IRAs are different from other assets you may own. Following are the top ten ways IRAs are different.
1. IRAs pass by beneficiary form, not by your will or trust.
2. IRAs cannot change ownership during lifetime because a transfer to another individual or entity, including any trust, is a taxable event.
3. IRAs cannot be owned jointly.
4. IRAs have required distributions during life for traditional IRAs and after death for all IRAs, including Roth IRAs.
5. Traditional IRA distributions are generally subject to income tax and may be subject to penalties. Some Roth IRA distributions may be subject to tax or penalties.
6. Traditional IRAs are subject to double tax at death, income tax and estate tax. Roth IRAs are includable in the account owner’s estate.
7. There is no step-up in basis, capital gains tax rates, or gain or loss recognition in an IRA.
8. You cannot borrow from, lend to, or pledge IRA assets as collateral.
9. IRAs have no principal and income concept.
10. IRAs require their own estate plan which must be integrated into the overall estate plan.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
Wednesday, June 30, 2010
Tuesday, June 29, 2010
Nominate an Advisor and the Gift Tax on Twitter
Our Twitter feed includes two great pieces of information today:
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*Copyright 2010 Ed Slott and Company, LLC
- Investment News lets all of you know that you can nominate a financial advisor for a Community Leadership Award.
- One of our Elite advisors answers the question, "When is a Gift Tax Return Required To Be Filed?"
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*Copyright 2010 Ed Slott and Company, LLC
Photos from NYC Public Television Pledge Drive
Ed Slott taped the pledge drive portion of his NEW Public Television TODAY at WNET/WLIW Studios in New York City.
We have posted behind-the-scenes pictures from today's Pledge Drive on Facebook...and if you look closely enough, you can see the name of the new special!
Log in to your Facebook account at www.facebook.com. If you are not one of our "Friends" just send a friend request to "Ed Slott".
If you have any questions, give us a call at 215-557-7022.
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*Copyright 2010 Ed Slott and Company, LLC
We have posted behind-the-scenes pictures from today's Pledge Drive on Facebook...and if you look closely enough, you can see the name of the new special!
Log in to your Facebook account at www.facebook.com. If you are not one of our "Friends" just send a friend request to "Ed Slott".
If you have any questions, give us a call at 215-557-7022.
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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, June 28, 2010
All In on Roth Conversions and Pension Funding Relief on Twitter
Our Twitter feed includes two timely, information-packed articles:
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*Copyright 2010 Ed Slott and Company, LLC
- President Barack Obama signed into law new legislation providing pension funding relief for multi-employer and single employer defined benefit plans
- One of our Elite advisors, Lewis Robinson, wrote a Q&A on Roth Conversions
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*Copyright 2010 Ed Slott and Company, LLC
Married Men: Don't Take Social Security Too Early
Social Security (SS) benefits typically begin to be received between ages 62 and 70. The most common scenario involves a married couple where the husband is both older and the higher earner. In these cases, the largest monthly payment is produced if the husband waits until age 70 to claim his benefit. Once payments begin, they will continue until the end of the surviving spouse’s life.
Most married men usually claim SS benefits at age 62 or 63, despite the fact that their family’s overall expected lifetime income would be much greater if they waited a few years. The longer an individual waits to claim SS benefits the larger his or her monthly payment will be. This is the result of an actuarial calculation that takes into consideration the delayed commencement of benefits.
Those most affected by an early claim of SS benefits are wives who outlive their husbands. While men who begin taking benefits at age 62 lose about 4% of the lifetime income they could have expected to receive if they had not started early, a surviving spouse typically receives a survivor’s benefit that is 20% less than it would have been.
So why do men generally begin taking SS benefits at age 62 or 63 even though it’s usually not in their family’s best interest to do so? A recent study by the Center for Retirement Research at Boston College examined this question, with surprising results. While it might be assumed that men are more likely to claim early because they need the money, the study found that wealth makes little difference in when benefits are claimed. Men without a lot of savings often claim early because they need the money to live on, but wealthy men often claim early too, because they want to leave their children an inheritance and they prefer to live on SS benefits instead of spending down other assets that could otherwise be passed along to their children.
A Roth IRA would certainly be a great asset to pass to the children. For example, a Roth IRA has no required minimum distributions (RMDs) during the owner’s lifetime and the designated beneficiary generally can withdraw it over his or her own life expectancy. This means, a 40-year-old beneficiary who inherits the Roth can draw it down over approximately 43 years. With no RMDs during the owner’s life and the extended time the beneficiary has to withdraw it, there should be ample time to generate meaningful growth to pass on to heirs, income tax-free.
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
Most married men usually claim SS benefits at age 62 or 63, despite the fact that their family’s overall expected lifetime income would be much greater if they waited a few years. The longer an individual waits to claim SS benefits the larger his or her monthly payment will be. This is the result of an actuarial calculation that takes into consideration the delayed commencement of benefits.
Those most affected by an early claim of SS benefits are wives who outlive their husbands. While men who begin taking benefits at age 62 lose about 4% of the lifetime income they could have expected to receive if they had not started early, a surviving spouse typically receives a survivor’s benefit that is 20% less than it would have been.
So why do men generally begin taking SS benefits at age 62 or 63 even though it’s usually not in their family’s best interest to do so? A recent study by the Center for Retirement Research at Boston College examined this question, with surprising results. While it might be assumed that men are more likely to claim early because they need the money, the study found that wealth makes little difference in when benefits are claimed. Men without a lot of savings often claim early because they need the money to live on, but wealthy men often claim early too, because they want to leave their children an inheritance and they prefer to live on SS benefits instead of spending down other assets that could otherwise be passed along to their children.
A Roth IRA would certainly be a great asset to pass to the children. For example, a Roth IRA has no required minimum distributions (RMDs) during the owner’s lifetime and the designated beneficiary generally can withdraw it over his or her own life expectancy. This means, a 40-year-old beneficiary who inherits the Roth can draw it down over approximately 43 years. With no RMDs during the owner’s life and the extended time the beneficiary has to withdraw it, there should be ample time to generate meaningful growth to pass on to heirs, income tax-free.
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, June 25, 2010
Financial Reform Bill Analysis on Twitter Today
Investment News talks about how the new Financial Reform Bill passed by Congress affects financial advisors today on our Twitter account, www.twitter.com/theslottreport.
As always, you can follow our Instant IRA information at Twitter.
Enjoy your weekend!
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*Copyright 2010 Ed Slott and Company, LLC
As always, you can follow our Instant IRA information at Twitter.
Enjoy your weekend!
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*Copyright 2010 Ed Slott and Company, LLC
Thursday, June 24, 2010
Stretch IRAs, Business Insurance Taxes on Twitter
What is going on at the home of Instant IRA information today?
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*Copyright 2010 Ed Slott and Company, LLC
- We shared an article on Stretch IRAs by Denise Appleby
- We re-tweeted a great article from Senior Market Advisor on the 10 rules of engagement for advisors
- We included 10 Personal and Business Insurance Tax Dos and Dont's
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*Copyright 2010 Ed Slott and Company, LLC
IRA Funds in Real Estate Highlights Mailbag
This week's Slott Report Mailbag discusses the possibility of using IRA funds to invest in real estate, guidance on using JUST after-tax dollars for a Roth IRA conversion and a situation involving inherited IRAs. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.
Enjoy!
1.
I would like to know more about using IRA funds to invest in real estate.
1. What are the guidelines for using an IRA account to invest in real estate?
2. Are the funds required to be transferred to an intermediary to establish independence and control for procedures over the investing, collecting rents, etc?
3. Should or could an LLC be set up to establish the independent control features?
Answer:
Real estate is a permitted investment in IRAs. You will need to establish a self directed IRA with a custodian that will allow real estate as an investment. While real estate is a permissible investment, not all custodians will allow it to be held in the account.
There are many issues involved in owning real estate in IRAs. There are far too many to list here. They range from prohibited transactions, when you use personal funds to pay the real estate expenses or perform services for the real estate beyond that of an investment decision, and investment gains resulting from investments that may create Unrelated Business Taxable Income (UBTI) and could require the IRA to file a tax return.
Owning real estate in IRAs is very complicated and you should seek out an advisor that is familiar with all the rules before embarking on owning real estate in your IRA.
2.
Can the after-tax dollars within a 401(k) be rolled into a Roth IRA while at the same time the pre-tax dollars be rolled into a traditional IRA? We do not want to incur a tax on either amount.
Answer:
The IRS has issued conflicting guidance on whether or not you can do a rollover of after-tax funds only to a Roth IRA income-tax-free. However, many plan administrators continue to advise their plan participants that this can be done. Unfortunately, we will just have to wait for more clarification from the IRS. Stay tuned for more information and check www.irahelp.com periodically.
3.
My father passed away in August 2005. I am currently 25 years old. My father had a 401(k) plan at a large corporate employer and I was left the funds.
If I do a rollover from a 401(k) to a traditional IRA now, registered as inherited or beneficiary IRA with my father's name on new IRA account, will I be able to defer withdrawals until age 59 1/2 and not be required to take distributions? My father was 51 at time of death so his required minimum distributions had not commenced.
Is the “trigger” event the current distribution of the 401(k) to the new IRA that starts the one-year clock ticking for the inherited IRA eligibility or was the clock started on the date of death, even though funds remained in the 401(k) since then?
Five years is up this August and I am in possession of a distribution check from the 401(k) plan so I need to act quickly.
Thank you!
Answer:
If in fact a distribution check was received and payable to the beneficiary your options are very, very limited. You can cash the check, deposit it in a personal account and pay all the necessary taxes. Once a check has been issued to the beneficiary the beneficiary can not do an inherited IRA or an IRA rollover with the funds.
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
Enjoy!
1.
I would like to know more about using IRA funds to invest in real estate.
1. What are the guidelines for using an IRA account to invest in real estate?
2. Are the funds required to be transferred to an intermediary to establish independence and control for procedures over the investing, collecting rents, etc?
3. Should or could an LLC be set up to establish the independent control features?
Answer:
Real estate is a permitted investment in IRAs. You will need to establish a self directed IRA with a custodian that will allow real estate as an investment. While real estate is a permissible investment, not all custodians will allow it to be held in the account.
There are many issues involved in owning real estate in IRAs. There are far too many to list here. They range from prohibited transactions, when you use personal funds to pay the real estate expenses or perform services for the real estate beyond that of an investment decision, and investment gains resulting from investments that may create Unrelated Business Taxable Income (UBTI) and could require the IRA to file a tax return.
Owning real estate in IRAs is very complicated and you should seek out an advisor that is familiar with all the rules before embarking on owning real estate in your IRA.
2.
Can the after-tax dollars within a 401(k) be rolled into a Roth IRA while at the same time the pre-tax dollars be rolled into a traditional IRA? We do not want to incur a tax on either amount.
Answer:
The IRS has issued conflicting guidance on whether or not you can do a rollover of after-tax funds only to a Roth IRA income-tax-free. However, many plan administrators continue to advise their plan participants that this can be done. Unfortunately, we will just have to wait for more clarification from the IRS. Stay tuned for more information and check www.irahelp.com periodically.
3.
My father passed away in August 2005. I am currently 25 years old. My father had a 401(k) plan at a large corporate employer and I was left the funds.
If I do a rollover from a 401(k) to a traditional IRA now, registered as inherited or beneficiary IRA with my father's name on new IRA account, will I be able to defer withdrawals until age 59 1/2 and not be required to take distributions? My father was 51 at time of death so his required minimum distributions had not commenced.
Is the “trigger” event the current distribution of the 401(k) to the new IRA that starts the one-year clock ticking for the inherited IRA eligibility or was the clock started on the date of death, even though funds remained in the 401(k) since then?
Five years is up this August and I am in possession of a distribution check from the 401(k) plan so I need to act quickly.
Thank you!
Answer:
If in fact a distribution check was received and payable to the beneficiary your options are very, very limited. You can cash the check, deposit it in a personal account and pay all the necessary taxes. Once a check has been issued to the beneficiary the beneficiary can not do an inherited IRA or an IRA rollover with the funds.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
Wednesday, June 23, 2010
Twitter Today: Wednesday, June 23rd
What are we following and passing on to you today at our Twitter account, www.twitter.com/theslottreport?
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*Copyright 2010 Ed Slott and Company, LLC
- You could save over 25% if you register for Investment News' Senior Market Expo by THIS FRIDAY!
- One of our Elite advisors, Lewis Robinson, wrote about 529 Plan Withdrawals.
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*Copyright 2010 Ed Slott and Company, LLC
ROBS: Rollovers as Business Start-Ups
Last October IRS issued a statement saying they would be scrutinizing what they called ROBS transactions. In May they issued another statement saying these transactions are an “emerging issue” as an area of abuse in retirement plans. Retirement account owners need to be very wary of these transactions and make every effort to be sure they comply with ALL retirement plan rules.
The basic transaction goes something like this. You want to start a business but the only funds you have are in your retirement account (IRA, 401(k), etc.). You establish the new business and establish a 401(k) plan for the business that will accept rollovers from other plans. You then roll your IRA or 401(k) into the new plan. Then the new plan purchases stock in the new business. This effectively transfers the cash from the 401(k) to the business bank account and the cash in the plan is replaced with company stock which is basically an ESOP transaction and is perfectly legal.
However, there are many traps for the unwary that can cause the new 401(k) plan to be disqualified and become completely taxable to the account owner. IRS is now actively looking for those who make a mistake.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
The basic transaction goes something like this. You want to start a business but the only funds you have are in your retirement account (IRA, 401(k), etc.). You establish the new business and establish a 401(k) plan for the business that will accept rollovers from other plans. You then roll your IRA or 401(k) into the new plan. Then the new plan purchases stock in the new business. This effectively transfers the cash from the 401(k) to the business bank account and the cash in the plan is replaced with company stock which is basically an ESOP transaction and is perfectly legal.
However, there are many traps for the unwary that can cause the new 401(k) plan to be disqualified and become completely taxable to the account owner. IRS is now actively looking for those who make a mistake.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
Tuesday, June 22, 2010
Ed Slott LIVE on CNN 650 AM in Houston this Wednesday
Ed Slott will be featured on CNN 650 AM KIKK in Houston this Wednesday from 6 PM ET to 7 PM ET on a program called "What's Working Now." Ed will be talking about certain strategies and tax laws to take advantage of prior to year-end while taking phone calls during the 1-hour time slot.
You can get more information on the station, the program and even LISTEN LIVE this Wednesday, June 23rd at www.cnn650.com.
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*Copyright 2010 Ed Slott and Company, LLC
You can get more information on the station, the program and even LISTEN LIVE this Wednesday, June 23rd at www.cnn650.com.
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*Copyright 2010 Ed Slott and Company, LLC
Twitter Today: Tuesday, June 22nd
What is going on at our Twitter account today? We have included the following for your reading pleasure (and information overload):
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*Copyright 2010 Ed Slott and Company, LLC
- A link to Laura Sanders' Wall Street Journal article about Roth IRAs and their tax consequences
- The IRS has extended the deadline for certain retirement plan sponsors. Find out who at the link in our Twitter feed
- A Colorado man lost his unemployment benefits -- following a 30-plus-year career at IBM -- because he dipped into his 401(k) to pay for his child's college tuition. A link to the horror story is at our Twitter account
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*Copyright 2010 Ed Slott and Company, LLC
Wall St. Journal: Is Roth IRA Safe From Taxes?
Laura Sanders wrote a June 18th article for Wall Street Journal asking a popular question: "Is a Roth IRA safe from taxes?"
The answer is "yes" but many less-convinced consumers and advisors ask Ed Slott: "If I pay tax to convert my IRA, how do I know Congress won't turn around and take away the benefits?"
There is no crystal ball to definitively answer that question, but as Sanders points out in the article, Congress won't tax Roth conversions anytime soon and the prospect of longer-term changes are low enough that experts in the field are converting their own accounts.
CLICK HERE to read the entire article.
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*Copyright 2010 Ed Slott and Company, LLC
The answer is "yes" but many less-convinced consumers and advisors ask Ed Slott: "If I pay tax to convert my IRA, how do I know Congress won't turn around and take away the benefits?"
There is no crystal ball to definitively answer that question, but as Sanders points out in the article, Congress won't tax Roth conversions anytime soon and the prospect of longer-term changes are low enough that experts in the field are converting their own accounts.
CLICK HERE to read the entire article.
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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, June 21, 2010
Twitter Today: Monday, June 21st
Each day, we will briefly highlight what The Slott Report has passed on to our loyal followers over at Twitter.
Receive all instantaneous IRA information at our Twitter feed www.twitter.com/theslottreport.
Today's feed includes:
Better yet, follow us on Twitter for the latest IRA analysis from America's IRA Experts and valuable information passed on to you from other major financial publications and resources.
Receive all instantaneous IRA information at our Twitter feed www.twitter.com/theslottreport.
Today's feed includes:
- Want to "make the most of the middle"? We re-tweeted the second part of a great four-part series in Investment News.
- The July mid-term rates used to calculate 72(t) payments are now available. We re-tweeted on a reminder notice on this. You can view those rates at http://72t.net.
Better yet, follow us on Twitter for the latest IRA analysis from America's IRA Experts and valuable information passed on to you from other major financial publications and resources.
Taking Social Security Benefits
The combination of guaranteed benefits for life, cost of living adjustments, and spousal coverage makes Social Security (SS) one of the most valuable sources of retirement income.
If you were born between 1943 and 1954 you qualify for full SS benefits at age 66, which is referred to as “Normal Retirement Age.” You may start collecting as early as age 62, but your monthly checks will be reduced by about 25% for the rest of your life. The normal retirement age increases gradually for individuals born between 1955 and 1959, until it reaches age 67 for those born in or after 1960.
Since 1983, SS benefits have been subject to income tax if the recipient’s total income exceeds a certain amount. You need to crunch the numbers to see how much of your benefits will be taxed at your regular income tax rate. Add up your taxable income from pensions, wages, interest, dividends and other sources, plus tax-exempt interest income and one-half of your SS benefits.
For 2009, if you are married and filing jointly and the total from all of those sources is:
• Less than $32,000 - your SS benefits will not be subject to income tax
• Between $32,000 and $44,000 - up to 50% of your benefits will be taxed
• More than $44,000 - up to 85% of your benefits will be taxed
If you are single and your total income from all sources is:
• Less than $25,000 - your SS benefits will not be taxed
• Between $25,000 and $34,000 - up to 50% of your SS benefits will be taxed
• More than $34,000 - up to 85% of your benefits will be taxed
If you are married, file separately, but lived with your spouse for any part of the year:
• 85% of your benefit is subject to tax, regardless of your income amount
The calculations can get tricky, so you might want to review IRS Publication 915 (Social Security and Equivalent Railroad Benefits) for more details.
Also keep in mind that receiving social security benefits may impact your ability to deduct traditional IRA contributions. Applicable worksheets are available in IRS Publication 590 (Individual Retirement Arrangements) for determining what affect, if any, receipt of social security benefits will have on your IRA deductions.
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
If you were born between 1943 and 1954 you qualify for full SS benefits at age 66, which is referred to as “Normal Retirement Age.” You may start collecting as early as age 62, but your monthly checks will be reduced by about 25% for the rest of your life. The normal retirement age increases gradually for individuals born between 1955 and 1959, until it reaches age 67 for those born in or after 1960.
Since 1983, SS benefits have been subject to income tax if the recipient’s total income exceeds a certain amount. You need to crunch the numbers to see how much of your benefits will be taxed at your regular income tax rate. Add up your taxable income from pensions, wages, interest, dividends and other sources, plus tax-exempt interest income and one-half of your SS benefits.
For 2009, if you are married and filing jointly and the total from all of those sources is:
• Less than $32,000 - your SS benefits will not be subject to income tax
• Between $32,000 and $44,000 - up to 50% of your benefits will be taxed
• More than $44,000 - up to 85% of your benefits will be taxed
If you are single and your total income from all sources is:
• Less than $25,000 - your SS benefits will not be taxed
• Between $25,000 and $34,000 - up to 50% of your SS benefits will be taxed
• More than $34,000 - up to 85% of your benefits will be taxed
If you are married, file separately, but lived with your spouse for any part of the year:
• 85% of your benefit is subject to tax, regardless of your income amount
The calculations can get tricky, so you might want to review IRS Publication 915 (Social Security and Equivalent Railroad Benefits) for more details.
Also keep in mind that receiving social security benefits may impact your ability to deduct traditional IRA contributions. Applicable worksheets are available in IRS Publication 590 (Individual Retirement Arrangements) for determining what affect, if any, receipt of social security benefits will have on your IRA deductions.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
Friday, June 18, 2010
Q of the Week: Where Do IRA Rules Come From
This week the Ed Slott IRA Discussion Forum featured a question on where a particular IRA rule came from. Well, there’s actually a whole assortment of places we can learn about IRA rules. Want to know what some of them are? Read on to find out…
The U.S. Tax Code - The “Code” is where it all starts. This is the tax law as passed by Congress and signed into law by the President. It is the most authoritative source for tax information since it is the primary source. The problem with the Code though, is that half of the time no one knows exactly what it means. Maybe that’s what they call it the Code?
Regulations - More commonly referred to as “Regs” (for those too lazy to use the full four syllables), the Regs are the U.S. Treasury Department’s interpretations of what Congress meant when they “wrote” the Code. The Regs are issued by the IRS (a branch of the U.S. Treasury Department) and for the most part, have the effect of being law.
IRS Notices - Although the Regs are meant to provide clarification on the rules, sometimes they don’t answer all the questions, or they may even raise new ones. So what happens when we need clarification of our clarification? Well, oftentimes, the IRS will issue a Notice to provide further guidance. These notices are generally written in question and answer form in order to be easily understood.
Private Letter Ruling (PLR) - A PLR is used when a taxpayer would like IRS to specifically address their own issue. Sometimes, they are used to get the IRS’ blessing on a particular transaction before it is done, while other times they are used to try and obtain relief on a previous mistake. For example, one of the most common ruling requests is for an extension of the 60-day rollover window. Although IRS releases PLRs to the public (with the personal information of the requestee blocked out), the ruling is only authoritative to the individual who requested it. But while it cannot be relied on as precedent, if your fact pattern matches that of the ruling, it’s likely that IRS would rule in a similar fashion.
Revenue Ruling - Sometimes, IRS sees the same requests over and over. When this happens, they may choose to issue a Revenue Ruling. Revenue rulings are somewhat similar to Private Letter Rulings, except they can be relied upon by all taxpayers. But where there may be hundreds of PLRs in a given year, there are very few Revenue Rulings - and even fewer of them affect IRAs.
There’s also a whole array of other sources from which we can learn more about the various tax rules and how they are being interpreted. These include internal guidance, such as a Chief Counsel Advisory or an Internal Legal Memorandum, as well as court cases of various levels (i.e. State Court, U.S. Supreme Court, U.S. Tax Court, etc.).
It’s no secret, the tax rules are complex. Why else would you need so many different sources of information just to know what it means? And even after all that, there are still different interpretations all the time.
Not sure about some of the rules? Need a better explanation of how they may apply in your situation? Make sure to seek out the advice of a qualified advisor who has specialized knowledge in this area.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
The U.S. Tax Code - The “Code” is where it all starts. This is the tax law as passed by Congress and signed into law by the President. It is the most authoritative source for tax information since it is the primary source. The problem with the Code though, is that half of the time no one knows exactly what it means. Maybe that’s what they call it the Code?
Regulations - More commonly referred to as “Regs” (for those too lazy to use the full four syllables), the Regs are the U.S. Treasury Department’s interpretations of what Congress meant when they “wrote” the Code. The Regs are issued by the IRS (a branch of the U.S. Treasury Department) and for the most part, have the effect of being law.
IRS Notices - Although the Regs are meant to provide clarification on the rules, sometimes they don’t answer all the questions, or they may even raise new ones. So what happens when we need clarification of our clarification? Well, oftentimes, the IRS will issue a Notice to provide further guidance. These notices are generally written in question and answer form in order to be easily understood.
Private Letter Ruling (PLR) - A PLR is used when a taxpayer would like IRS to specifically address their own issue. Sometimes, they are used to get the IRS’ blessing on a particular transaction before it is done, while other times they are used to try and obtain relief on a previous mistake. For example, one of the most common ruling requests is for an extension of the 60-day rollover window. Although IRS releases PLRs to the public (with the personal information of the requestee blocked out), the ruling is only authoritative to the individual who requested it. But while it cannot be relied on as precedent, if your fact pattern matches that of the ruling, it’s likely that IRS would rule in a similar fashion.
Revenue Ruling - Sometimes, IRS sees the same requests over and over. When this happens, they may choose to issue a Revenue Ruling. Revenue rulings are somewhat similar to Private Letter Rulings, except they can be relied upon by all taxpayers. But where there may be hundreds of PLRs in a given year, there are very few Revenue Rulings - and even fewer of them affect IRAs.
There’s also a whole array of other sources from which we can learn more about the various tax rules and how they are being interpreted. These include internal guidance, such as a Chief Counsel Advisory or an Internal Legal Memorandum, as well as court cases of various levels (i.e. State Court, U.S. Supreme Court, U.S. Tax Court, etc.).
It’s no secret, the tax rules are complex. Why else would you need so many different sources of information just to know what it means? And even after all that, there are still different interpretations all the time.
Not sure about some of the rules? Need a better explanation of how they may apply in your situation? Make sure to seek out the advice of a qualified advisor who has specialized knowledge in this area.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Thursday, June 17, 2010
Slott Report Mailbag: June 17th
It is time for another edition of The Slott Report Mailbag with 3 consumer questions and our answers. Enjoy the summer season! As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.
1.
Hello,
I took out an early distribution from my IRA last April and I sadly (partly due to being unemployed and having a pretty hectic life) have just missed the 60-day deadline to put the money back into the IRA or convert it to a Roth.
What do you think is the best thing for me to do at this point?
Thanks in advance,
Bill W.
Answer:
The IRS is taking a much tougher stance on the 60-day rule. There have been many Private Letter Rulings, which are very expensive to apply for, concerning the 60-day rule. Unless you have a very compelling reason why you missed the 60 days you will not get relief. Unfortunately, you will have to pay the 10% early withdrawal penalty plus income tax on the distribution from a traditional IRA.
2.
Just got your June newsletter. Always interesting and helpful.
1. You did not mention that in 2010 there is a required RMD before Roth conversion which adds to the 2010 tax burden. Is this right? I made the RMD January 4th.
2. Then I made a sizable (multimillion) Roth Conversion on January 7th. Now, if I wish to pay the tax this year, when is it due? Immediately? By means of estimated tax payments? Is the latest payment on April 15, 2011?
Can I use the "safe harbor' provision by paying 115% of last year's tax in the estimated payments and then the remaining huge lump April 15th of next year?
3. I contacted the New Jersey Tax Authorities. They replied they will go along with the Federal requirements.
I would appreciate your early reply and also believe this information will be helpful for your "tribe."
Sincerely,
Peter H. Seckel
Answer:
An RMD must come out first before doing a Roth conversion. This was mentioned in our April 2010 newsletter when discussing that RMDs were back again in 2010.
If you wish to pay the income tax on the Roth IRA conversion this year you will have to pay the tax by April 15, 2011. There is a safe harbor provision you mentioned, check our March 2010 newsletter for an in-depth discussion on paying the tax on a Roth conversion and estimated tax rules when income increases. I would also suggest you consult with your tax and financial advisor about paying estimated income tax.
3.
In the fifth paragraph of your April 5th Investment News article it states that if a "client's income exceeds the contribution income eligibility limits...they can bypass those limits by first contributing the funds to traditional IRAs..."
But if someone is over the contribution limits for a Roth, a client would also be over the contribution limits for a traditional IRA. So why would I do that?
My accountant is telling me that I make too much money to contribute to a Roth IRA so we should undo what we started and change it back to a traditional IRA.
Thank you for the clarification.
CH
Answer:
There are income limits that apply to deductibility of traditional IRA contributions. If your income exceeds the limit for deductibility you can always, assuming you have enough earned income, make a non deductible traditional IRA contribution.
Here are the income limits on deductible traditional IRA contributions for 2010: If you are married and filing a joint tax return, and both are covered by an employer retirement plan, income of $89,000 or less--full deductibility, $89,000-$109,000--partial deductibility and more than $109,000--none.
For Roth IRAs the 2010 contribution eligibility for married individuals is $167,000-$176,000. Again you must have earned income.
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.
Hello,
I took out an early distribution from my IRA last April and I sadly (partly due to being unemployed and having a pretty hectic life) have just missed the 60-day deadline to put the money back into the IRA or convert it to a Roth.
What do you think is the best thing for me to do at this point?
Thanks in advance,
Bill W.
Answer:
The IRS is taking a much tougher stance on the 60-day rule. There have been many Private Letter Rulings, which are very expensive to apply for, concerning the 60-day rule. Unless you have a very compelling reason why you missed the 60 days you will not get relief. Unfortunately, you will have to pay the 10% early withdrawal penalty plus income tax on the distribution from a traditional IRA.
2.
Just got your June newsletter. Always interesting and helpful.
1. You did not mention that in 2010 there is a required RMD before Roth conversion which adds to the 2010 tax burden. Is this right? I made the RMD January 4th.
2. Then I made a sizable (multimillion) Roth Conversion on January 7th. Now, if I wish to pay the tax this year, when is it due? Immediately? By means of estimated tax payments? Is the latest payment on April 15, 2011?
Can I use the "safe harbor' provision by paying 115% of last year's tax in the estimated payments and then the remaining huge lump April 15th of next year?
3. I contacted the New Jersey Tax Authorities. They replied they will go along with the Federal requirements.
I would appreciate your early reply and also believe this information will be helpful for your "tribe."
Sincerely,
Peter H. Seckel
Answer:
An RMD must come out first before doing a Roth conversion. This was mentioned in our April 2010 newsletter when discussing that RMDs were back again in 2010.
If you wish to pay the income tax on the Roth IRA conversion this year you will have to pay the tax by April 15, 2011. There is a safe harbor provision you mentioned, check our March 2010 newsletter for an in-depth discussion on paying the tax on a Roth conversion and estimated tax rules when income increases. I would also suggest you consult with your tax and financial advisor about paying estimated income tax.
3.
In the fifth paragraph of your April 5th Investment News article it states that if a "client's income exceeds the contribution income eligibility limits...they can bypass those limits by first contributing the funds to traditional IRAs..."
But if someone is over the contribution limits for a Roth, a client would also be over the contribution limits for a traditional IRA. So why would I do that?
My accountant is telling me that I make too much money to contribute to a Roth IRA so we should undo what we started and change it back to a traditional IRA.
Thank you for the clarification.
CH
Answer:
There are income limits that apply to deductibility of traditional IRA contributions. If your income exceeds the limit for deductibility you can always, assuming you have enough earned income, make a non deductible traditional IRA contribution.
Here are the income limits on deductible traditional IRA contributions for 2010: If you are married and filing a joint tax return, and both are covered by an employer retirement plan, income of $89,000 or less--full deductibility, $89,000-$109,000--partial deductibility and more than $109,000--none.
For Roth IRAs the 2010 contribution eligibility for married individuals is $167,000-$176,000. Again you must have earned income.
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's Travels This Week
Ed Slott has been traveling around the country this week, speaking to financial advisors and stressing the importance of 2010 Year-End Tax Planning, including taking advantage of Roth Conversions, Health Care Tax Strategies and historically low tax rates.
- Ed spoke to a group of advisors in Charlotte for Nationwide on Tuesday, June 15th
- He traveled to Franklin, Tennessee and spoke to another contingent of Nationwide advisors on Wednesday, June 16th
- Ed is in Las Vegas today, speaking to a group of financial advisors at 3-Mentors' "Superstars of Sales Conference."
Wednesday, June 16, 2010
Retirement Stats from MDRT's Boomer Session
We are at MDRT (Million Dollar Round Table) in Vancouver this week, and thanks to Senior Market Advisor's Twitter feed, we discovered some interesting statistics that speak to the life-changing importance of planning for and talking about retirement with your loved ones.
- 60% of couples disagree on when to retire
- 44% of couples disagree on whether to work or not in retirement
- 75% of baby boomers want to work (at least part-time) in retirement
Tuesday, June 15, 2010
Attention Returning 2-Day Workshop Attendees
If you have attended a 2-Day IRA Workshop within the last two years and are considering brushing up on 2010 Tax Planning Opportunities before year-end, you can come to our NEXT Instant IRA Success workshop for a reduced price.
Returning workshop attendees can receive a $600 DISCOUNT off the full tuition price.
CLICK HERE for more information on Ed Slott's 2-Day IRA Workshop on November 4-5 in La Jolla, California (for those who ask, "Where is La Jolla?" -- it is just outside San Diego).
If you have any questions, please give us a call at 215-557-7022.
Returning workshop attendees can receive a $600 DISCOUNT off the full tuition price.
CLICK HERE for more information on Ed Slott's 2-Day IRA Workshop on November 4-5 in La Jolla, California (for those who ask, "Where is La Jolla?" -- it is just outside San Diego).
If you have any questions, please give us a call at 215-557-7022.
The Perfect Storm Creates Another IRA Disaster
We know times are tough - it would be hard to miss that fact. This story is about an IRA owner in Florida who was a real estate agent. He did well for a while, but then the market started to drop in Florida, so James was looking for ways to support his family and pay his bills. He found another job, but the pay was not nearly what he was making in real estate so he did what many others have done - he started taking money from his IRA.
In James’ mind his withdrawals were loans from the IRA to him. He was going to pay them back. So when he did his taxes for the year he did not report the income from his IRA distributions (there were six of them). He did not pay the tax or the penalty since James was under the age of 59 ½ at the time of the distributions.
IRS came calling for the taxes. James, instead of just paying up, kept insisting that he did not owe any taxes on the distributions. James ended up in Tax Court to try and prove his case. Needless to say he lost. But he did not lose as much as he could have.
The Court noted that a loan from the IRA to the account owner is always a prohibited transaction that would cause the IRA to lose its exempt status and the entire account balance to be taxable. The Court was very sympathetic to James so they did not consider the distributions to be loans. However, the law allowed them no choice but to assess the taxes and early distribution penalties on all the distributions.
Had James consulted an expert in IRAs, he would have saved himself a lot of trouble. Don’t go it alone on IRA transactions. You don’t want to make a bad situation worse. Consult a professional. You can find a list of Ed Slott trained advisors on our web site, www.irahelp.com.
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
In James’ mind his withdrawals were loans from the IRA to him. He was going to pay them back. So when he did his taxes for the year he did not report the income from his IRA distributions (there were six of them). He did not pay the tax or the penalty since James was under the age of 59 ½ at the time of the distributions.
IRS came calling for the taxes. James, instead of just paying up, kept insisting that he did not owe any taxes on the distributions. James ended up in Tax Court to try and prove his case. Needless to say he lost. But he did not lose as much as he could have.
The Court noted that a loan from the IRA to the account owner is always a prohibited transaction that would cause the IRA to lose its exempt status and the entire account balance to be taxable. The Court was very sympathetic to James so they did not consider the distributions to be loans. However, the law allowed them no choice but to assess the taxes and early distribution penalties on all the distributions.
Had James consulted an expert in IRAs, he would have saved himself a lot of trouble. Don’t go it alone on IRA transactions. You don’t want to make a bad situation worse. Consult a professional. You can find a list of Ed Slott trained advisors on our web site, www.irahelp.com.
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
Monday, June 14, 2010
Don't Cash Out IRAs to Pay Off Mortgages
Thinking of cashing out your IRA to pay your mortgage? Don't do it.
You will generally pay income tax on amounts distributed from a traditional IRA, plus a 10% early withdrawal penalty if you are younger than 59 1/2. Certain withdrawals from a Roth IRA may also have tax and penalty consequences, depending on how long you have had the account and the age at which you make the withdrawal.
Having to add an IRA withdrawal to your other income might push you into a higher income tax bracket. In some cases, a sufficiently large enough IRA withdrawal could result in full or partial loss of your home mortgage interest deduction.
If a major portion of your retirement assets are tied up in the equity of your home, you could have a future problem similar to what we are seeing now. The value of your home could have declined or it could be a buyer's market at the time you need to realize the proceeds from your home. A home could be on the market for a long time.
Additionally, the money you cash out of a retirement account will not be able to grow for you over time. A traditional IRA grows tax-deferred, while a Roth IRA grows tax-free, provided certain conditions are met. Given the recent volatility of the stock and housing markets, you just might have to accumulate as much money as you can in tax-advantaged accounts for your retirement.
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
You will generally pay income tax on amounts distributed from a traditional IRA, plus a 10% early withdrawal penalty if you are younger than 59 1/2. Certain withdrawals from a Roth IRA may also have tax and penalty consequences, depending on how long you have had the account and the age at which you make the withdrawal.
Having to add an IRA withdrawal to your other income might push you into a higher income tax bracket. In some cases, a sufficiently large enough IRA withdrawal could result in full or partial loss of your home mortgage interest deduction.
If a major portion of your retirement assets are tied up in the equity of your home, you could have a future problem similar to what we are seeing now. The value of your home could have declined or it could be a buyer's market at the time you need to realize the proceeds from your home. A home could be on the market for a long time.
Additionally, the money you cash out of a retirement account will not be able to grow for you over time. A traditional IRA grows tax-deferred, while a Roth IRA grows tax-free, provided certain conditions are met. Given the recent volatility of the stock and housing markets, you just might have to accumulate as much money as you can in tax-advantaged accounts for your retirement.
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, June 11, 2010
Q of the Week: 2010 Roth Conversion Income Split
This week the Ed Slott IRA Discussion Forum featured a question on how the income from a 2010 Roth IRA conversion can be split. Want to know how? Read on to find out the answer plus a little known trick…
In most years, if you convert your IRA (or other retirement account) to a Roth IRA, you’re required to include the income from the conversion on your tax return for that year. But 2010 isn’t most years. This year (2010), if you convert you have a choice - you can include all the income from your conversion in 2010 or you can split the income from the conversion equally over 2011 and 2012.
That’s a pretty sweet deal, but some want to make it even better by mixing the two options - and that simply can’t be done. For example, let’s suppose you have an IRA worth $100,000 and you decide to convert it to a Roth IRA in 2010. As a default option, the income from the conversion would be split by adding $50,000 to your 2011 return and $50,000 to your 2012 return. Alternatively, you could make an election to add all $100,000 of conversion income from to your 2010 return. You could not, however, include $50,000 of income on your 2010 and then split the remaining $50,000 between 2011 and 2012 ($25,000/year).
Maybe you’re thinking to yourself, “Well I know how to get around that. I’ll just do two separate conversions and include the income from one conversion this year and split the income from the second conversion equally over 2011 and 2012.” Not so fast… …IRS has that one covered. When you file your 2010 tax return, any conversions done in 2010 will get lumped together and you’ll have to make the choice for the cumulative amount. But nice try!!
Think you’ve got a new angle on it because you and your spouse are each doing a Roth conversion (or multiple conversions) in 2010? Well, if you came up with that one on your own, you get the gold star! IRAs are individual retirement accounts and the Tax Code says that a taxpayer may make the election (to split income or not) - so yes, if you and your spouse each do a Roth conversion in 2010, you can select different options for the inclusion of the conversion income - even if you file a joint return. In essence, you could convert now but split the income from the conversions over three years.
For example, let’s say Jane and Bob are married. Jane’s IRA is worth $40,000 and Bob’s IRA is worth $20,000. If both Jane and Bob convert all their IRAs in 2010, Jane can elect to split the income from her conversion equally over 2011 and 2012 ($20,000 each year) and Bob can elect to include all the income from his conversion in 2010. As a result, Jane and Bob will have $60,000 growing tax free in their Roth IRAs from 2010 on, but will not add more than $20,000 of income to their return in any one year (owed over three years). This could potentially keep Jane and Bob in a lower bracket and reduce the overall tax owed on their conversions.
Of course, in this case, Jane and Bob would actually have four options to choose from. They both could elect to include all their conversion income in 2010, they both could elect the split option, Jane could split the income over 2011 and 2012 while Bob includes it all in 2010, or Bob could split the income over 2011 and 2012 while Jane includes it all in 2010. What should they choose? We’ll that would require careful analysis of a number of factors including their projected other income for those years, projected deductions, credits, exemptions and the projected tax rates - and that’s just the start!!!
Curious as to what option you should choose? Best to speak with a qualified advisor who has specialized knowledge in this area so that they can review your unique situation and help you make the right decision.
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
In most years, if you convert your IRA (or other retirement account) to a Roth IRA, you’re required to include the income from the conversion on your tax return for that year. But 2010 isn’t most years. This year (2010), if you convert you have a choice - you can include all the income from your conversion in 2010 or you can split the income from the conversion equally over 2011 and 2012.
That’s a pretty sweet deal, but some want to make it even better by mixing the two options - and that simply can’t be done. For example, let’s suppose you have an IRA worth $100,000 and you decide to convert it to a Roth IRA in 2010. As a default option, the income from the conversion would be split by adding $50,000 to your 2011 return and $50,000 to your 2012 return. Alternatively, you could make an election to add all $100,000 of conversion income from to your 2010 return. You could not, however, include $50,000 of income on your 2010 and then split the remaining $50,000 between 2011 and 2012 ($25,000/year).
Maybe you’re thinking to yourself, “Well I know how to get around that. I’ll just do two separate conversions and include the income from one conversion this year and split the income from the second conversion equally over 2011 and 2012.” Not so fast… …IRS has that one covered. When you file your 2010 tax return, any conversions done in 2010 will get lumped together and you’ll have to make the choice for the cumulative amount. But nice try!!
Think you’ve got a new angle on it because you and your spouse are each doing a Roth conversion (or multiple conversions) in 2010? Well, if you came up with that one on your own, you get the gold star! IRAs are individual retirement accounts and the Tax Code says that a taxpayer may make the election (to split income or not) - so yes, if you and your spouse each do a Roth conversion in 2010, you can select different options for the inclusion of the conversion income - even if you file a joint return. In essence, you could convert now but split the income from the conversions over three years.
For example, let’s say Jane and Bob are married. Jane’s IRA is worth $40,000 and Bob’s IRA is worth $20,000. If both Jane and Bob convert all their IRAs in 2010, Jane can elect to split the income from her conversion equally over 2011 and 2012 ($20,000 each year) and Bob can elect to include all the income from his conversion in 2010. As a result, Jane and Bob will have $60,000 growing tax free in their Roth IRAs from 2010 on, but will not add more than $20,000 of income to their return in any one year (owed over three years). This could potentially keep Jane and Bob in a lower bracket and reduce the overall tax owed on their conversions.
Of course, in this case, Jane and Bob would actually have four options to choose from. They both could elect to include all their conversion income in 2010, they both could elect the split option, Jane could split the income over 2011 and 2012 while Bob includes it all in 2010, or Bob could split the income over 2011 and 2012 while Jane includes it all in 2010. What should they choose? We’ll that would require careful analysis of a number of factors including their projected other income for those years, projected deductions, credits, exemptions and the projected tax rates - and that’s just the start!!!
Curious as to what option you should choose? Best to speak with a qualified advisor who has specialized knowledge in this area so that they can review your unique situation and help you make the right decision.
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
Thursday, June 10, 2010
Slott Report Mailbag: June 10th
It is time for another edition of The Slott Report Mailbag. This week's mailbag includes a pair of questions and our answers. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.
1.
Ed and Company,
My father passed away and the estate is being settled. He had an annuity that named my mother as beneficiary. She passed before him in 2002. He did not change the beneficiary form to include my sisters and I. But, he had written and spoken to us about it many times and we believe that he felt we would be able to roll it over to to an inherited IRA. Is there any way to escape the severe tax to the estate for this?
Thanks so much for any input. Obviously this is a time sensitive question.
Libby Stinson
Answer:
You most likely are considered to have inherited the IRA through your Dad's estate rather than being named beneficiaries. Under the Tax Code if your dad died after age 70 1/2 then you can stretch the amount over his continued life expectancy. If, however, he died before age 70 1/2, then you will have to take it out over a period not to exceed 5 years. The annuity contract may state otherwise, in which case you would have to follow those rules.
2.
I am 71 years old and unemployed. In 2008, I began my Roth IRA with a $6000 contribution. In 2009, I rolled over $35,000 from my 401(k) into my Roth. My question is does the 5-year rule apply to me since I am over age 59 1/2?
Best Regards,
William Wheeling
Answer:
The 5-year rule for the early distribution penalty on converted amounts does NOT apply because you are over age 59 1/2. The amount you contributed, assuming you were eligible at that time to make a contribution, will start the clock on the 5-year rule for a tax-free distribution of earnings.
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.
Ed and Company,
My father passed away and the estate is being settled. He had an annuity that named my mother as beneficiary. She passed before him in 2002. He did not change the beneficiary form to include my sisters and I. But, he had written and spoken to us about it many times and we believe that he felt we would be able to roll it over to to an inherited IRA. Is there any way to escape the severe tax to the estate for this?
Thanks so much for any input. Obviously this is a time sensitive question.
Libby Stinson
Answer:
You most likely are considered to have inherited the IRA through your Dad's estate rather than being named beneficiaries. Under the Tax Code if your dad died after age 70 1/2 then you can stretch the amount over his continued life expectancy. If, however, he died before age 70 1/2, then you will have to take it out over a period not to exceed 5 years. The annuity contract may state otherwise, in which case you would have to follow those rules.
2.
I am 71 years old and unemployed. In 2008, I began my Roth IRA with a $6000 contribution. In 2009, I rolled over $35,000 from my 401(k) into my Roth. My question is does the 5-year rule apply to me since I am over age 59 1/2?
Best Regards,
William Wheeling
Answer:
The 5-year rule for the early distribution penalty on converted amounts does NOT apply because you are over age 59 1/2. The amount you contributed, assuming you were eligible at that time to make a contribution, will start the clock on the 5-year rule for a tax-free distribution of earnings.
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, June 9, 2010
Use the Beneficiary Form to Save Your IRA
For many individuals, the simple act of moving their IRA funds from one institution to another could, in fact, be the end of their IRA. Why? Because at the new institution the funds get put into a non-IRA account. This is a mistake that can sometimes be fixed but the fix is not simple and it is not cheap. You must apply to IRS for a private letter ruling (PLR). You must pay a fee to IRS and you generally will have to pay someone to prepare the PLR for you.
There is a very simple way to avoid this entire problem. It is the beneficiary form. Every IRA should have a beneficiary form. You worked hard for that money and it should go to the person you choose to inherit the money, not someone chosen by the IRA custodian (through the default language in their document) or the government. So whenever you move your IRA funds, you should be looking for that beneficiary form to fill out and to sign.
How will that help you avoid the problems we see in PLRs? Easy. A non-IRA account won’t have a beneficiary form. If you take IRA funds out of a CD and go to another bank to open a new IRA CD, there should be a beneficiary form to fill out and sign. You won’t have a beneficiary form on a regular CD account. There is no beneficiary form for a regular brokerage account either. So look for those beneficiary forms. If you don’t see one in the paperwork you are filling out and signing, ask for it - and don’t take no for an answer. It could cost you your 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
There is a very simple way to avoid this entire problem. It is the beneficiary form. Every IRA should have a beneficiary form. You worked hard for that money and it should go to the person you choose to inherit the money, not someone chosen by the IRA custodian (through the default language in their document) or the government. So whenever you move your IRA funds, you should be looking for that beneficiary form to fill out and to sign.
How will that help you avoid the problems we see in PLRs? Easy. A non-IRA account won’t have a beneficiary form. If you take IRA funds out of a CD and go to another bank to open a new IRA CD, there should be a beneficiary form to fill out and sign. You won’t have a beneficiary form on a regular CD account. There is no beneficiary form for a regular brokerage account either. So look for those beneficiary forms. If you don’t see one in the paperwork you are filling out and signing, ask for it - and don’t take no for an answer. It could cost you your 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
Tuesday, June 8, 2010
Retirement Fears: Age 50 is the Magic Number
Age 50 is a milestone (no matter if we want to admit it or not).
It is a perfect barometer age to take stock of your retirement situation. It is also the age you can begin making "catch-up" contributions to many types of tax-advantaged retirement plans.
All of those numbers may seen like a lot to process, but that is WHY you work with a competent financial advisor.
This installment of Retirement Fears discusses all of those contributions you can make, but the underlying (yet powerful) theme as always remains: Work with an educated financial advisor to avoid waking up with Retirement Fears.
CLICK HERE to read this installment.
It is a perfect barometer age to take stock of your retirement situation. It is also the age you can begin making "catch-up" contributions to many types of tax-advantaged retirement plans.
All of those numbers may seen like a lot to process, but that is WHY you work with a competent financial advisor.
This installment of Retirement Fears discusses all of those contributions you can make, but the underlying (yet powerful) theme as always remains: Work with an educated financial advisor to avoid waking up with Retirement Fears.
CLICK HERE to read this installment.
Monday, June 7, 2010
Inv News: Having the Conversion Conversation
Ed Slott wrote a June 6th article for Investment News titled, "Having the conversion conversation."
Slott began the piece: "Although the Roth conversion isn't for everyone, financial advisers must have the conversion conversation with every client who qualifies. If you aren't discussing conversion now, you can bet that some other adviser is."
The Roth Conversion rules apply ADVANTAGEOUSLY to 2010.
Slott continued: "Roth conversions can still be done after this year, but at what cost? Taxes for many clients may be higher. Advisers must identify those clients who will benefit most from a 2010 Roth conversion and take action now to plan out the most efficient and low-cost Roth conversion possible."
CLICK HERE to read the article in its entirety.
Slott began the piece: "Although the Roth conversion isn't for everyone, financial advisers must have the conversion conversation with every client who qualifies. If you aren't discussing conversion now, you can bet that some other adviser is."
The Roth Conversion rules apply ADVANTAGEOUSLY to 2010.
Slott continued: "Roth conversions can still be done after this year, but at what cost? Taxes for many clients may be higher. Advisers must identify those clients who will benefit most from a 2010 Roth conversion and take action now to plan out the most efficient and low-cost Roth conversion possible."
CLICK HERE to read the article in its entirety.
Ed Slott-Jay Leno Keynote Speakers in CA Conf
Ed Slott and Jay Leno were the Keynote Speakers at the Securities America Conference on Sunday, June 6th in Huntington Beach, California.
Prior to visiting Huntington Beach, Ed spoke to ATS Financial in Palo Alto, California on Friday, June 4th.
CLICK HERE to view Ed's entire speaking schedule.
Prior to visiting Huntington Beach, Ed spoke to ATS Financial in Palo Alto, California on Friday, June 4th.
CLICK HERE to view Ed's entire speaking schedule.
Friday, June 4, 2010
Question of the Week: Roth Recharacterization and RMDs
This week the Ed Slott IRA Discussion Forum featured a question about how a Roth recharacterization can impact RMDs. Did you know that it can? Want to know how? Read on to find out…
Roth conversions are all the rage this year, but many of those conversions could be recharacterized, either because the investments drop in value or simply because the retirement account owner had a change of heart. For many, the decision to recharacterize will simply result in the unwinding of a conversion, with no further actions needed. For those subject to required minimum distributions though, the decision to recharacterize will leave IRA owners with an additional step.
It is widely understood that one of the greatest benefits of the Roth conversion is the ability to recharacterize, or undo the Roth conversion. In fact, if you convert anytime in 2010, you have all the way up until October 15th, 2011 to do so. According to the tax code, should you flip the undo switch and choose to recharacterize, the funds are treated as if they had never left the traditional IRA account.
Those that are subject to required minimum distributions must take this into consideration or risk facing large penalties. For example, let’s say you were 75 years old and converted your entire $100,000 IRA balance to a Roth IRA on November 15, 2010. That would leave you with a $0 balance in your traditional IRA as of December 31, 2010 (used to calculate 2011 RMDs). Since Roth IRAs have no RMDs (during an account owner’s lifetime) and there was no year-end balance in the traditional account, you would have no 2011 RMDs.
But now let’s say that on October 10, 2011 you see your Roth IRA balance has dropped to $90,000 and you make the decision to recharacterize. So now, according to the rules, those funds are treated as if they were in your traditional IRA all along - which also means that now, you DO have a December 31, 2010 balance (even though you “actually” didn’t - get it?).
So what is the December 31, 2010 balance to use? Is it the $100,000 converted? The $90,000 you had in the Roth IRA when you decided to recharacterize? Actually, it’s neither. You would need to use a December 31, 2010 balance from the Roth IRA.
If you’re doing a full recharacterization of the Roth IRA account, this is an easy calculation - just take the year-end value from the Roth IRA account. If you’re only doing a partial recharacterization though, the formula is a bit more complex and you may want to ask either your custodian, tax preparer or financial advisor for some help.
And what if you just blow off the RMD that should be taken all together? Well, that missed distribution will be subject to a 50% penalty, so it’s probably (ahem… …DEFINITELY) not a good idea.
So should this keep you from converting and/or recharacterizing? Of course not. Just be aware of the rules and if you have questions or doubts about something, make sure to seek the advice of a qualified professional who has specialized knowledge in this area.
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
Roth conversions are all the rage this year, but many of those conversions could be recharacterized, either because the investments drop in value or simply because the retirement account owner had a change of heart. For many, the decision to recharacterize will simply result in the unwinding of a conversion, with no further actions needed. For those subject to required minimum distributions though, the decision to recharacterize will leave IRA owners with an additional step.
It is widely understood that one of the greatest benefits of the Roth conversion is the ability to recharacterize, or undo the Roth conversion. In fact, if you convert anytime in 2010, you have all the way up until October 15th, 2011 to do so. According to the tax code, should you flip the undo switch and choose to recharacterize, the funds are treated as if they had never left the traditional IRA account.
Those that are subject to required minimum distributions must take this into consideration or risk facing large penalties. For example, let’s say you were 75 years old and converted your entire $100,000 IRA balance to a Roth IRA on November 15, 2010. That would leave you with a $0 balance in your traditional IRA as of December 31, 2010 (used to calculate 2011 RMDs). Since Roth IRAs have no RMDs (during an account owner’s lifetime) and there was no year-end balance in the traditional account, you would have no 2011 RMDs.
But now let’s say that on October 10, 2011 you see your Roth IRA balance has dropped to $90,000 and you make the decision to recharacterize. So now, according to the rules, those funds are treated as if they were in your traditional IRA all along - which also means that now, you DO have a December 31, 2010 balance (even though you “actually” didn’t - get it?).
So what is the December 31, 2010 balance to use? Is it the $100,000 converted? The $90,000 you had in the Roth IRA when you decided to recharacterize? Actually, it’s neither. You would need to use a December 31, 2010 balance from the Roth IRA.
If you’re doing a full recharacterization of the Roth IRA account, this is an easy calculation - just take the year-end value from the Roth IRA account. If you’re only doing a partial recharacterization though, the formula is a bit more complex and you may want to ask either your custodian, tax preparer or financial advisor for some help.
And what if you just blow off the RMD that should be taken all together? Well, that missed distribution will be subject to a 50% penalty, so it’s probably (ahem… …DEFINITELY) not a good idea.
So should this keep you from converting and/or recharacterizing? Of course not. Just be aware of the rules and if you have questions or doubts about something, make sure to seek the advice of a qualified professional who has specialized knowledge in this area.
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
Thursday, June 3, 2010
Slott Report Mailbag: June 3rd
The sun in the sky is as high as people's concerns about their IRAs. The summer is a time for fun, family and financial security. This week's edition of The Slott Report Mailbag answers 2 consumer questions.
As always, you should work with a competent, educated financial advisor. CLICK HERE to find an Ed Slott-trained financial advisor in your area.
1.
I am a teacher who will be retiring shortly. The school system has offered me a $40,000 buyout. $20,000 this year and $10,000 in 2011 and 2012. I was informed to place this money into a 403(b) account and transfer this money into an IRA account. Is this a wise move? Presently, I intend on using this money as a rainy day fund.
Answer:
It is difficult to answer your question, however we can give you some specifics to think about. Certain employees have special catch up rules that would allow additional contributions. The decision to make contributions to a 403(b), and eventually an IRA, as opposed to holding them outside the IRA will depend on your overall financial situation. Funds that go into the 403(b) will not be currently taxed. If you put the distribution in your rainy day fund they will be taxed in the year you receive them. Keep in mind that once they are in the IRA you will have access to the funds depending on your investments. I assume that you are over age 59 1/2 since you will be retiring so you would not have an early distribution penalty on any funds you take out of your IRA; you will only owe income tax on the distribution.
2.
I work for a law firm and recently I inquired about rolling over my 401(k) to a Roth. The firm treats it as a withdrawal and because of that we cannot get back into the plan until a year later. How do you suggest I proceed?
Thanks!
Answer:
Your law firm's 401(k) plan is similar to many other 401(k) plans. It is not uncommon to have restrictions on in-service withdrawals, taking a distribution while still participating in the plan.
Some 401(k) plans have 401(k) Roth IRA component. You would have to check to see if your employer offers that type of provision. Sometimes after a certain age, for example at age 50 1/2 some 401(k) plans allow in-service withdrawals while allowing participants to continue to participate in the plan, again you will have to check your company's 401(k) summary plan description. By the way, any amount converted to a Roth IRA from an IRA or a plan is treated as a distribution according to the tax code.
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
As always, you should work with a competent, educated financial advisor. CLICK HERE to find an Ed Slott-trained financial advisor in your area.
1.
I am a teacher who will be retiring shortly. The school system has offered me a $40,000 buyout. $20,000 this year and $10,000 in 2011 and 2012. I was informed to place this money into a 403(b) account and transfer this money into an IRA account. Is this a wise move? Presently, I intend on using this money as a rainy day fund.
Answer:
It is difficult to answer your question, however we can give you some specifics to think about. Certain employees have special catch up rules that would allow additional contributions. The decision to make contributions to a 403(b), and eventually an IRA, as opposed to holding them outside the IRA will depend on your overall financial situation. Funds that go into the 403(b) will not be currently taxed. If you put the distribution in your rainy day fund they will be taxed in the year you receive them. Keep in mind that once they are in the IRA you will have access to the funds depending on your investments. I assume that you are over age 59 1/2 since you will be retiring so you would not have an early distribution penalty on any funds you take out of your IRA; you will only owe income tax on the distribution.
2.
I work for a law firm and recently I inquired about rolling over my 401(k) to a Roth. The firm treats it as a withdrawal and because of that we cannot get back into the plan until a year later. How do you suggest I proceed?
Thanks!
Answer:
Your law firm's 401(k) plan is similar to many other 401(k) plans. It is not uncommon to have restrictions on in-service withdrawals, taking a distribution while still participating in the plan.
Some 401(k) plans have 401(k) Roth IRA component. You would have to check to see if your employer offers that type of provision. Sometimes after a certain age, for example at age 50 1/2 some 401(k) plans allow in-service withdrawals while allowing participants to continue to participate in the plan, again you will have to check your company's 401(k) summary plan description. By the way, any amount converted to a Roth IRA from an IRA or a plan is treated as a distribution according to the tax code.
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, June 2, 2010
Retirement Plan Provisions for Military Personnel
Memorial Day has just passed and soon the 4th of July will be upon us - our two most patriotic holidays. So this week’s post is about some little known provisions for military personnel.
IRA Contributions - Generally you need earned income to make IRA contributions. Combat pay is excluded from taxable income. But military personnel can make IRA contributions, including contributions for spouses, based on their combat pay.
10% Early Distribution Penalty - Reservists called to active duty for more than 179 days who take a distribution from their IRAs or company plans are exempt from the penalty. In addition, they have up to two years after the end of their active service to repay the distribution. However, they do not get a deduction for the repayment, so consider making any repayments to a Roth IRA.
SGLI Death Benefits - A beneficiary receiving Service members Group Life Insurance can contribute all or a portion of the proceeds to a Roth IRA. The contribution is made without regard to the contribution limits or to the income limits for making contributions. The beneficiary can make the contribution up to one year after receiving the benefit.
For more information on any of these provisions, see IRS Publication 590 or contact an advisor who specializes in retirement plans. You can find a list of Ed Slott trained advisors on our web site, www.irahelp.com.
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
IRA Contributions - Generally you need earned income to make IRA contributions. Combat pay is excluded from taxable income. But military personnel can make IRA contributions, including contributions for spouses, based on their combat pay.
10% Early Distribution Penalty - Reservists called to active duty for more than 179 days who take a distribution from their IRAs or company plans are exempt from the penalty. In addition, they have up to two years after the end of their active service to repay the distribution. However, they do not get a deduction for the repayment, so consider making any repayments to a Roth IRA.
SGLI Death Benefits - A beneficiary receiving Service members Group Life Insurance can contribute all or a portion of the proceeds to a Roth IRA. The contribution is made without regard to the contribution limits or to the income limits for making contributions. The beneficiary can make the contribution up to one year after receiving the benefit.
For more information on any of these provisions, see IRS Publication 590 or contact an advisor who specializes in retirement plans. You can find a list of Ed Slott trained advisors on our web site, www.irahelp.com.
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, June 1, 2010
529 Plans Can Pay for Computers in 2010
Tax-free college savings plans and prepaid tuition programs, known as “529” plans, can be used to buy computer equipment and internet services for college students during 2010. This change was part of the stimulus bill enacted by Congress last year.
Many grandparents and other relatives set up 529 plans (named for section 529 of the federal tax code) to help young people with college expenses. Family members can contribute up to $13,000 a year to these plans ($26,000 for a couple) without incurring gift tax. The money can then grow in the account tax free.
Family members who want to quickly get money out of their estate for tax reasons can “front load” contributions by giving $65,000 right away (or $130,000 for a couple.) Front-loading in this manner will preclude the donor(s) from making any other contributions to the account, or annual gifts to the person for whose benefit the account was established, for five years.
The money in the account can be used to pay college tuition, room and board, or certain other education-related expenses. In 2010, these expenses include computer equipment and internet access. However, the money can’t be used to buy software for sports, games or hobbies, unless it is predominantly educational in nature.
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
Many grandparents and other relatives set up 529 plans (named for section 529 of the federal tax code) to help young people with college expenses. Family members can contribute up to $13,000 a year to these plans ($26,000 for a couple) without incurring gift tax. The money can then grow in the account tax free.
Family members who want to quickly get money out of their estate for tax reasons can “front load” contributions by giving $65,000 right away (or $130,000 for a couple.) Front-loading in this manner will preclude the donor(s) from making any other contributions to the account, or annual gifts to the person for whose benefit the account was established, for five years.
The money in the account can be used to pay college tuition, room and board, or certain other education-related expenses. In 2010, these expenses include computer equipment and internet access. However, the money can’t be used to buy software for sports, games or hobbies, unless it is predominantly educational in nature.
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
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