Slott Report Mailbag: May 27th

It is time for another edition of The Slott Report Mailbag with 2 questions and our answers. As always, make sure you work with a competent, educated financial advisor.

CLICK HERE to find an Ed Slott-trained advisor in your area.

1.

I'm looking for some information regarding the timing of a 2010 conversion following a 2009 recharacterization (done in 2010) using the same assets.

I did a 2009 conversion for $80,000 in December 2009. Recharacterized $30,000 in 2010 (before filing 2009 tax returns). Would like to do a 2010 conversion for the whole IRA ($65,000 - but $30,000 of this conversion will be the same assets from the 2009 conversion (that was recharacterized in 2010), so when is the earliest the conversion can happen? Mainly, I am concerned with the $30,000 asset -- can it be converted after 30 days or not until 2011 or immediately? IRS Pub 590 isn't clear how working with different tax years works into the reconversion situation. Thoughts? Thank you.

Answer:
The rule for a reconversion after a recharacterization is the taxpayer must wait until the calendar year following the initial conversion or greater than 30 days, whichever is longer. Since the conversion took place in 2009, you have already met the following year test and you would only have to wait 31 days to reconvert. The entire amount in the traditional IRA can now be converted to a Roth IRA.

2.

Dear Mr. Slott,

Your book, "The Retirement Savings Time Bomb," has been of great help in getting my financial affairs in order; and I truly thank you for it. I plan to take advantage of 2010 opportunities to convert a portion of my IRAs to a Roth and to split the tax liability in 2011 and 2012. I have also read that we have until October 17, 2011 to recharacterize any portion of the conversion back to an IRA if we desire. It has been suggested by some that we could convert all, or a large portion of our IRAs to Roths, and then convert most of them back before the October 2011 deadline. If this was done, it appears to me that the IRA total reported to IRS for December 31, 2010 would be zero or substantially smaller; resulting in a zero or very low RMD for 2011; thereby, essentially limiting the 2011 tax liability to the half of the IRA to Roth conversion that was left after recharacterizing the majority of it back. This would result in only one year (2012) of a higher tax liability, where the normal RMD would be combined with the 2nd part of the IRA to a Roth conversion.

Is this a legal procedure that would work, or has the IRS already got this loophole converted in some way. I obviously would not want to get involved in such a procedure unless it is fool proof; but if it is legal, it obviously could save several thousand dollars. I will appreciate hearing back from you about this matter.

Sincerely,

Charles Thorpe

Answer:
Charles,

You generally have until October 15 of the year following the conversion to do a recharacterization. You are correct that October 15, 2011 is a Saturday so you will have until the 17th.

A 2011 required minimum distribution (RMD) is based on the 12/31/2010 balance. Any rollovers or recharacterizations in limbo (completed after that date) will have to be added into the 12/31/2010 market value to determine your RMD for the year.

Another important point to keep in mind is that if you are age 70 1/2 or older this year, you must take your RMD for 2010 out first before converting to a Roth IRA. An RMD cannot be converted to a Roth IRA.

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

*Copyright 2010 Ed Slott and Company, LLC

Ed Slott's Retirement Decisions Guide #45

Ed Slott's Retirement Decisions Guide is a 47-page compact guide that is a perfect read for both consumers and financial advisors.

This week, The Slott Report will be providing a sneak peak at some of the material in the guide. The guide is broken up into "86 Ways to Save & Stretch Your Wealth." Over the next few days, we will showcase 4 of those ways.

CLICK HERE to purchase the guide (bulk options available). The guide is also available on Amazon Kindle eBook.

45. How to protect your wealth

If the value of your estate is significant and will likely face estate taxes when you die, consider taking out a life insurance policy to cover the estate-tax tab. The death benefit of this policy will keep heirs from having to dip into the estate (their inheritance) to pay Uncle Sam.

Trivia aka UBIT

Today is trivia day. Yesterday was the anniversary of the opening of the Brooklyn Bridge in 1883. The toll on opening day was one cent. Today is the 60th anniversary of the court case that gave us UBIT (unrelated business income tax).

UBIT is largely due to macaroni - Mueller Co. macaroni. In 1946 Henry Mueller died. A Delaware corporation was formed by a group of New York University alumni to purchase the company. All profits from the company were to go to NYU. The company did well and NYU profited. The company claimed a tax exemption as a charitable organization which enhanced the funds going to NYU since the company profits were not subject to any income tax. To be fair to NYU, they were not the first institution to utilize this strategy.

NYU and the Mueller Co. eventually found themselves in Tax Court. The Court ruled that the macaroni was taxable even though it was manufactured by a “charitable” organization. Mueller appealed this decision and eventually won, but it was too late.

Congress agreed with the Court and passed legislation that same year (1950) to stop this practice by NYU and other institutions of higher education. They wanted a level playing field for all businesses as far as taxation goes.

And so we have unrelated business taxable income. Some IRAs are subject to this tax. If your IRA owns a macaroni business or any other type of business, it will owe tax on the unrelated business income in excess of $1,000 received by the IRA.

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

*Copyright 2010 Ed Slott and Company, LLC

Ed Slott's Retirement Decisions Guide: #12

Ed Slott's Retirement Decisions Guide is a 47-page compact guide that is a perfect read for both consumers and financial advisors.

This week, The Slott Report will be providing a sneak peak at some of the material in the guide. The guide is broken up into "86 Ways to Save & Stretch Your Wealth." Over the next four days, we will showcase 4 of those ways.

CLICK HERE to purchase the guide (bulk options available). The guide is also available on Amazon Kindle eBook.

12. Does a Roth IRA conversion pay?

In many cases, the answer is a resounding yes. Income restrictions for converting to a Roth IRA have been waived starting in 2010. If you can pay the income tax due on the portfolio's market value at the time of conversion, the move is a powerful one.

Here's why: Historically, today's income-tax rates are relatively low. A conversion allows you to pay income tax at the current rate and get rid of Uncle Sam for life. So, for example, if a $500,000 portfolio in a Roth IRA grows to $1 million in 15 years, all of those dollars are yours. And you get to enjoy all of the benefits of a Roth IRA, including no mandatory withdrawals.

Income Tax Sale

Income taxes paid by Americans last year were at their lowest level since Harry Truman was president, according to the Bureau of Economic Analysis. Federal, state and local taxes, including income, property, sales and other taxes consumed 9.2% of all personal income in 2009, the lowest rate since 1950. This rate is far below the historic level average of 12% for the last half century.

Individual tax rates vary widely based on how much a taxpayer earns, where the person lives and other factors. On average, though, the combined tax rate paid by all Americans, rich, poor or somewhere in-between, has fallen 26% since the recession began in 2007. Taxes paid have fallen at a much faster clip than income during this recession. While personal income fell 2% last year, the amount of taxes paid dropped by 23% (social security taxes are excluded from the tax calculation.)

In an interesting twist, a Gallup Poll last month found that 48% of those surveyed thought taxes were "too high" while 45% thought they were "about right." In reality, they were at a 50-year low.

When John F. Kennedy took office the top income tax rate was 91%. He lowered it to 71%. At the same time, however, there were a lot more tax deductions available.

In 1981, President Ronald Reagan reduced the top rate to 28%. Today, it is 35%. Unfortunately, the 35% rate is due to expire on December 31, 2010 and will go back to 39.6% on January 1, 2011.

Most lower rates will adjust upward as well. And don't hold your breath waiting for the President or Congress to take any action to avert this scheduled rise in income tax rates. Our national deficit is a huge, and possibly insurmountable, impediment to legislation that would either lower income tax rates or keep them level.

The expected rise in federal income tax rates creates an interesting dilemma for retirement account holders converting to Roth IRAs in 2010. Should they treat the taxable portion of their conversion as 2010 income, knowing the rate at which they will pay income tax? Or, should they roll the dice and split the amount evenly in 2011 and 2012, not knowing exactly where rates will be or how much tax they will pay on their conversion? Those are good questions. These individuals must ponder where they think their income levels will be in 2011 and 2012, versus 2010, and make an educated guess about where income tax rates are headed and what affect all of that will have on them. Hmmm....renting crystal balls might be a good business to be in over the next couple of years.

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

Toldeo Free Press: Leave a Legacy; Spend It, Too

The self-proclaimed Retirement Guys at the Toledo Free Press wrote an article on Thursday, May 20th about leaving a legacy for your heirs.

The article references Ed Slott calling the retirement account the "tax ticking time bomb." They also mention that Slott points out the time tomb will go off at some point unless steps are taken to diffuse it.

CLICK HERE to read the entire article.

Have a great weekend!

Slott Report Mailbag: May 20th

The mailbag was overflowing this week with questions from consumers concerned about their retirement outlook. We answer 4 of those questions below. You should make it a priority to work with a competent, educated financial.

CLICK HERE to find an Ed Slott-trained advisor in your area.

1.

Ed and Company,

I'm writing for my brother who doesn't have a computer. He is taking a retirement buyout from his employer, he will have a pension, a 401(k) and the buyout which is 2 paid weeks for every year he was employed (82 weeks pay). Will he be able to roll the money they pay him for his buyout into something where he doesn't have to pay taxes on that money this year? Can he do a rollover on that money the same as he does with this 401(k) money?

Thank you,

Mark Holland

Answer:
Generally 401(k) plan balances and lump-sum distributions qualify for rollover to an IRA. There is no income tax consequence and in the IRA the assets will continue to grow tax deferred just like the assets in the 401(k) plan. Severance pay does not generally qualify to be rolled over to an IRA. Only qualified money such as mentioned above can be rolled over.

2.

Ed & Company,

Publication 590, chapter 1, page 29, under Re-characterizations (the example).

It states that if you convert an amount from a traditional IRA to a Roth IRA, then re-characterize back to a Traditional IRA, you must wait the later of either 30 days, or the next calendar period to re-convert that same amount.

Does that mean that you can re-convert a different amount? For example, if we converted $5,000, then re-characterized it, can I re-convert only $3,000 before the 30-day/next calendar mark?

I ask because if the money is invested in a variable amount, value will change day by day, so does that mean we can re-convert before the 30-day/next calendar year if the amount has changed?

Thanks!

Answer:
The rule you stated from Publication 590 is correct. You must wait the later of the 30 days or the next calendar year to re-convert the SAME funds, all of the funds no matter what the asset is worth. When you recharacterize that is just undoing what you converted (as if it never happened). You can always convert other traditional IRA assets to a Roth IRA anytime. It is just the amount being recharacterized that has the waiting period.

3.

Dear Ed and Company,

I'm 64 years old, unemployed and resigned to the fact that I will be retiring later this year when I turn 65. I am collecting unemployment payments of $430 per week and supplementing this with withdrawals from my 401(k). My taxable income for 2010 will be about $45,000. Should I take advantage of this low number to transfer any or all of my 401(k) (about $200,000) into a Roth or other taxable account? My wife and I will be jointly eligible for $50,000 in pensions starting December 2010.

Thanks,

Tony

Answer:
The decision to convert your 401(k) plan assets to a Roth IRA is a difficult decision. Your own personal circumstances have to be weighed and measured in order to determine if it is the right decision for you. For example, do you have enough outside funds (not 401(k) funds) to pay the income tax on the conversion to a Roth IRA and will you need to withdraw money from the Roth IRA to live on? Generally if you do not have outside funds to pay the income tax and you will need to withdraw funds from the Roth to live on, it probably is NOT a good idea to convert to a Roth IRA. There are many other factors you should consider as well. Consult a financial advisor trained in this area.

4.

Hello,

Would you please answer the following question. If a person converts to a Roth at the age of 57, does that person have to wait 5 years to withdraw the conversion amount an the earnings without paying a penalty? We wondered what the conversion rules state when a person withdraws when over 59 1/2, as they are confusing, too. If a person converts after age 59 1/2, does that person have to wait 5 years to withdraw the conversion amount and the earnings without a penalty? Any guidance would be appreciated.

Answer:
You can always take a distribution of basis from a Roth IRA. Basis is annual contributions and converted amounts. Those distributions will NOT be taxed when they are withdrawn as they were subject to tax when they went into the Roth IRA( or they were already after-tax amounts).

There are ordering rules for Roth distributions and there are qualified distribution rules. Ordering rules: contributions come out first. Converted amounts come out next, funds that were taxable at the time of conversion come out before funds that were not taxable at the time of conversion. Earnings come out last.

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

Wall Street Journal: Picking Out Tax Treatments

Karen Damato answered consumer questions in a Saturday, May 15th column on The Wall Street Journal's online home.

The first question dealt with partial Roth conversions with a husband and a wife choosing different variations of the conversion. One wanted to pay the tax bill on the 2010 return and the other wanted to spread the conversion over 2011 and 2012.

"You and your wife should be able to do this whether you file jointly or separately," said Ed Slott.

CLICK HERE to read the entire Question-and-Answer article.

Fixing a Simple Mistake

In the world of IRAs fixing a simple mistake is not always simple. It also may not be logical. Here’s what I mean.

This is based on a real case that has come across my desk. A taxpayer, lets call him Paul, made an after-tax contribution (he took no deduction for the contribution) of $5,000 to his IRA in 2007 and another after-tax contribution of $6,000 in 2008. There was just one problem with Paul’s contributions - he had no earned income for those two years. You must have earned income in order to make an IRA contribution (even a Roth contribution).

Paul discovered this problem in 2009 so he did the logical, easy thing. He took a distribution of $11,000 out of his IRA in early October. Problem solved, right? WRONG!

Paul’s distribution did correct his problem for the 2007 contribution of $5,000 but it did not fix his problem for the 2008 contribution. Why not?

The rule is that you have until October 15th of the year after the excess contribution to remove - with net earnings (or losses) the amount of the excess contribution. Paul did not tell his IRA custodian that he was removing an excess contribution and he did not take out a net amount. Therefore, he only took a normal distribution for $6,000 and he did not fix his problem. This means that he owes another year of the 6% penalty tax and he still has an excess contribution.

IRAs are a relatively simple way to save for retirement. Generally, the rules for contributions are simple. But the rules for distributions can be extremely complicated and mistakes can be very costly. Be sure you do your homework before trying to correct any errors.

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

eSeminar Series Roth IRAs: Today at 3 PM ET

Roth IRAs are a major retirement planning staple in 2010. You can learn all you need to know from IRA Technical Consultants Beverly DeVeny and Jeffrey Levine in a 90-minute webcast TODAY AT 3 PM ET.

This is your LAST CHANCE to take part in the Roth IRAs session until September.

You will receive download-ready and printable PDF materials prior to the session, and you will have the ability to ask questions during the 90-minute webcast.

CLICK HERE to Register for today's session.

If you have any questions, please give us a call at 215-557-7022.

Spending Your Retirement Savings During Retirement

The “dream retirement” for many individuals might include extensive leisure travel, enjoying endless rounds of golf or tennis matches, donating a good chunk of time to volunteer activities, or visiting frequently with children or grandchildren. Regardless of how you choose to spend your retirement years, lots of planning will be required in order to make your financial resources last.

Living longer than your financial resources are able to provide for can be a serious problem. In the past, it was assumed that most people would work until age 65 and live another 10-15 years. However, lifestyle changes and medical advancements have increased our chances of living longer, making the old assumptions about retirement obsolete. Living until age 90 or beyond could involve a retirement period of 25-30 years. You may need to stretch your financial resources over many more years in retirement than you ever imagined. You will need to save and invest earlier and more often in order to support yourself through a longer retirement.

In a quest to avoid out-living their savings, most individuals have to determine the nest-egg they’ll need to accumulate during their working years, as well as the amount they can safely withdraw in retirement, to cover day-to-day living expenses. Both of these numbers can be moving targets at any point in time, so detailed and ongoing planning in these areas should be a constant activity.

One popular rule of thumb suggests limiting yearly distributions to about 4% of your portfolio, a rate deemed by many financial planning professionals to be a conservative amount that gives you a fighting chance of making your money last 20 or 30 years. Outliving one’s money has become a pressing concern, and a modest withdrawal rate can be a good hedge against many unknown events that might negatively affect your financial well-being in the future.

If your withdrawals prove to be conservative, and you end up leaving more unspent cash to your heirs than you had intended, it would not be the worst of sins.

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

Question of the Week: Illiquid IRA Investments

This week the Ed Slott and Company IRA Discussion Forum featured a question about the illiquid investments in an IRA and how they may affect RMDs. Do you have these types of investments in you IRA? Read on to find out some of the major items you need to be aware of…

One of the major benefits of an IRA (as opposed to most company plans) is that other than a few exceptions (i.e. life insurance, collectibles), you can invest in just about anything. But that doesn’t mean you don’t have to consider the possible side effects on an investment. What do we mean by side effects? Well, just so we are all on the same page, let’s define side effects like this - a side effect of an IRA investment is any impact the investment has on the IRA or administration of the IRA other than its gains or losses in value.

Many of you probably have your IRAs invested in highly liquid items like stocks, bonds, mutual funds and cash. However, not all investments share the same levels of liquidity - and some may not even be liquid at all.

So what are some of the possible side effects of investing in illiquid assets within your IRA? Well, for starters, there’s the obvious danger of needing access to your retirement money but not being able to get to it. But that’s not really a side effect of having an illiquid asset within your IRA - that would be the case even if that same investment was held outside of an IRA as well.

One possible side effect - specifically of an illiquid investment within your IRA is that it may complicate taking your required minimum distributions (RMDs). Although the tax code allows for RMDs to be distributed in kind (i.e. stock moved from IRA to individual brokerage account), some custodians may not make this an easy process. In addition, it’s also possible that your interest in a particular investment may not be able to be divided. In such cases, you may find yourself subject to a 50% penalty on the amount of the RMD that should have been taken.

Another possible side effect of illiquid investments within an IRA can occur after the death of an IRA owner when multiple beneficiaries don’t agree on how to move forward. For example, suppose you plan to leave your IRA to your three children in equal shares. Upon your death, the total value of your IRA is $300,000, but $250,000 is invested in a rental property. Two of your children want to keep the property, but one child wants to sell it and use the money to buy his own new house. Such situations can pit family members against each other in ways the IRA owner never intended.

So does this mean that you should never invest in an illiquid asset within your IRA? Absolutely not. It just means that you have to be aware of these complications when you do. Maybe that means eliminating illiquid assets within your IRA by the time you reach 70 ½. Maybe you only put a portion of your IRA into these types of investments. Or maybe you leave IRA assets to some beneficiaries and other assets to different beneficiaries. These are the types of conversations you should be having with a qualified advisor now to make sure that you and your heirs aren’t hit with any surprises.

Concerned about other possible side effects your IRA investments may expose you to? Check back next Friday to learn about another one!

Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.

By IRA Technical Consultant Jeffrey Levine and Jared Trexler
------------------------------------------------------------------------------
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 in the News

Ed Slott is always in the news.

We include a running log of the articles he has written and been quoted in at the following link: http://www.irahelp.com/press_room.php

SmartMoney Magazine's Stephanie AuWerter wrote a Mailbag column recently with several IRA questions. One of the consumers posed the question: "Can a spouse make a non-tax-deductible contribution to a traditional IRA then convert to a Roth IRA?"

The answer is "Yes" with the caveat "it's tricky to explain." Ed Slott assists in the explanation RIGHT HERE.

You can visit the Press Room for the latest articles and up-to-date IRA information straight from Ed Slott.

Slott Report Mailbag: May 13th

Today's edition of The Slott Report Mailbag features a pair of consumer questions and answers from our team of IRA Experts. We also stress to all consumers -- please protect your hard-earned money by working with a competent, educated financial advisor.

CLICK HERE to search for an Ed Slott-trained advisor in your area.

1.

Dear Ed,

I have $500,000 in 401(k) and IRA money that I would want to put into an annuity. I am concerned with what part (and how it would) of any immediate withdrawals would be taxed because it is coming from 401(k)/IRA money, versus what part would be taxed if I waited. I would like to retire in about 4-5 years. I keep hearing different answers on what is taxed, when it is taxed and how it is taxed at different times.

Please help.

Gene Herscher

Answer:

Gene --

You can invest your IRA in an annuity now with no taxation. You just need to be sure (very, very sure) that the funds go into an IRA annuity. As long as all of your IRA funds are pre-tax, then any distributions you receive from the annuity will be fully taxable as they are made to you. You may not be able to move your 401(k) funds into an annuity now since you are still working unless your plan offers an annuity as an investment option of the plan. When you leave the company, you will be able to move the funds into an annuity just as you could the IRA funds and the distributions would be treated the same as the IRA distributions. When you move the funds out of the 401(k) be sure to do it as a direct transfer so that there is no 20% withholding done on the transaction.

The annuity distribution rules are different for non-qualified (non-IRA) annuities. This may be where some of the different answers are coming from.

2.

Mr. Slott,

What options are available to parents whose son had died without naming beneficiaries on his 401(k) plan?

Answer:

The only options available are those outlined in the plan. If your son was married, his current spouse will automatically be entitled to at least 50% of the plan, but generally is entitled to 100% of the plan. If he was not married, then the plan could say the funds go to the children, but it is most likely that the plan will say the funds will go to his estate. This will be a taxable event and the funds will lose their tax-deferred status. Unfortunately, there is no way around this.

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

RMDs and Roth Conversions

If you are doing a Roth conversion this year and you are age 70 ½ or older, the RMD must be taken before you do the conversion. The conversion is considered a distribution and RMD funds are considered to be the first funds distributed from the account. RMDs cannot be moved into the Roth IRA.

When an RMD amount is mistakenly put into the Roth IRA, it is considered an excess contribution. An excess contribution that is not timely removed is subject to a penalty tax of 6% per year for every year that it remains in the Roth IRA. This penalty is reported on Form 5498 which must be filed with your tax return.

How do you correct an excess contribution? First of all, you must tell the Roth IRA custodian that you are removing an excess contribution. Just taking the RMD out as a distribution does NOT correct the situation. You have until October 15th of the year after the conversion to remove the excess contribution without penalty. You must remove a net amount - earnings or losses on the excess contribution amount (the RMD) must be removed along with the excess contribution.

There is no way out of an RMD - not even death. So remember to take those RMDs before you convert to a Roth IRA.

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

*Copyright 2010 Ed Slott and Company, LLC

Social Security Timeline

1935: The Social Security Act is passed by Congress and signed by President Roosevelt at approximately 3:30 pm on the fourteenth day of August.

1937: First ever Social Security benefits are paid. Early Social Security checks are one-time payments.

1939: The Social Security program is expanded to include dependents and survivors of workers who retire, are disabled, or die prematurely.

1940: Monthly Social Security payments begin. Ida Fuller was the first person to receive a monthly Social Security check. She paid in $24.75 between 1937 and 1939 on an income of $2,484. Her first check, dated January 31, was for $22.54. She would live to be 100 and collect about $22,000 over her lifetime.

1950: The first cost-of-living adjustment (COLA) is made by Congress. Social Security payments are increased by 77 percent. Benefits began to be paid to the dependent widower, dependent husband, and wife under 65 with a child in her care, and to a divorced wife.

1956: The Social Security program is expanded to cover the disabled children of workers.

1961: Social Security amendment lowers the retirement age to 62 for male workers.

1975: Automatic cost-of-living adjustments to Social Security are approved. Now COLAs are based on the rise and fall of consumer prices.

1983: Because of a funding crisis, Social Security benefits are taxed as income for the first time.

1999: Welfare reform affects Social Security. Efforts are made to ease disabled workers into the work force. Social Security Administration began mailing 125 million Social Security Statements to all workers 25 years of age or older. Statements will now be sent on an annual basis.

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

*Copyright 2010 Ed Slott and Company, LLC

Where Is Ed This Week?

Ed Slott is speaking in four different cities this week, 3 times to Nationwide and once for an Elite Advisor in Maryland.

• Ed Slott speaks to Nationwide on Tuesday, May 11th at the Marriott in Houston, TX
  
• Ed Slott speaks to Nationwide on Wednesday, May 12th at the Marriott in Birmingham, AL
• Ed Slott speaks to Nationwide on Thursday, May 13th in Fort Myers, FL
• Ed Slott speaks for Retirement Planning Services in a Client Seminar on Saturday, May 15th in Anapolis, MD

If you would like to have Ed to your company, please contact Laurin Levine at 516-536-8282. As always, you can CLICK HERE to view Ed's entire 2010 speaking schedule.

Question of the Week: Multiple Retirement Accounts (Part 3)

Welcome back to our final installment of RMD madness. So far, we’ve learned about the RMD rules for plans and we’ve learned about the RMD rules for IRAs. Now, it’s time to finish up our crash course on RMDs by learning the basic rules for inherited accounts.

The first rule you must know is that RMDs from inherited accounts of different decedents (the person who died) can never aggregated. You can’t get any simpler than that! In fact, inherited accounts from different decedents can’t be combined in anyway. So if you inherited one IRA from mom and one IRA from dad, you need to maintain them as two separate inherited IRAs and must calculate and take RMDs separately from each account each year.

Much like a plan participant generally can’t aggregate RMDs from multiple company plans (see Part I), in general, a beneficiary of multiple company plans, even of the same decedent, must continue to calculate and take the RMDs separately from each company plan. So if Jay dies and leaves two 401(k) plan accounts to his son David, David must calculate and take the distribution from each inherited 401(k) account separately. However, beginning this year (2010), all plan beneficiaries are able to make a direct transfer of inherited plan funds to an inherited IRA (or inherited Roth IRA) where aggregation rules may apply.

Finally, we come to inherited IRAs. If a beneficiary inherits several IRAs from the same individual, RMDs can be taken in one of two ways. The first method is to calculate the RMDs for each account separately and then take the RMD for each account from that account. Alternatively, the RMDs for each account can be calculated separately and then the total amount distributed from one (or more) of the accounts. This is similar to the RMD calculations for IRA owners (see part II).

But what about inherited Roth IRAs? While Roth IRA owners have no RMDs during their lifetime, beneficiaries of Roth IRAs are subject to RMDs. Inherited IRAs and inherited Roth IRAs are not the same though, so RMDs between the two cannot be aggregated. For example, if you inherit one Roth IRA and one IRA from the same person, you must calculate the RMD for each account separately and you must take that amount from the respective account in order to avoid a penalty.

So what have we learned over the past three weeks? Well, for starters, RMDs are much more complicated than they may seem at first!!! The number of distributions that must be taken depends on many factors, including the types of accounts, the number of accounts, whether or not those accounts are inherited and from whom the inherited accounts were inherited. If you have questions about how RMDs for your retirement accounts, make sure to speak with an advisor who has specialized training in this area and knows the rules.

Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.


By IRA Technical Consultant Jeffrey Levine and Jared Trexler
------------------------------------------------------------------------------
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

Slott Report Mailbag: May 6th

It is time for another edition of The Slott Report Mailbag.

Below we have 3 consumer questions and answers from our team of IRA Technical Consultants. Consumers should always work with a competent, educated financial advisor. CLICK HERE to find an Ed Slott-trained advisor in your area.

1.

I am 66, retired, and have no earned income; my wife is of a similar age and also has no earned income. My 401(k) account is still at my former employer. I have been planning to rollover my 401(k) to a Roth IRA. Recently I read that it would be advantageous from an estate planning standpoint for my wife and I to have separate Roth IRAs so that if one of us dies, the proceeds from one Roth IRA can roll directly to the other spouse's Roth IRA.

Can I rollover the 401(k) into 2 Roth IRAs; split between my wife and I?

Answer:
No you can not rollover your 401(k) plan into an IRA for you and a separate one in your wife's name. You can rollover your 401(k) plan into a traditional or Roth IRA in your name. You could name your wife as your primary beneficiary. By naming her as your beneficiary, she will then have an IRA or a Roth IRA at your death.

2.

I understand that conversions from a regular IRA to a Roth IRA in 2010 may be included in one's income, 50% in 2011 and 50% in 2012, or included 100% in one's 2010 income. Is it possible to have 2 conversions of, say $200,000 and $100,000, and to include the $100,000 in 2010 income and the $200,000 50% in 2011 and 50% in 2012? This, if possible, could create a level income of $100,000 per year for three years, which is my objective.

Thanks,

Ernie Doe

Answer:
Good thought, however, if both IRAs are in your name you will not be able to include the pre-tax income on the conversion in 2010 on one IRA and spread the income on the conversion equally over 2011 and 2012 on the other. All of your 2010 conversions must be treated the same. If, however, you are married and your spouse is doing a 2010 conversion she can elect one method, include the income in 2010, and you can elect to spread the income equally over 2011 and 2012 on your conversion. Each individual must use the same method for all conversions in 2010. If you want to pay the tax over three years, then do three conversions, one in 2010, one in 2011 and one in 2012.

3.

To the team that is never stumped:

In 2009 I rolled the cash portion of my SIMPLE account into my Roth (yeah!); in 2010 I would like to transfer the rest of my SIMPLE funds (which are all mutual funds) into my Roth, which would effectively close the SIMPLE account.

My issue is timing.

When I started researching I become confused about the timing rules associated with a SIMPLE -- that closing the account can only be done at the end of the year -- and I'm checking to see what you think -- are SIMPLE accounts frozen until year-end or can they be rolled over into a ROTH during the year?

If this makes a difference, I am an S-corp, and the only employee.

Thanks,

Madeline

Answer:
SIMPLE IRAs can be converted into a Roth IRA. However, if you take a distribution from a SIMPLE IRA within a 2-year period that begins on the date you first participated in the SIMPLE IRA plan, you will not be eligible to convert to a Roth IRA. You will have to wait 2 years from the date you established the SIMPLE IRA. SIMPLE IRAs are not "frozen" until year end but they are calendar year plans and once a SIMPLE has been started for the year, it must continue for the balance of the year. The employer contribution for the year must be made before the plan can be terminated. Your SIMPLE plan agreement should contain information on these requirements.

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

RMDs and Age 70 1/2

Required minimum distributions (RMDs) begin in the year you turn 70 ½. Not age 70 and not age 71 but age 70 ½. So who is age 70 ½ in 2010? If you were born from July 1, 1939 up through June 30, 1940 you will be 70 ½ this year.

How do you know what age to use for calculating your RMD? After all, some people who are born in January won’t take their RMD until year end and some people who are born in December will take their RMD early in the year. The rule is that you use the age you will be at the end of the year (on December 31st, to be exact).

So, some of you folks who are turning age 70 ½ this year will be using age 70 to calculate your RMD and some of you will be using age 71.

If you are turning 70 ½ this year, you can put off taking your first RMD until April 1st next year. This only happens for the age 70 ½ RMD. But, if you wait until next year to take your RMD, you will have to take your 2011 RMD also by the end of the year so you end up with two RMDs for the year. For most individuals this does not make sense from a tax standpoint.

And finally, if you are doing a Roth conversion this year, the RMD must be taken before you do the conversion. The conversion is considered a distribution and RMD funds are considered to be the first funds distributed from the account. They cannot be moved into the Roth IRA.


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

*Copyright 2010 Ed Slott and Company, LLC

Social Media's Information Takeover

Ed Slott and Company have bolstered your ability to receive instantaneous IRA information, connect and network with like-minded financial advisors and consumers and remain up to speed on our latest workshop, webcast and product information.

Facebook: Friend "Ed Slott" on Facebook to receive the latest IRA information, get updates on workshop and webcast schedules and look at photos from our workshops and events.

Twitter: Follow "The Slott Report" on Twitter by going to www.twitter.com/theslottreport. You can also receive all of our messages via text message by texting "follow theslottreport" to "40404".

Linkedin: Connect with "Ed Slott and Company" on Linkedin, network with like-minded financial advisors and receive instant IRA updates.

Consumers -- Tell your friends and colleagues about the importance of working with competent, educated financial advisors and remain up-to-speed on the basic IRA information only available at Ed Slott and Company.

Financial Advisors -- Tell your colleagues to follow us on Twitter and join us on Facebook and Linkedin. Visit The Slott Report at least once a week to remain current on the latest IRA information and tell your clients to follow us as well.

Are you apprehensive about the importance and impact of social media on your business and/or your life? You won't be after watching the video below.

Retirement Fears: Is Working In Retirement In Your Future?

Maybe.

In this economic environment, it is even more important to properly plan with an educated, competent financial advisor.

Read this edition of Retirement Fears to get the statistics that show many retirees aren't truly...retired.

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 2010 Ed Slott and Company, LLC

Ed Slott & Company's eSeminar Series: IRA Basics

Ed Slott and Company's eSeminar Series session, IRA Basics, will take place on Tuesday, May 4th at 3 PM EASTERN TIME.

The web session will last 90 minutes and include a Question-and-Answer session with our IRA Technical Consultants.

CLICK HERE for more information and to register.

Ed Slott's Elite-Master Elite Workshop in Pictures

They say that pictures are worth a 1,000 words.

Ed Slott's Elite and Master Elite IRA Advisor Group took place April 30 - May 2 at the Hyatt Regency O'Hare in Chicago.

We have posted 37 photos from the event, including the general sessions, networking events, guest speaker Dan Sullivan and the Master Elite Dinner Event. They are posted on Ed Slott's Facebook account. Please "Friend" Ed Slott (if you haven't already) and click on our profile to view the pictures.

For current members, view these photos as a way to remember the week. For financial advisors thinking about joining the Group, these pictures speak volumes at the speaker quality, networking time and value of information covered in Ed Slott's Elite and Master Elite IRA Advisor Group.