completely distributed by December 31st in order to avoid a 50% tax penalty.
We will continue to keep you updated on the status of QCDs for 2010. Stay tuned to The Slott Report for future commentary.
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 2010 Ed Slott and Company, LLC
Friday, January 22, 2010
NY Times Blog: Ed Slott on Roth IRAs (Part 5)
Ed Slott continued his series of answering consumer questions about Roth IRAs in the "Bucks" section of The New York Times.
America's IRA Expert answered two questions in the fifth installment of the series. Both questions dealt in part with non-deductible IRAs and individuals over the income limit for Roth contributions.
CLICK HERE to read the entire Q&A session in The New York Times.
America's IRA Expert answered two questions in the fifth installment of the series. Both questions dealt in part with non-deductible IRAs and individuals over the income limit for Roth contributions.
CLICK HERE to read the entire Q&A session in The New York Times.
NY Times Blog: Ed Slott on Roth IRAs (Part 4)
Ed Slott continued his series of answering consumer questions about Roth IRAs in the "Bucks" section of The New York Times.
America's IRA Expert answered consumer questions on the pro-rata rule and partial Roth IRA conversions.
CLICK HERE to read the entire Q&A in The New York Times.
America's IRA Expert answered consumer questions on the pro-rata rule and partial Roth IRA conversions.
CLICK HERE to read the entire Q&A in The New York Times.
NY Times Blog: Ed Slott on Roth IRAs (Part 3)
Ed Slott continued his series of answering consumer questions about Roth IRA conversions in the "Bucks" section of The New York Times.
The "Ask an Expert" section brought in America's IRA Expert to answer consumer questions. The first of three questions dealt with income restrictions when dealing with Roth IRA contributions.
As Slott pointed out, "The income restrictions on Roth contributions were not lifted. They still exist. There are two ways to get money into a Roth IRA. One is to make regular contributions and the other is to convert existing IRAs or company plans to a Roth IRA."
CLICK HERE to read the entire Q&A session with Ed Slott.
The "Ask an Expert" section brought in America's IRA Expert to answer consumer questions. The first of three questions dealt with income restrictions when dealing with Roth IRA contributions.
As Slott pointed out, "The income restrictions on Roth contributions were not lifted. They still exist. There are two ways to get money into a Roth IRA. One is to make regular contributions and the other is to convert existing IRAs or company plans to a Roth IRA."
CLICK HERE to read the entire Q&A session with Ed Slott.
Thursday, January 21, 2010
Slott Report Mailbag: January 21st
Here is another version of The Slott Report Mailbag with a question we are getting a lot lately along with a detailed answer.
1.
I'd like to take advantage of the special IRS tax treatment of Roth conversions in 2010 and pay some of the tax on the conversion in April 2012 and April 2013. Do you know how the IRS will treat this taxable income over the next three years?
I'd convert a large sum this year, if the IRS rules allow, and claim 1/3 of the converted funds as 2010 income (paid in April 2011), 1/3 in 2011 (paid in April 2012) and the last 1/3 in 2012 (paid in April 2013).
Less than ideal to make a choice and either pay all the taxes in 2010 on all the converted funds or split the income between 2012 and 2012 and pay the taxes in 2012 and 2013.
Thanks,
Mark Crossler
2.
I have followed Ed's contributions to "Bottomline" and other similar publications for several years. Here is my issue.
I have $30,000 in a rollover traditional IRA. I wish to convert 100% of it in 2010 into a Roth. My ideal situation would be to pay 1/3 of the taxes in '10, 1/3 in '11 and 1/3 in '12. I have read several articles indicating that if one makes a contribution in '10 they have a one-time option to pay 50% of the tax due in '11 and 50% due in '12. However, I have not seen the issue addressed as to the option to pay a portion of the taxes in 2010 if you wish to exercise the delayed tax payment in 2011 and 2012.
Thanks,
James P. Selm
Answer:
We can answer both questions with one detailed answer.
For Roth conversions in 2010, you have the following options: pay all of the income tax due on the conversion amount in 2010 (your tax return for 2010) or if you choose not to pay the income tax in 2010 you can spread the conversion amount over 2011 and 2012. One half the converted amount in 2011 and one half in 2012. The income tax due will be based on your income in those years as well as the tax rates in effect at that time. You cannot do one third for each year as you suggested.
You can pay the taxes over three years by simply doing three conversions. The first one would be in 2010 and you would elect to pay all the tax in 2010. The second one would be in 2011 and the third one in 2012. The risk you run by doing it this way is that the account value might increase and cost extra taxes to do the conversion.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
1.
I'd like to take advantage of the special IRS tax treatment of Roth conversions in 2010 and pay some of the tax on the conversion in April 2012 and April 2013. Do you know how the IRS will treat this taxable income over the next three years?
I'd convert a large sum this year, if the IRS rules allow, and claim 1/3 of the converted funds as 2010 income (paid in April 2011), 1/3 in 2011 (paid in April 2012) and the last 1/3 in 2012 (paid in April 2013).
Less than ideal to make a choice and either pay all the taxes in 2010 on all the converted funds or split the income between 2012 and 2012 and pay the taxes in 2012 and 2013.
Thanks,
Mark Crossler
2.
I have followed Ed's contributions to "Bottomline" and other similar publications for several years. Here is my issue.
I have $30,000 in a rollover traditional IRA. I wish to convert 100% of it in 2010 into a Roth. My ideal situation would be to pay 1/3 of the taxes in '10, 1/3 in '11 and 1/3 in '12. I have read several articles indicating that if one makes a contribution in '10 they have a one-time option to pay 50% of the tax due in '11 and 50% due in '12. However, I have not seen the issue addressed as to the option to pay a portion of the taxes in 2010 if you wish to exercise the delayed tax payment in 2011 and 2012.
Thanks,
James P. Selm
Answer:
We can answer both questions with one detailed answer.
For Roth conversions in 2010, you have the following options: pay all of the income tax due on the conversion amount in 2010 (your tax return for 2010) or if you choose not to pay the income tax in 2010 you can spread the conversion amount over 2011 and 2012. One half the converted amount in 2011 and one half in 2012. The income tax due will be based on your income in those years as well as the tax rates in effect at that time. You cannot do one third for each year as you suggested.
You can pay the taxes over three years by simply doing three conversions. The first one would be in 2010 and you would elect to pay all the tax in 2010. The second one would be in 2011 and the third one in 2012. The risk you run by doing it this way is that the account value might increase and cost extra taxes to do the conversion.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Ed Slott's 2-Day IRA Workshop Reminder
Ed Slott and Company's 2-Day IRA Workshop, Instant IRA Success, is LESS THAN 2 MONTHS AWAY on March 19-20 in Orlando, Florida.
CLICK HERE for more information on the 2-Day IRA Workshop.
Ed Slott and Company will be heavily covering 2010 Roth Conversion Planning at this 2-day event. You can also call our office at 215-557-7022 for more information and group discounts.
CLICK HERE for more information on the 2-Day IRA Workshop.
Ed Slott and Company will be heavily covering 2010 Roth Conversion Planning at this 2-day event. You can also call our office at 215-557-7022 for more information and group discounts.
Wednesday, January 20, 2010
Can You Still do a 2009 IRA Contribution or Roth Conversion?
Most taxpayers know that you make IRA or Roth IRA contributions up to April 15th for last year (if you are eligible to make a contribution in the first place). You must let the IRA custodian know that your contribution is for the prior year and it must be received by April 15th. In some cases, you may be able to go by a postmark, but I would check with your IRA custodian before you try that. Also, don't just drop off your contribution at the nearest office or branch without some sort of a cover letter to let someone, anyone, at the institution know what you are doing.
Do these same rules hold true for Roth conversions? NO, they do not. In order to have a Roth conversion for 2009, the funds must leave the IRA by December 31, 2009. There is no extension on that date. If the funds leave the institution on January 1, 2010, then you have a conversion for 2010.
Now, to go back to the issue of contributions. I know you are asking "What are the requirements for making contributions?" First of all, you must have earned income. The safe harbor is income reported on a W-2 form. For IRAs, there are no income limits for making a contribution. For Roth IRAs, there are income limits.
2009 $166,000-$176,000 (married/joint) $105,000-$120,000 (single or head of household)
2010 $167,000-$177,000 (married/joint) $105,000-$120,000 (single or house of household)
If you file married-separate, your phase-out range is $0-$10,000.
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 2010 Ed Slott and Company, LLC
Do these same rules hold true for Roth conversions? NO, they do not. In order to have a Roth conversion for 2009, the funds must leave the IRA by December 31, 2009. There is no extension on that date. If the funds leave the institution on January 1, 2010, then you have a conversion for 2010.
Now, to go back to the issue of contributions. I know you are asking "What are the requirements for making contributions?" First of all, you must have earned income. The safe harbor is income reported on a W-2 form. For IRAs, there are no income limits for making a contribution. For Roth IRAs, there are income limits.
2009 $166,000-$176,000 (married/joint) $105,000-$120,000 (single or head of household)
2010 $167,000-$177,000 (married/joint) $105,000-$120,000 (single or house of household)
If you file married-separate, your phase-out range is $0-$10,000.
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 2010 Ed Slott and Company, LLC
Tuesday, January 19, 2010
Retirement Fears: John's Tutorial on Self-Directed IRAs
Our newest Retirement Fears provides "John" and all of you with a tutorial on the questions to ask and the information to know about investments and self-directed IRAs.
The piece touches on stocks, bonds, mutual funds, real estate and several more types of assets.
CLICK HERE to read the entire article. Remember, that "John" will not know the full picture until he meets with a competent, education financial advisor.
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 2010 Ed Slott and Company, LLC
The piece touches on stocks, bonds, mutual funds, real estate and several more types of assets.
CLICK HERE to read the entire article. Remember, that "John" will not know the full picture until he meets with a competent, education financial advisor.
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 2010 Ed Slott and Company, LLC
SF Chronicle Double Dip: IRAs to Roths
Kathleen Pender wrote an article in the San Francisco Chronicle on January 16th about the abolished income restriction on Roth IRA conversions and went into details on the benefits of Roth conversions.
Pender also assessed "who should convert" and quoted Ed Slott, America's IRA Expert, as saying, "Once you take the tax hit (with a Roth conversion), you never have to withdraw in your lifetime and it can just build tax free for your heirs."
CLICK HERE to read the article in its entirety.
Pender then followed up with a January 19th article providing more help on converting traditional IRAs to Roths. She took consumer questions as a follow-up to the January 16th column.
One of the questions dealt with Roth recharacterizations and the benefit of converting three stocks into three separate Roth IRAs so you can cherry-pick which ones increase or decrease in value and recharacterize the devalued accounts by October 2011.
If you put them all in one Roth IRA account you don't get to recognize all of the losses when you recharacterize and you lose some of the Roth conversion benefits.
"You may have to pay a separate conversion or Roth custodial fee on each account," said Ed Slott and Company IRA Technical Consultant Jeffrey Levine.
CLICK HERE to read the Q&A in its entirety.
Pender also assessed "who should convert" and quoted Ed Slott, America's IRA Expert, as saying, "Once you take the tax hit (with a Roth conversion), you never have to withdraw in your lifetime and it can just build tax free for your heirs."
CLICK HERE to read the article in its entirety.
Pender then followed up with a January 19th article providing more help on converting traditional IRAs to Roths. She took consumer questions as a follow-up to the January 16th column.
One of the questions dealt with Roth recharacterizations and the benefit of converting three stocks into three separate Roth IRAs so you can cherry-pick which ones increase or decrease in value and recharacterize the devalued accounts by October 2011.
If you put them all in one Roth IRA account you don't get to recognize all of the losses when you recharacterize and you lose some of the Roth conversion benefits.
"You may have to pay a separate conversion or Roth custodial fee on each account," said Ed Slott and Company IRA Technical Consultant Jeffrey Levine.
CLICK HERE to read the Q&A in its entirety.
Monday, January 18, 2010
Sun-Sentinel: Six Mistakes to Avoid When Converting to Roth IRA
Robert Powell of Marketwatch wrote a January 11th article titled, "Roth it right: Six mistakes to avoid when converting to a Roth IRA."
The first mistake is the most basic, but also maybe the most important: Neglecting to do the conversion. Ed Slott and Company IRA Technical Consultant Beverly DeVeny said: "Conversions are not for everyone, but the No. 1 mistake to avoid is to not do a conversion at all.
"Why would you not want to pay taxes today at known -- and probably very low rates -- to get tax-free income at a later date (probably at higher and maybe much higher rates)?"
CLICK HERE to read the five other mistakes to avoid.
The first mistake is the most basic, but also maybe the most important: Neglecting to do the conversion. Ed Slott and Company IRA Technical Consultant Beverly DeVeny said: "Conversions are not for everyone, but the No. 1 mistake to avoid is to not do a conversion at all.
"Why would you not want to pay taxes today at known -- and probably very low rates -- to get tax-free income at a later date (probably at higher and maybe much higher rates)?"
CLICK HERE to read the five other mistakes to avoid.
Friday, January 15, 2010
New York Times Blog: Ed Slott Answers Your Questions (Part 2)
Last week, we published the first part of a two-part Q&A session between consumers and Ed Slott, America's IRA Expert, on Roth IRA Conversion Planning.
In this second installment, Ed Slott answers three consumer questions on Roth conversions in the "Bucks" section of The New York Times.
CLICK HERE to read the article in its entirety.
In this second installment, Ed Slott answers three consumer questions on Roth conversions in the "Bucks" section of The New York Times.
CLICK HERE to read the article in its entirety.
Thursday, January 14, 2010
Slott Report Mailbag: January 14th
It is time for another edition of The Slott Report Mailbag with three consumer questions and answers from our IRA Technical Consultants.
1.
Thanks for your very informative website, which was recommended by The Wall Street Journal. Just to be sure, I have two questions: My wife and I are both age 72 and in very good health. I manage her traditional IRA through TD-AMERITRADE and have quite well in the past (easily beat the S&P) but don't do anything unsound, safety first by all means.
I do so by virtue of well accepted and proven "swing" trading methods spelled out in various Dr. Alexander Elder Publications, you may have heard of him. This helps me to remain active (still up at 5 am - old habits die heard), while making gains in finances if she survives me. At this time we are considering converting her traditional IRA account entirely to a Roth. We have solid, six-figure retirement income from a source separate from my wife's IRA. So, we don't anticipate needing the money from her Roth IRA anytime soon and the Roth tax advantage is very attractive to us. But one can never be sure of the future, though so we have two questions as indicated.
1. I am well aware of the 5-year rule for Roth withdrawals, but I have gotten the opinion elsewhere that the original conversion funds (what I call seed money), can be withdrawn once taxes have been paid, at least for someone aged 70 or older. Meaning that the 5-year rule only applies to earning after conversion. Am I correct in this thinking?
2. What are the rules for withdrawals of all money in a Roth, including earnings; for example, say 5 years from now she had some kind of catastrophic and debilitating illness? We use her money as a sort of life insurance/long-term-health care combo account. Thanks for your time and expertise.
Answer:
Congratulations on doing a good investment job on your IRAs. The fact that you don't think you will need the funds from your IRAs to live on is an excellent reason to consider converting to a Roth IRA. There are no required minimum distributions during the Roth owner's lifetime.
Here are the rules concerning distributions and the five-year rule for Roth IRAs:
You can always take a distribution of basis from the Roth IRA. Basis is annual contributions and converted amounts. Those distributions will not be income taxed when they are withdrawn as they were subject to income tax when they went into the Roth IRA (or they were after-tax amounts).
There are what is called ordering rules for Roth IRA distributions. Contribution amounts come out first, converted amounts come out next (first in, first out) and earnings come out last.
Distributions must be qualified distributions to be free of all takes and penalties. To be considered a qualified distribution, you must have had a Roth IRA for five years AND you must be at least 59 1/2, or the distribution is due to death, or the distribution is due to the disability of the account owner, or the distribution qualifies for the first time home buyer exemption.
The five years start with the establishment of your first Roth IRA and covers all future Roth IRAs you may establish. In other words, it only runs once. If a distribution is qualified (see above), all funds come out of the Roth IRA income tax and penalty free. If the distribution is not qualified, a distribution of earnings (see ordering rules above) will be subjected to income tax and the early distribution penalty, if applicable.
2.
Can a 50-year-old who has been in a 72(t) for 18 months do a partial conversion to a Roth? Could the above person return all funds to the IRA and "erase" the effects of the 72(t)? Then do a conversion?
Thank you!
Answer:
If you are taking payments under the 72(t) exemption you can convert all of your traditional IRA to a Roth IRA. There is no consensus of opinion as to whether you can do a partial conversion. You will, however, have to continue to take the full 72(t) payments on the account after the conversion. You can not erase the effects of the 72(t) payments when you do a conversion to a Roth IRA. Any 72(t) payments from the Roth will be income tax free because you would have paid the income tax due when you converted.
3.
Ed and Company --
I have several of your books. Can you explain the rules or choices on when income taxes are due when converting IRA(s) to Roth IRA(s) in 2010 both a)if you choose to defer to 2011 and 2012 and b)if you decide to pay in 2010?
If you are not required to make quarterly payments, are the payments only 90% required by January 15th and the remainder (<10%) style="font-weight: bold;">
Answer:
For Roth IRA conversions in 2010, the income tax on the conversion can be paid in 2010 (your 2010 income tax return) or you could chose not to pay the income tax in 2010 and pay it in 2011 and 2012. For example, if you converted $100,000 to a Roth IRA in 2010 and decide to pay the income tax due in 2011 and 2012 you would add $50,000 to your 2011 income and $50,000 to your 2012 income to compute the income tax due. The deferral to 2011 and 2012 is only for Roth conversions completed in 2010.
Regarding the payment of estimated income tax, which may or may not be due, you should consult a tax advisor.
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 2010 Ed Slott and Company, LLC
1.
Thanks for your very informative website, which was recommended by The Wall Street Journal. Just to be sure, I have two questions: My wife and I are both age 72 and in very good health. I manage her traditional IRA through TD-AMERITRADE and have quite well in the past (easily beat the S&P) but don't do anything unsound, safety first by all means.
I do so by virtue of well accepted and proven "swing" trading methods spelled out in various Dr. Alexander Elder Publications, you may have heard of him. This helps me to remain active (still up at 5 am - old habits die heard), while making gains in finances if she survives me. At this time we are considering converting her traditional IRA account entirely to a Roth. We have solid, six-figure retirement income from a source separate from my wife's IRA. So, we don't anticipate needing the money from her Roth IRA anytime soon and the Roth tax advantage is very attractive to us. But one can never be sure of the future, though so we have two questions as indicated.
1. I am well aware of the 5-year rule for Roth withdrawals, but I have gotten the opinion elsewhere that the original conversion funds (what I call seed money), can be withdrawn once taxes have been paid, at least for someone aged 70 or older. Meaning that the 5-year rule only applies to earning after conversion. Am I correct in this thinking?
2. What are the rules for withdrawals of all money in a Roth, including earnings; for example, say 5 years from now she had some kind of catastrophic and debilitating illness? We use her money as a sort of life insurance/long-term-health care combo account. Thanks for your time and expertise.
Answer:
Congratulations on doing a good investment job on your IRAs. The fact that you don't think you will need the funds from your IRAs to live on is an excellent reason to consider converting to a Roth IRA. There are no required minimum distributions during the Roth owner's lifetime.
Here are the rules concerning distributions and the five-year rule for Roth IRAs:
You can always take a distribution of basis from the Roth IRA. Basis is annual contributions and converted amounts. Those distributions will not be income taxed when they are withdrawn as they were subject to income tax when they went into the Roth IRA (or they were after-tax amounts).
There are what is called ordering rules for Roth IRA distributions. Contribution amounts come out first, converted amounts come out next (first in, first out) and earnings come out last.
Distributions must be qualified distributions to be free of all takes and penalties. To be considered a qualified distribution, you must have had a Roth IRA for five years AND you must be at least 59 1/2, or the distribution is due to death, or the distribution is due to the disability of the account owner, or the distribution qualifies for the first time home buyer exemption.
The five years start with the establishment of your first Roth IRA and covers all future Roth IRAs you may establish. In other words, it only runs once. If a distribution is qualified (see above), all funds come out of the Roth IRA income tax and penalty free. If the distribution is not qualified, a distribution of earnings (see ordering rules above) will be subjected to income tax and the early distribution penalty, if applicable.
2.
Can a 50-year-old who has been in a 72(t) for 18 months do a partial conversion to a Roth? Could the above person return all funds to the IRA and "erase" the effects of the 72(t)? Then do a conversion?
Thank you!
Answer:
If you are taking payments under the 72(t) exemption you can convert all of your traditional IRA to a Roth IRA. There is no consensus of opinion as to whether you can do a partial conversion. You will, however, have to continue to take the full 72(t) payments on the account after the conversion. You can not erase the effects of the 72(t) payments when you do a conversion to a Roth IRA. Any 72(t) payments from the Roth will be income tax free because you would have paid the income tax due when you converted.
3.
Ed and Company --
I have several of your books. Can you explain the rules or choices on when income taxes are due when converting IRA(s) to Roth IRA(s) in 2010 both a)if you choose to defer to 2011 and 2012 and b)if you decide to pay in 2010?
If you are not required to make quarterly payments, are the payments only 90% required by January 15th and the remainder (<10%) style="font-weight: bold;">
Answer:
For Roth IRA conversions in 2010, the income tax on the conversion can be paid in 2010 (your 2010 income tax return) or you could chose not to pay the income tax in 2010 and pay it in 2011 and 2012. For example, if you converted $100,000 to a Roth IRA in 2010 and decide to pay the income tax due in 2011 and 2012 you would add $50,000 to your 2011 income and $50,000 to your 2012 income to compute the income tax due. The deferral to 2011 and 2012 is only for Roth conversions completed in 2010.
Regarding the payment of estimated income tax, which may or may not be due, you should consult a tax advisor.
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 2010 Ed Slott and Company, LLC
Wednesday, January 13, 2010
2010 and the Return of RMDs
With the beginning of a new year and a new decade, comes the return of required minimum distributions (RMDs) on IRAs and defined contribution plans.
There are no changes in the RMD rules. None. You will calculate your distribution just as if 2009 did not happen. You will use the prior year end account balance -- that would be 12/31/09, not 2008. If you are the account owner, you will use the age you turn on your birthday this year to find your life expectancy factor. If you are a beneficiary, you will use the life expectancy factor determined in the year after death and subtract one from that factor for each subsequent year, including 2009.
And if you turned 70 1/2 in 2009, you do not have to take a 2009 RMD by April 1, 2010. Think of it this way. Your RMD for 2009 was $0. If you defer that until April 1, 2010, how much do you have to take out? The answer is the amount you deferred, which is $0.
But if you are required to take an RMD in 2010, don't forget to take that distribution this year. The penalty for not doing so is 50% of the amount not taken. That is not a typo; it is 50%.
If you are having problems figuring out your RMD amount, consult a qualified advisor. Don't have one? You can find a list of qualified advisors on our website. Just click on "Find an Advisor."
January 31: Deadline for issuing Form 1099-R to report IRA distributions for 2009
April 15: Deadline for making traditional IRA and Roth IRA contributions for 2009 (no extension allowed)
Deadline for calendar-year businesses to make SEP employer contributions and employee non-elective or matching SIMPLE IRA contributions for 2009 (can be up to October 15 with tax-filing extension).
May 31: Deadline for issuing Form 5498 to report year-end account balances and contributions received in 2009.
September 30: Date by which the "designated beneficiary(s)" must be identified for the IRAs of individuals who died in 2009
October 1: Standard deadline for establishing a SIMPLE IRA plan for 2010
October 15: Deadline for recharacterizing 2009 traditional IRA contributions, Roth IRA contributions, and Roth IRA conversions.
October 31: Deadline for providing either a copy of the trust agreement or a certified list of all trust beneficiaries and a description of their rights to benefits under the trust to the IRA trustee or custodian if the trust is the beneficiary of an IRA whose owner died in 2009.
November 1: Standard deadline for employers who are continuing to offer a SIMPLE IRA
plan to send 2011 elective deferral notification to eligible employees.
December 31: Deadline for taking 2010 RMDS; individuals attaining age 70 1/2 in 2010 may delay the RMD until no later than April 1, 2011.
Deadline for distributing or transferring traditional, SEP or SIMPLE IRA assets to a Roth IRA as a 2010 conversion. The income from a 2010 conversion will be reported in two equal installments for 2011 and 2012, unless the taxpayer elects to include all the income in 2010.
Deadline for establishing separate accounts for multiple beneficiaries of account owners who died in 2009. This will allow each beneficiary to use their own single life expectancy for required minimum distribution purposes instead of using the life expectancy of the oldest beneficiary.
While no specific date applies, it is always a good idea to review your IRA beneficiary form annually to make any necessary or desired changes or adjustments and to ensure you have a designation of beneficiary form on file with your IRA trustee or custodian.
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 2010 Ed Slott and Company, LLC
There are no changes in the RMD rules. None. You will calculate your distribution just as if 2009 did not happen. You will use the prior year end account balance -- that would be 12/31/09, not 2008. If you are the account owner, you will use the age you turn on your birthday this year to find your life expectancy factor. If you are a beneficiary, you will use the life expectancy factor determined in the year after death and subtract one from that factor for each subsequent year, including 2009.
And if you turned 70 1/2 in 2009, you do not have to take a 2009 RMD by April 1, 2010. Think of it this way. Your RMD for 2009 was $0. If you defer that until April 1, 2010, how much do you have to take out? The answer is the amount you deferred, which is $0.
But if you are required to take an RMD in 2010, don't forget to take that distribution this year. The penalty for not doing so is 50% of the amount not taken. That is not a typo; it is 50%.
If you are having problems figuring out your RMD amount, consult a qualified advisor. Don't have one? You can find a list of qualified advisors on our website. Just click on "Find an Advisor."
January 31: Deadline for issuing Form 1099-R to report IRA distributions for 2009
April 15: Deadline for making traditional IRA and Roth IRA contributions for 2009 (no extension allowed)
Deadline for calendar-year businesses to make SEP employer contributions and employee non-elective or matching SIMPLE IRA contributions for 2009 (can be up to October 15 with tax-filing extension).
May 31: Deadline for issuing Form 5498 to report year-end account balances and contributions received in 2009.
September 30: Date by which the "designated beneficiary(s)" must be identified for the IRAs of individuals who died in 2009
October 1: Standard deadline for establishing a SIMPLE IRA plan for 2010
October 15: Deadline for recharacterizing 2009 traditional IRA contributions, Roth IRA contributions, and Roth IRA conversions.
October 31: Deadline for providing either a copy of the trust agreement or a certified list of all trust beneficiaries and a description of their rights to benefits under the trust to the IRA trustee or custodian if the trust is the beneficiary of an IRA whose owner died in 2009.
November 1: Standard deadline for employers who are continuing to offer a SIMPLE IRA
plan to send 2011 elective deferral notification to eligible employees.
December 31: Deadline for taking 2010 RMDS; individuals attaining age 70 1/2 in 2010 may delay the RMD until no later than April 1, 2011.
Deadline for distributing or transferring traditional, SEP or SIMPLE IRA assets to a Roth IRA as a 2010 conversion. The income from a 2010 conversion will be reported in two equal installments for 2011 and 2012, unless the taxpayer elects to include all the income in 2010.
Deadline for establishing separate accounts for multiple beneficiaries of account owners who died in 2009. This will allow each beneficiary to use their own single life expectancy for required minimum distribution purposes instead of using the life expectancy of the oldest beneficiary.
While no specific date applies, it is always a good idea to review your IRA beneficiary form annually to make any necessary or desired changes or adjustments and to ensure you have a designation of beneficiary form on file with your IRA trustee or custodian.
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 2010 Ed Slott and Company, LLC
Tuesday, January 12, 2010
Where Will Ed Slott Be Next?
Every so often, The Slott Report updates where Ed Slott will be speaking next. As always, you can CLICK HERE to view Ed's complete speaking schedule.
If you or your company is interested in bringing Ed in to speak, contact Laurin Levine at 516-536-8282.
January 14:
Capital Wealth Advisors
Naples, Florida
January 19:
Nationwide
Chicago, Illinois
January 21:
Nationwide
Minneapolis, MN
January 28:
Nationwide
Columbus, OH
If you or your company is interested in bringing Ed in to speak, contact Laurin Levine at 516-536-8282.
January 14:
Capital Wealth Advisors
Naples, Florida
January 19:
Nationwide
Chicago, Illinois
January 21:
Nationwide
Minneapolis, MN
January 28:
Nationwide
Columbus, OH
Monday, January 11, 2010
Important IRA Dates to Remember in 2010
January 31: Deadline for issuing Form 1099-R to report IRA distributions for 2009
April 15: Deadline for making traditional IRA and Roth IRA contributions for 2009 (no extension allowed)
Deadline for calendar-year businesses to make SEP employer contributions and employee non-elective or matching SIMPLE IRA contributions for 2009 (can be up to October 15 with tax-filing extension).
May 31: Deadline for issuing Form 5498 to report year-end account balances and contributions received in 2009.
September 30: Date by which the "designated beneficiary(s)" must be identified for the IRAs of individuals who died in 2009
October 1: Standard deadline for establishing a SIMPLE IRA plan for 2010
October 15: Deadline for recharacterizing 2009 traditional IRA contributions, Roth IRA contributions, and Roth IRA conversions.
October 31: Deadline for providing either a copy of the trust agreement or a certified list of all trust beneficiaries and a description of their rights to benefits under the trust to the IRA trustee or custodian if the trust is the beneficiary of an IRA whose owner died in 2009.
November 1: Standard deadline for employers who are continuing to offer a SIMPLE IRA
plan to send 2011 elective deferral notification to eligible employees.
December 31: Deadline for taking 2010 RMDS; individuals attaining age 70 1/2 in 2010 may delay the RMD until no later than April 1, 2011.
Deadline for distributing or transferring traditional, SEP or SIMPLE IRA assets to a Roth IRA as a 2010 conversion. The income from a 2010 conversion will be reported in two equal installments for 2011 and 2012, unless the taxpayer elects to include all the income in 2010.
Deadline for establishing separate accounts for multiple beneficiaries of account owners who died in 2009. This will allow each beneficiary to use their own single life expectancy for required minimum distribution purposes instead of using the life expectancy of the oldest beneficiary.
While no specific date applies, it is always a good idea to review your IRA beneficiary form annually to make any necessary or desired changes or adjustments and to ensure you have a designation of beneficiary form on file with your IRA trustee or custodian.
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 2010 Ed Slott and Company, LLC
April 15: Deadline for making traditional IRA and Roth IRA contributions for 2009 (no extension allowed)
Deadline for calendar-year businesses to make SEP employer contributions and employee non-elective or matching SIMPLE IRA contributions for 2009 (can be up to October 15 with tax-filing extension).
May 31: Deadline for issuing Form 5498 to report year-end account balances and contributions received in 2009.
September 30: Date by which the "designated beneficiary(s)" must be identified for the IRAs of individuals who died in 2009
October 1: Standard deadline for establishing a SIMPLE IRA plan for 2010
October 15: Deadline for recharacterizing 2009 traditional IRA contributions, Roth IRA contributions, and Roth IRA conversions.
October 31: Deadline for providing either a copy of the trust agreement or a certified list of all trust beneficiaries and a description of their rights to benefits under the trust to the IRA trustee or custodian if the trust is the beneficiary of an IRA whose owner died in 2009.
November 1: Standard deadline for employers who are continuing to offer a SIMPLE IRA
plan to send 2011 elective deferral notification to eligible employees.
December 31: Deadline for taking 2010 RMDS; individuals attaining age 70 1/2 in 2010 may delay the RMD until no later than April 1, 2011.
Deadline for distributing or transferring traditional, SEP or SIMPLE IRA assets to a Roth IRA as a 2010 conversion. The income from a 2010 conversion will be reported in two equal installments for 2011 and 2012, unless the taxpayer elects to include all the income in 2010.
Deadline for establishing separate accounts for multiple beneficiaries of account owners who died in 2009. This will allow each beneficiary to use their own single life expectancy for required minimum distribution purposes instead of using the life expectancy of the oldest beneficiary.
While no specific date applies, it is always a good idea to review your IRA beneficiary form annually to make any necessary or desired changes or adjustments and to ensure you have a designation of beneficiary form on file with your IRA trustee or custodian.
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 2010 Ed Slott and Company, LLC
Friday, January 8, 2010
New York Times Blog: Ed Slott Answers Your Questions
Ed Slott answers consumers' questions in the "Ask The Experts" Section of Bucks in The New York Times.
Today, we provide Part 1 of his answers on Roth IRA Conversions.
CLICK HERE for the installment from The New York Times.
Today, we provide Part 1 of his answers on Roth IRA Conversions.
CLICK HERE for the installment from The New York Times.
Thursday, January 7, 2010
Slott Report Mailbag: January 7th
Happy New Year! It is 2010 -- a new decade and a new year for you and your family.
Start off the year the right way with this week's edition of The Slott Report Mailbag.
1.
Can I convert an IRA, in the amount of my RMD, to a Roth IRA? Does this satisfy meeting my RMD?
Thank you,
Jack
Answer:
Required minimum distributions are back in 2010. The regulations do not allow an RMD to be converted to a Roth IRA. Your RMD must be taken first and then you can do a conversion in any amount other than your 2010 RMD.
2.
I inherited a traditional IRA from my husband who passed away about 10 years ago. I also have a small Roth IRA. The traditional IRA is currently worth about $200,000. I am 63 years old, am retired and have income of about $66,000 per year from various sources (pensions, social security). It is likely that I will never use the IRA as a source for retirement funding, as I have sufficient taxable investment portfolios I am utilizing to supplement my retirement income. Therefore, what would the benefits be for me to convert my traditional IRA to a Roth, if any?
Answer:
From your question it is assumed that you rolled your husband's IRA to your own traditional IRA. There are several benefits in converting to a Roth IRA in 2010. The fact that you don't think you will need that one to live on is a big plus in favor of a Roth IRA which has no required distributions at age 70 1/2. Paying the income tax now on the conversion will mean that your heirs will never have to pay income tax on that money when they take it out of the Roth IRA. In addition, if the income tax rates go up in future years, you will have paid the tax at a lower rate. A 2010 conversion will allow you to pay the income tax due on the conversion either entirely in 2010, or if not paid in 2010, in 2011 and 2012. For example, on a $200,000 conversion you would add $100,000 to your 2011 tax return and $100,000 to your 2012 return. Also keep in mind that it is always better to pay the income tax due on the conversion from non-IRA assets.
3.
I've found the advice in your "IRA Advisor" newsletter very helpful, but there is one question on Roth recharacterizations that I have not seen answered. The IRS allows you to file an amended return and recover the taxes paid on the original conversion, but what about state taxes? I live in California, where the top tax rate is around 10% and therefore of significance. If California did not allow recharacterizations and I had to pay state income tax twice, that would be a no-go. Can you help on this?
Martin Hellman
Stanford, CA
Answer:
Most states will refund the state tax paid on a Roth IRA conversion after a recharacterization if an amended state tax return is filed. I don't know if California is one of those states. I would recommend that you consult with a tax professional in California.
4.
I have a Traditional IRA funded with after-tax dollars (market value of $30,000 with a cost basis of $25,000) as well as a SEP IRA (market value of $50,000), a SIMPLE IRA (market value of $120,000) and a solo 401(k). I would like to convert the Traditional IRA but unfortunately it only represents about 15% of the value of my IRA accounts. I would like to be able to convert the Traditional IRA and only owe the tax on the $5,000 gain.
Is it possible to roll the SEP and SIMPLE accounts into my 401(k) plan and then do a Roth conversion on the Traditional IRA making the taxable amount limited to the gain in that account with no tax on the after-tax original contributions? After the conversion can I then roll the money previously rolled into the 401(k) into an IRA? Can this all happen in the same year?
Thank you for your help.
Thomas D. Nowe
Answer:
Very interesting question. The first assumption is that you are eligible to have a SEP, SIMPLE IRA and a solo 401(k). Generally you would not be able to have all three if they are all established for the same or for related business. Under certain circumstances you would be able to roll the SEP and SIMPLE into the Solo 401(k) plan and then convert your Traditional IRA to a Roth and not have to include the other two plans for the pro-rata rule. For the SIMPLE IRA to be rolled into the Solo 401(k) plan it would have to have been opened for two years or longer and the Solo 401(k) plan must allow rollover contributions. Only pre-tax contributions can be rolled into a Solo 401(k).
If the SEP and SIMPLE IRAs can go into the Solo 401(k) plan then you can not put it back into an IRA in the same year (see the instructions for Form 8606).
This process can be a recipe for a disaster. Pleas consult a competent tax advisor before proceeding.
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 2010 Ed Slott and Company, LLC
Start off the year the right way with this week's edition of The Slott Report Mailbag.
1.
Can I convert an IRA, in the amount of my RMD, to a Roth IRA? Does this satisfy meeting my RMD?
Thank you,
Jack
Answer:
Required minimum distributions are back in 2010. The regulations do not allow an RMD to be converted to a Roth IRA. Your RMD must be taken first and then you can do a conversion in any amount other than your 2010 RMD.
2.
I inherited a traditional IRA from my husband who passed away about 10 years ago. I also have a small Roth IRA. The traditional IRA is currently worth about $200,000. I am 63 years old, am retired and have income of about $66,000 per year from various sources (pensions, social security). It is likely that I will never use the IRA as a source for retirement funding, as I have sufficient taxable investment portfolios I am utilizing to supplement my retirement income. Therefore, what would the benefits be for me to convert my traditional IRA to a Roth, if any?
Answer:
From your question it is assumed that you rolled your husband's IRA to your own traditional IRA. There are several benefits in converting to a Roth IRA in 2010. The fact that you don't think you will need that one to live on is a big plus in favor of a Roth IRA which has no required distributions at age 70 1/2. Paying the income tax now on the conversion will mean that your heirs will never have to pay income tax on that money when they take it out of the Roth IRA. In addition, if the income tax rates go up in future years, you will have paid the tax at a lower rate. A 2010 conversion will allow you to pay the income tax due on the conversion either entirely in 2010, or if not paid in 2010, in 2011 and 2012. For example, on a $200,000 conversion you would add $100,000 to your 2011 tax return and $100,000 to your 2012 return. Also keep in mind that it is always better to pay the income tax due on the conversion from non-IRA assets.
3.
I've found the advice in your "IRA Advisor" newsletter very helpful, but there is one question on Roth recharacterizations that I have not seen answered. The IRS allows you to file an amended return and recover the taxes paid on the original conversion, but what about state taxes? I live in California, where the top tax rate is around 10% and therefore of significance. If California did not allow recharacterizations and I had to pay state income tax twice, that would be a no-go. Can you help on this?
Martin Hellman
Stanford, CA
Answer:
Most states will refund the state tax paid on a Roth IRA conversion after a recharacterization if an amended state tax return is filed. I don't know if California is one of those states. I would recommend that you consult with a tax professional in California.
4.
I have a Traditional IRA funded with after-tax dollars (market value of $30,000 with a cost basis of $25,000) as well as a SEP IRA (market value of $50,000), a SIMPLE IRA (market value of $120,000) and a solo 401(k). I would like to convert the Traditional IRA but unfortunately it only represents about 15% of the value of my IRA accounts. I would like to be able to convert the Traditional IRA and only owe the tax on the $5,000 gain.
Is it possible to roll the SEP and SIMPLE accounts into my 401(k) plan and then do a Roth conversion on the Traditional IRA making the taxable amount limited to the gain in that account with no tax on the after-tax original contributions? After the conversion can I then roll the money previously rolled into the 401(k) into an IRA? Can this all happen in the same year?
Thank you for your help.
Thomas D. Nowe
Answer:
Very interesting question. The first assumption is that you are eligible to have a SEP, SIMPLE IRA and a solo 401(k). Generally you would not be able to have all three if they are all established for the same or for related business. Under certain circumstances you would be able to roll the SEP and SIMPLE into the Solo 401(k) plan and then convert your Traditional IRA to a Roth and not have to include the other two plans for the pro-rata rule. For the SIMPLE IRA to be rolled into the Solo 401(k) plan it would have to have been opened for two years or longer and the Solo 401(k) plan must allow rollover contributions. Only pre-tax contributions can be rolled into a Solo 401(k).
If the SEP and SIMPLE IRAs can go into the Solo 401(k) plan then you can not put it back into an IRA in the same year (see the instructions for Form 8606).
This process can be a recipe for a disaster. Pleas consult a competent tax advisor before proceeding.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
Wednesday, January 6, 2010
2010 and Roth IRA Conversions for Everyone
Welcome to 2010, the year with no estate tax -- at least for the time being (more on that in later blogs) -- and Roth conversions for everyone.
That's right! Everyone can do a Roth conversion this year. The income limits and marital restrictions are repealed -- permanently. In addition, if you do a Roth conversion in 2010 you can defer paying the taxes on the conversion until you file your tax returns for 2011 and 2012.
If you convert $100,000 to a Roth IRA in 2010, you can include $50,000 in income in 2011 and $50,000 in income in 2012. You will have to calculate the tax on that income using the tax rates in effect for 2011 and 2012.
You can also elect to pay all the tax on the conversion on the return you file for 2010. You cannot use both options. However, if you want to pay some tax in all 3 years, then you can do a conversion in 2010, another one in 2011, and a third one in 2012.
You should check with your advisor or tax preparer to determine your best Roth conversion option.
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 2010 Ed Slott and Company, LLC
That's right! Everyone can do a Roth conversion this year. The income limits and marital restrictions are repealed -- permanently. In addition, if you do a Roth conversion in 2010 you can defer paying the taxes on the conversion until you file your tax returns for 2011 and 2012.
If you convert $100,000 to a Roth IRA in 2010, you can include $50,000 in income in 2011 and $50,000 in income in 2012. You will have to calculate the tax on that income using the tax rates in effect for 2011 and 2012.
You can also elect to pay all the tax on the conversion on the return you file for 2010. You cannot use both options. However, if you want to pay some tax in all 3 years, then you can do a conversion in 2010, another one in 2011, and a third one in 2012.
You should check with your advisor or tax preparer to determine your best Roth conversion option.
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 2010 Ed Slott and Company, LLC
Tuesday, January 5, 2010
Reminder: eSeminar Series Session IRA Basics TODAY at 3 PM ET
Just a reminder that our IRA Technical Consultants Beverly DeVeny and Jeffrey Levine will be holding an eSeminar Series session, IRA Basics, TODAY at 3 PM ET.
You still have time to register! CLICK HERE to register for this session.
The session lasts 90 minutes and includes Q&A with Beverly and Jeff. You MUST complete a quiz at the end of the session if you are planning on taking all 8 sessions and joining Ed Slott's Elite IRA Advisor Group.
If you have any questions, please give us a call at 215-557-7022.
You still have time to register! CLICK HERE to register for this session.
The session lasts 90 minutes and includes Q&A with Beverly and Jeff. You MUST complete a quiz at the end of the session if you are planning on taking all 8 sessions and joining Ed Slott's Elite IRA Advisor Group.
If you have any questions, please give us a call at 215-557-7022.
Monday, January 4, 2010
IRA New Year Resolutions
Protect your IRA. These are words you should live by. The IRA rules guarantee that your beneficiaries can inherit your IRA and reap the benefits of extended tax-deferral or even tax-free compounding over their life expectancies, but only if they are appropriately named and the IRA beneficiary form can be found when needed. Now is the time to address this issue. Don't leave this for your IRA provider to take care of. If beneficiary forms are lost or misplaced, your beneficiaries may lose the ability to maintain the inherited IRA over their lifetimes. Thus, let these be your "IRA New Year Resolutions" for 2010:
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 2010 Ed Slott and Company, LLC
- I will obtain and keep a copy of each of my IRA beneficiary forms and give copies to my financial advisor and attorney.
- I will tell my beneficiaries where to locate my IRA beneficiary forms and provide them with contact information for my financial advisor and attorney and keep this information up to date.
- I will make sure that I have named a primary beneficiary and a secondary (contingent) beneficiary for each IRA I own.
- If there are multiple beneficiaries on one IRA, I will make sure that each beneficiary's share is clearly identified with a fraction, a percentage or the word "equally" if that is applicable. I will also make sure the beneficiary designation is "per stirpes" so that the share of a beneficiary who predeceases me will automatically go to his or her children, unless I specifically want other treatment for contingent beneficiaries.
- I will make sure that my IRA trustee or custodian has my current beneficiary selection on file and that its records agree with my choices.
- I will ask my IRA trustee or custodian to countersign and return a copy of my current beneficiary designation election form and will do so anytime I change my beneficiary elections.
- I will review my IRA agreement to determine if it contains beneficiary default provisions in case my beneficiary designation form cannot be located; if these default provisions are not to my liking I will consider changing my IRA trustee or custodian.
- I will review my IRA beneficiary forms at least once each year to make sure they are correct and properly reflect any changes that occur during the year such as new tax laws or major life events, including deaths, births, adoptions, marriages and divorces.
- I will not name a trust as a beneficiary of my IRA without a valid reason (e.g. protection against the creditors of my heirs, control the rate of distribution after my death, protect the inheritance of children from a first marriage, etc.) and without advice from a competent attorney or advisor who is well-versed in the rules regarding IRAs; to do otherwise risks elimination of important tax benefits for my heirs.
- I will NEVER, EVER let my estate be the beneficiary of my IRA as this will result in the worst possible tax scenario for my heirs; if I have no heirs, I will consider designating one or more charities as a beneficiary of my IRA.
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 2010 Ed Slott and Company, LLC
Ed Slott's 2-Day IRA Workshop in Orlando
First things first. Happy New Year! All of us at Ed Slott and Company wish each of you a healthy, happy and prosperous 2010.
You can jumpstart your business in 2010 by signing up RIGHT NOW for Ed Slott's 2-Day IRA Workshop in Orlando, Florida on March 19-20.
Register early, as space is available on a first-come, first-serve basis. CLICK HERE for more information and to register.
If you have any questions, please give us a call at 215-557-7022.
You can jumpstart your business in 2010 by signing up RIGHT NOW for Ed Slott's 2-Day IRA Workshop in Orlando, Florida on March 19-20.
Register early, as space is available on a first-come, first-serve basis. CLICK HERE for more information and to register.
If you have any questions, please give us a call at 215-557-7022.
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