This week, the Ed Slott and Company IRA Discussion Forum featured a question on how tax withholdings from an IRA distribution are be treated. Sounds simple enough, but withholding can actually be a pretty tricky topic when it comes to retirement plans. Want to know why? Read on to find out.
Distributions from an employer plan can have different withholding requirements depending on how the distribution is made and what is being distributed. Fortunately, if you make a trustee-to-trustee (direct rollover) distribution from a plan to another qualifying plan (including an IRA) - which is generally the best way to move money - the distribution will not be subject to any withholding.
On the other hand, if you take a distribution from an employer plan and have it payable to yourself (i.e. a check made out to you), the plan is generally required to withhold 20% of your distribution (you can voluntarily withhold more). This can cause problems if you are planning to roll those funds to an IRA (or another plan) via a 60-day rollover. In order to roll over the full amount, you’ll have to come up enough money out-of-pocket to replace the 20% that was withheld.
For example, say you had $100,000 in a 401(k) and took a full distribution of your account - payable to yourself - with the intention of rolling over your total plan balance to an IRA. Upon the distribution, the plan would give you an $80,000 check and would withhold the remaining $20,000 (20%). If you put the full check into the IRA, you’d still only have only $80,000 in the account. In order to make a “complete” rollover, you’d have to replace the $20,000 withheld by the plan with your own funds within 60 days. If not, the $20,000 would be taxable and, if applicable, the 10% early distribution penalty would apply as well.
Of course, like most things in the world of retirement plans, there are exceptions to the general rule. Distributions of certain “types” of plan funds are not subject to the 20% withholding rule. These exceptions to the norm include distributions of after-tax dollars and distributions of only employer securities.
What about IRAs? Well, good news here actually. One of the benefits of having your retirement funds in an IRA is that there are generally no withholding requirements. Although there is a standard 10% withholding, unlike the 20% withholding from a plan, you can simply opt out of it and elect to receive the entire distribution. Alternatively, you can elect to have a larger portion of the distribution withheld. In fact, if you wanted to, you could withhold the entire distribution.
Keep in mind that any funds that do not get rolled over are treated as a distribution to you - even if the money withheld goes directly to the government! You will owe taxes on those funds and the 10% penalty if you are under the age of 59 ½ at the time of the distribution.
It’s pretty clear to see that the withholding rules for various types of retirement accounts can be a little more complicated than you might think at first glance. If you are planning on taking a distribution from a retirement account and want to know what withholding rules will apply, you may want to speak with a qualified advisor who specializes in distribution planning.
Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Friday, July 30, 2010
InvNews: Turn lemons into Roth Conversion Cash
Ed Slott wrote a July 25th article in Investment News that talks about how sales of depressed assets can create a "bank" of capital losses for your clients.
As Slott starts the article: "If your client wants to convert his or her individual retirement account to a Roth IRA this year but doesn't have cash from non-IRA sources to pay the tax on the conversion, consider looking at his or her capital assets."
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
As Slott starts the article: "If your client wants to convert his or her individual retirement account to a Roth IRA this year but doesn't have cash from non-IRA sources to pay the tax on the conversion, consider looking at his or her capital assets."
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
Thursday, July 29, 2010
RMDs and the 72(t) Exemption Highlight Mailbag
It is another busy week at The Slott Report Mailbag with 3 consumer 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.
Dear Ed and Company,
I bought your book, but haven't had time to read it yet. Here is our situation:
Our mom died in 1999 and our dad died in 2001. We 5 siblings inherited their IRAs. We were able to divide up their IRAs so that we each have inherited IRAs from both our Mom and Dad. Recently I've been reading that we needed to take distributions to our life expectancy. I've never taken a distribution because I wasn't aware of it. None of the brokerages that I've been with over the years has advised me to take a distribution. Is there some kind of exception because our parents died prior to the new changes? Should we be taking distributions now? I will be turning 59 1/2 in six months. Does that change anything?
Appreciate your help.
Thanks,
Cindy
Answer:
Yes you and your other siblings that inherited an IRA from your mother and father should be taking required minimum distributions (RMDs) each year. A year after the death of the parent you inherited the IRA from RMDs must be taken each year until the account balance is zero. There are no exceptions even if it was a Roth IRA. Your RMD is based on your single life expectancy (table found in IRS Publication 590) based on your age a year after the death of the IRA owner. The life expectancy factor is reduced each subsequent year by one. If the inherited IRAs were split into shares for each of the children prior to 12/31 of the year following the death of the IRA owner then each sibling would use their own age to determine their life expectancy.
If the account was NOT split prior to 12/31 all of the siblings must then use the shortest life expectancy of the oldest sibling. You must take RMDs for each year to avoid a 50% penalty. You can of course take more but not less than the RMD to avoid the penalty. Your current age younger or older than age 59 1/2 does NOT matter.
I would suggest you seek help from a knowledgeable advisor in determining the RMDs for each year you didn't take the RMD. The distribution rules changed in 2002. The advisor must know old rules and have old tables to correctly calculate the RMDs through 2001. Take the amount out as soon as you can and write a letter to the IRS asking them to waive the penalty because you did not know the rules and your advisor did not advise you to take RMDs. Form 5239 for each year there was a missed distribution must be submitted to IRS with the letter.
You still may have to pay the 50% penalty.
2.
My wife retired from a hospital and is vested in their 457b plan. We were told that she cannot do a rollover to an IRA. Is this by law?
Thank you,
Attilio Di Marco
Answer:
With the facts presented it is difficult to determine why they are saying her 457 plan cannot be rolled over to an IRA. It could be that the plan document does not provide for a lump sum distribution. Also, there are 2 types of 457 plans. Non-governmental plans generally are not eligible for rollover.
3.
Dear Ed,
Are you able to add multiple IRA accounts (with multiple trustees), and take a 72(t) distribution from only one of the accounts? I have a 50-year-old client who will rollover $662,000 from his pension into an IRA brokerage account. I would like to do the 72(t) calculation on the entire $662,000 (which comes to approximately $2,700/mo) and then transfer $500,000 to two different variable annuity companies, leaving $162,000 in the brokerage account. Once the $162,000 is depleted in (approx) 5 years, I would then continue the distributions from the 2 remaining carries.
My objective is to:
1)take 5 years of distributions from a fixed account, and invest the remaining $500,000 into variable annuities with living benefits guarantees, instead of immediately taking distributions on the entire $662,000 in a variable annuity.
2)Invest with 2 carries to diversify my holdings.
Thank you so much!
Answer:
In order to use the 72(t) exemption as you suggestion the entire amount must go into the IRA. The investments you make in the IRA will not prohibit you from doing the 72(t) payments. You will of course have to have liquidity to pay the annual payments. Administratively, I would do the transfers before taking the first 72(t) distribution. You must understand that ALL the accounts are part of the 72(t). No other contributions, rollovers or transfers can go into any of the accounts and no distributions, other than the 72(t) distributions, can be made from any of the accounts. The payments must be taken until the late of age 59 1/2 or five years.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
1.
Dear Ed and Company,
I bought your book, but haven't had time to read it yet. Here is our situation:
Our mom died in 1999 and our dad died in 2001. We 5 siblings inherited their IRAs. We were able to divide up their IRAs so that we each have inherited IRAs from both our Mom and Dad. Recently I've been reading that we needed to take distributions to our life expectancy. I've never taken a distribution because I wasn't aware of it. None of the brokerages that I've been with over the years has advised me to take a distribution. Is there some kind of exception because our parents died prior to the new changes? Should we be taking distributions now? I will be turning 59 1/2 in six months. Does that change anything?
Appreciate your help.
Thanks,
Cindy
Answer:
Yes you and your other siblings that inherited an IRA from your mother and father should be taking required minimum distributions (RMDs) each year. A year after the death of the parent you inherited the IRA from RMDs must be taken each year until the account balance is zero. There are no exceptions even if it was a Roth IRA. Your RMD is based on your single life expectancy (table found in IRS Publication 590) based on your age a year after the death of the IRA owner. The life expectancy factor is reduced each subsequent year by one. If the inherited IRAs were split into shares for each of the children prior to 12/31 of the year following the death of the IRA owner then each sibling would use their own age to determine their life expectancy.
If the account was NOT split prior to 12/31 all of the siblings must then use the shortest life expectancy of the oldest sibling. You must take RMDs for each year to avoid a 50% penalty. You can of course take more but not less than the RMD to avoid the penalty. Your current age younger or older than age 59 1/2 does NOT matter.
I would suggest you seek help from a knowledgeable advisor in determining the RMDs for each year you didn't take the RMD. The distribution rules changed in 2002. The advisor must know old rules and have old tables to correctly calculate the RMDs through 2001. Take the amount out as soon as you can and write a letter to the IRS asking them to waive the penalty because you did not know the rules and your advisor did not advise you to take RMDs. Form 5239 for each year there was a missed distribution must be submitted to IRS with the letter.
You still may have to pay the 50% penalty.
2.
My wife retired from a hospital and is vested in their 457b plan. We were told that she cannot do a rollover to an IRA. Is this by law?
Thank you,
Attilio Di Marco
Answer:
With the facts presented it is difficult to determine why they are saying her 457 plan cannot be rolled over to an IRA. It could be that the plan document does not provide for a lump sum distribution. Also, there are 2 types of 457 plans. Non-governmental plans generally are not eligible for rollover.
3.
Dear Ed,
Are you able to add multiple IRA accounts (with multiple trustees), and take a 72(t) distribution from only one of the accounts? I have a 50-year-old client who will rollover $662,000 from his pension into an IRA brokerage account. I would like to do the 72(t) calculation on the entire $662,000 (which comes to approximately $2,700/mo) and then transfer $500,000 to two different variable annuity companies, leaving $162,000 in the brokerage account. Once the $162,000 is depleted in (approx) 5 years, I would then continue the distributions from the 2 remaining carries.
My objective is to:
1)take 5 years of distributions from a fixed account, and invest the remaining $500,000 into variable annuities with living benefits guarantees, instead of immediately taking distributions on the entire $662,000 in a variable annuity.
2)Invest with 2 carries to diversify my holdings.
Thank you so much!
Answer:
In order to use the 72(t) exemption as you suggestion the entire amount must go into the IRA. The investments you make in the IRA will not prohibit you from doing the 72(t) payments. You will of course have to have liquidity to pay the annual payments. Administratively, I would do the transfers before taking the first 72(t) distribution. You must understand that ALL the accounts are part of the 72(t). No other contributions, rollovers or transfers can go into any of the accounts and no distributions, other than the 72(t) distributions, can be made from any of the accounts. The payments must be taken until the late of age 59 1/2 or five years.
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
Wednesday, July 28, 2010
I'm Still Working; What's My RMD?
I get this question frequently. Many of us are looking at working beyond the age of 70 ½. What required distributions (RMDs) do you have to take if you continue working?
If you are participating in the retirement plan where you work and if the plan allows, you do not have to take any RMD from that plan until the year you retire. If you own 5% or more of the company, you have to take an RMD. These rules apply to most employer plans. If the plan is a SEP or a SIMPLE, you have to take the RMD since those are IRA based plans. From any plan where you are required to take a distribution, you can continue to make contributions, as long as the plan allows.
There is no exception for IRAs. Once you reach the year you turn 70 ½, you must take an RMD. You also have to take RMDs from any employer plan if you are no longer working for that employer. The “still working” exception only applies to your current employer.
When you finally do retire, quit, get fired, or laid off, you do have an RMD for the year in which you stop working, even if your last day is December 31st. You have until April 1st of the following year to take this first distribution, but if you wait until that date, you also have to take your second distribution by the end of that year. This results in your having to take two RMDs in the same year. If you die while you are still working, you are deemed to have died before your required beginning date and there is no RMD for your year of death.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
If you are participating in the retirement plan where you work and if the plan allows, you do not have to take any RMD from that plan until the year you retire. If you own 5% or more of the company, you have to take an RMD. These rules apply to most employer plans. If the plan is a SEP or a SIMPLE, you have to take the RMD since those are IRA based plans. From any plan where you are required to take a distribution, you can continue to make contributions, as long as the plan allows.
There is no exception for IRAs. Once you reach the year you turn 70 ½, you must take an RMD. You also have to take RMDs from any employer plan if you are no longer working for that employer. The “still working” exception only applies to your current employer.
When you finally do retire, quit, get fired, or laid off, you do have an RMD for the year in which you stop working, even if your last day is December 31st. You have until April 1st of the following year to take this first distribution, but if you wait until that date, you also have to take your second distribution by the end of that year. This results in your having to take two RMDs in the same year. If you die while you are still working, you are deemed to have died before your required beginning date and there is no RMD for your year of death.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Tuesday, July 27, 2010
Retirement Fears: Financial Check-up
You should have regularly scheduled self-exams and trips to the doctor...the financial doctor.
This week's Retirement Fears talks about your personal check-up, details the perfect ways to save and reiterates the importance of working with an educated financial team.
CLICK HERE to read this installment of Retirement Fears.
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
This week's Retirement Fears talks about your personal check-up, details the perfect ways to save and reiterates the importance of working with an educated financial team.
CLICK HERE to read this installment of Retirement Fears.
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
Monday, July 26, 2010
Ed Slott On The Road: Week of July 26th
Ed takes a break from his National PBS Pledge Drive this week to speak at two highly-renowned conferences.
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 will speak at the AICPA Advanced Estate Planning Conference in Washington, DC on Monday, July 26th
- Ed will speak at at the LPL National Conference in Boston, MA on Thursday, July 29th
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, July 23, 2010
Fate of QCD is in Congress' Hands
This week, the Ed Slott and Company IRA Discussion Forum featured a question on giving money to a charity from your IRA. For some IRA owners, there has actually been an “on again, off again, on again, off again” provision relating specifically to giving money to charities from their IRAs. What’s the deal right now? Read on to find out.
On August 17, 2006 the Pension Protection Act was signed into law by George W. Bush. Buried within the law was a provision allowing for a new type of IRA distribution, known as a qualified charitable distribution - or QCD for short.
The new provision allowed IRA owners (or IRA beneficiaries) over the age of 70 ½ to make distributions of up to $100,000 from their accounts directly to a qualifying charity. Instead of adding taxable income to their return and then claiming a corresponding deduction, they simply excluded the amount directly transferred to the qualifying charity from their taxable income. The direct transfer to the charity would also (help) satisfy any required minimum distributions. As a result, the new law benefited both charities and those who were already charitably inclined.
While the QCD provision was widely accepted as a positive change to the tax code, the Pension Protection Act only made the provision effective through December 31, 2007. That date came and went, but while Congress didn’t act quickly enough to prevent the provision from lapsing, on October 3, 2008, they passed The Emergency Economic Stabilization Bill - a.k.a. the bailout bill. It didn’t receive much press (which is understandable given the economic meltdown at the time), but once again, buried within the bill was the QCD provision.
Not only did Congress bring back the QCD provision via the “bailout bill”, but they made it retroactive back to the beginning of 2008. Too good to be true right? There’s gotta be a catch. And there was - for some reason, Congress once again failed to permanently enact the change, and instead, made it effective only through December 31, 2009. That date has also since passed and now, there is no QCD provision in effect.
Bringing back the QCD provision has been on Congress’ radar this year, but unfortunately they have yet to act on any legislation containing the extension. Is it likely to pass at some point? To be honest, lately it depends on what day of the week you ask. I’d like to say yes, but then again, who would have ever thought we’d have no estate tax this year.
There’s no guarantee that Congress will bring back QCDs, but if they do, who’s to say they will make it retroactive again (like they did last time) If you are considering donating a portion of your IRA money to a charity, you may want to consider waiting until later in 2010 to take your RMD - this way, if Congress does bring back the provision, you can kill two birds with one stone. Keep in mind though, that if you are planning on converting to a Roth IRA, you must first take your RMD.
Tax laws change all the time. Some are big, some are small - but no matter how big the change, you can only take advantage of those changes if you know about them. If IRAs are an important part of your financial picture, you should make sure to work with a knowledgeable advisor who stays up to date on the latest changes.
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
On August 17, 2006 the Pension Protection Act was signed into law by George W. Bush. Buried within the law was a provision allowing for a new type of IRA distribution, known as a qualified charitable distribution - or QCD for short.
The new provision allowed IRA owners (or IRA beneficiaries) over the age of 70 ½ to make distributions of up to $100,000 from their accounts directly to a qualifying charity. Instead of adding taxable income to their return and then claiming a corresponding deduction, they simply excluded the amount directly transferred to the qualifying charity from their taxable income. The direct transfer to the charity would also (help) satisfy any required minimum distributions. As a result, the new law benefited both charities and those who were already charitably inclined.
While the QCD provision was widely accepted as a positive change to the tax code, the Pension Protection Act only made the provision effective through December 31, 2007. That date came and went, but while Congress didn’t act quickly enough to prevent the provision from lapsing, on October 3, 2008, they passed The Emergency Economic Stabilization Bill - a.k.a. the bailout bill. It didn’t receive much press (which is understandable given the economic meltdown at the time), but once again, buried within the bill was the QCD provision.
Not only did Congress bring back the QCD provision via the “bailout bill”, but they made it retroactive back to the beginning of 2008. Too good to be true right? There’s gotta be a catch. And there was - for some reason, Congress once again failed to permanently enact the change, and instead, made it effective only through December 31, 2009. That date has also since passed and now, there is no QCD provision in effect.
Bringing back the QCD provision has been on Congress’ radar this year, but unfortunately they have yet to act on any legislation containing the extension. Is it likely to pass at some point? To be honest, lately it depends on what day of the week you ask. I’d like to say yes, but then again, who would have ever thought we’d have no estate tax this year.
There’s no guarantee that Congress will bring back QCDs, but if they do, who’s to say they will make it retroactive again (like they did last time) If you are considering donating a portion of your IRA money to a charity, you may want to consider waiting until later in 2010 to take your RMD - this way, if Congress does bring back the provision, you can kill two birds with one stone. Keep in mind though, that if you are planning on converting to a Roth IRA, you must first take your RMD.
Tax laws change all the time. Some are big, some are small - but no matter how big the change, you can only take advantage of those changes if you know about them. If IRAs are an important part of your financial picture, you should make sure to work with a knowledgeable advisor who stays up to date on the latest changes.
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
Thursday, July 22, 2010
Roth IRA Contribution Limits Highlight Mailbag
What a week of questions! Some great questions turned in by consumers across the country desperate for educated financial guidance. We answered questions about income limits for Roth IRA contributions and inherited 401(k) plans. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.
1.
In the July newsletter, you confirmed that the income limit of $100,000 has been eliminated permanently and that everyone, regardless of income, can now convert to a Roth IRA in 2010 and beyond. However, there are still income limits which govern who is eligible to contribute to a Roth IRA. So, if I am over the income limit, can I contribute $5,000 to my traditional IRA and then once it is funded, can I convert it into a Roth IRA every year hence effectively funding a Roth IRA? If this is possible are there any rules or guidelines that I need to be aware of?
Thanks,
Seema Qureshi
Answer:
Yes, there are income limits that still apply to making Roth IRA contributions. If, however, you are over the limit (there are different limits for filing a joint or single tax return and the limits are indexed for inflation each year) you can, if you have earned income, make a non-deductible IRA contribution. The maximum you can contribute in 2010 is $5,000 and if you are age 50 or older by 12/31/10 you can add an additional $1,000 for a total of $6,000. Then you convert an amount equal to the contribution to a Roth IRA. When doing that conversion you must consider all your IRAs to calculate the amount that is taxable. This is known as the pro rata rule.
2.
Dear Slott Report,
My husband and I contributed a large amount of money (we're talking hundreds of thousands) into our Traditional IRA accounts in 2007. We were not apprised by our investment firm of the fact that this is considered an excess contribution and is subject to IRS penalty and interest charges until we attempted to convert our Traditional IRA into a Roth IRA earlier this year. We have already withdrawn the excess contribution (plus earnings) from our IRA account. And we have already paid penalty and interest charges to the IRS for 2007, 2008 and 2009 - a large sum to be sure, but a relatively straightforward 6% plus late penalty plus interest calculation. However, we are quite concerned that we are headed for an extremely large 2010 tax payment in addition to all of this. What kind of options might we have that could help lead us to a lower 2010 tax payment?
Sincerely,
Susan Miller
Answer:
You do not say whether or not you took a tax deduction for your IRA contributions. If you did NOT and you filed Form 8606 with your tax return to report the amount of the after-tax contribution, you may be able to escape paying income tax on the distribution. You need to consult with a tax or financial advisor to explore the options you might have to reduce your 2010 taxable income if possible. Please check our website, www.irahelp.com to locate an advisor near you that is knowledgeable in this area of the tax code.
3.
I inherited my husband's 401(k). My husband's employer changed the name on the account into my name and allowed me to keep the 401(k) account at the company for up to 5 years following my husband's death. I have a 401(k) at my place of employment as well. The 5 years are coming up. What are my options with this inherited 401(k)?
Thanks!
Answer:
Good question and one that we hear often. You can do a trustee to trustee transfer from the company 401(k) plan to an IRA for herself. All of the pre-tax contributions plus earnings can go into the IRA. Any after-tax contributions in the 401(k) plan can be taken out with out any income tax consequence. The other option you may have is if your own 401(k) plan allows amounts from other 401(k) plans to be contributed to it you can do a trustee to trustee transfer into your own 401(k) plan. You must check the plan document or summary plan description to see if this option is allowed.
Just as a reminder to our readers, only a spouse has these options. Non-spouse beneficiaries have very different options.
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.
In the July newsletter, you confirmed that the income limit of $100,000 has been eliminated permanently and that everyone, regardless of income, can now convert to a Roth IRA in 2010 and beyond. However, there are still income limits which govern who is eligible to contribute to a Roth IRA. So, if I am over the income limit, can I contribute $5,000 to my traditional IRA and then once it is funded, can I convert it into a Roth IRA every year hence effectively funding a Roth IRA? If this is possible are there any rules or guidelines that I need to be aware of?
Thanks,
Seema Qureshi
Answer:
Yes, there are income limits that still apply to making Roth IRA contributions. If, however, you are over the limit (there are different limits for filing a joint or single tax return and the limits are indexed for inflation each year) you can, if you have earned income, make a non-deductible IRA contribution. The maximum you can contribute in 2010 is $5,000 and if you are age 50 or older by 12/31/10 you can add an additional $1,000 for a total of $6,000. Then you convert an amount equal to the contribution to a Roth IRA. When doing that conversion you must consider all your IRAs to calculate the amount that is taxable. This is known as the pro rata rule.
2.
Dear Slott Report,
My husband and I contributed a large amount of money (we're talking hundreds of thousands) into our Traditional IRA accounts in 2007. We were not apprised by our investment firm of the fact that this is considered an excess contribution and is subject to IRS penalty and interest charges until we attempted to convert our Traditional IRA into a Roth IRA earlier this year. We have already withdrawn the excess contribution (plus earnings) from our IRA account. And we have already paid penalty and interest charges to the IRS for 2007, 2008 and 2009 - a large sum to be sure, but a relatively straightforward 6% plus late penalty plus interest calculation. However, we are quite concerned that we are headed for an extremely large 2010 tax payment in addition to all of this. What kind of options might we have that could help lead us to a lower 2010 tax payment?
Sincerely,
Susan Miller
Answer:
You do not say whether or not you took a tax deduction for your IRA contributions. If you did NOT and you filed Form 8606 with your tax return to report the amount of the after-tax contribution, you may be able to escape paying income tax on the distribution. You need to consult with a tax or financial advisor to explore the options you might have to reduce your 2010 taxable income if possible. Please check our website, www.irahelp.com to locate an advisor near you that is knowledgeable in this area of the tax code.
3.
I inherited my husband's 401(k). My husband's employer changed the name on the account into my name and allowed me to keep the 401(k) account at the company for up to 5 years following my husband's death. I have a 401(k) at my place of employment as well. The 5 years are coming up. What are my options with this inherited 401(k)?
Thanks!
Answer:
Good question and one that we hear often. You can do a trustee to trustee transfer from the company 401(k) plan to an IRA for herself. All of the pre-tax contributions plus earnings can go into the IRA. Any after-tax contributions in the 401(k) plan can be taken out with out any income tax consequence. The other option you may have is if your own 401(k) plan allows amounts from other 401(k) plans to be contributed to it you can do a trustee to trustee transfer into your own 401(k) plan. You must check the plan document or summary plan description to see if this option is allowed.
Just as a reminder to our readers, only a spouse has these options. Non-spouse beneficiaries have very different options.
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
Wednesday, July 21, 2010
Don't Recharacterize Too Soon
Some taxpayers who did Roth conversions earlier this year have seen their account values drop. As a result, they are considering doing a recharacterization of their Roth back to an IRA. But maybe they should wait a while. Why? Maybe, if they wait long enough, the Roth account will recover and not need to be recharacterized.
The better answer, however, lies in the rules for reconverting assets once they have been recharacterized. A 2010 Roth conversion that is recharacterized in 2010 cannot be reconverted until at least 2011. What if you converted in January 2010, your assets decline, so you recharacterize in August 2010? Now you cannot reconvert those funds to a Roth IRA until January 1, 2011. If the account recovers, you will have to pay income tax on the increased value when you reconvert. A 2010 conversion that is recharacterized in 2011 can be reconverted after a 30-day waiting period. In no case can you reconvert in less than 30 days.
The biggest issue, however, may be the ability to spread the taxes over 2 years, 2011 and 2012. That option is only available for a 2010 conversion. If you recharacterize a 2010 conversion in 2010 you lose that option - even on your reconversion. The reconversion will be done in 2011 and you cannot split the income on a 2011 conversion.
Everyone who timely files their tax return and pays their taxes has until October 15th of the year after the conversion to do a recharacterization. For conversions done in 2010, you have until October 17, 2011 to recharacterize. You don’t have to do it now. Take your time and evaluate all your options before making the recharacterization decision.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
The better answer, however, lies in the rules for reconverting assets once they have been recharacterized. A 2010 Roth conversion that is recharacterized in 2010 cannot be reconverted until at least 2011. What if you converted in January 2010, your assets decline, so you recharacterize in August 2010? Now you cannot reconvert those funds to a Roth IRA until January 1, 2011. If the account recovers, you will have to pay income tax on the increased value when you reconvert. A 2010 conversion that is recharacterized in 2011 can be reconverted after a 30-day waiting period. In no case can you reconvert in less than 30 days.
The biggest issue, however, may be the ability to spread the taxes over 2 years, 2011 and 2012. That option is only available for a 2010 conversion. If you recharacterize a 2010 conversion in 2010 you lose that option - even on your reconversion. The reconversion will be done in 2011 and you cannot split the income on a 2011 conversion.
Everyone who timely files their tax return and pays their taxes has until October 15th of the year after the conversion to do a recharacterization. For conversions done in 2010, you have until October 17, 2011 to recharacterize. You don’t have to do it now. Take your time and evaluate all your options before making the recharacterization decision.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Monday, July 19, 2010
Ed kicks off National PBS Pledge Drive in Atlanta
Ed Slott kicked off his National PBS Pledge Drive for the NEW Public Television Special, "Lower Your Taxes Now & Forever" on Monday, July 19 in at PBA Studios in Atlanta, GA.
UPDATED 2:05 pm ET: A tentative schedule is beginning to form for Ed Slott's National Pledge Drive. All of these dates are subject to change, and you should contact your local Public Television Station for firm dates.
Tuesday, July 20: WEDU Tampa, FL 9-11 pm
Wednesday, July 21: WPBT Miami, FL 12-4 pm
Thursday, July 22: WMHT Albany, NY
Monday, August 2: MPT Baltimore, MD
Tuesday, August 3: KQED San Francisco, CA 7-9:30 pm
Thursday, August 5: KOCE Huntington Beach, CA 7-9 pm
Tuesday, August 10: WQED Pittsburgh, PA 8-10 pm
Monday, September 13: UNC Raleigh-Durham, NC 8-10 pm
For continuous updates on the Public Television Special, please follow us on Facebook and Twitter.
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*Copyright 2010 Ed Slott and Company, LLC
UPDATED 2:05 pm ET: A tentative schedule is beginning to form for Ed Slott's National Pledge Drive. All of these dates are subject to change, and you should contact your local Public Television Station for firm dates.
Tuesday, July 20: WEDU Tampa, FL 9-11 pm
Wednesday, July 21: WPBT Miami, FL 12-4 pm
Thursday, July 22: WMHT Albany, NY
Monday, August 2: MPT Baltimore, MD
Tuesday, August 3: KQED San Francisco, CA 7-9:30 pm
Thursday, August 5: KOCE Huntington Beach, CA 7-9 pm
Tuesday, August 10: WQED Pittsburgh, PA 8-10 pm
Monday, September 13: UNC Raleigh-Durham, NC 8-10 pm
For continuous updates on the Public Television Special, please follow us on Facebook and Twitter.
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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
Autopilot 401(k)
Inertia seems to be the new way of thinking about workplace retirement plans. Employers and investment firms recognize that most people just don’t spend a lot of time or effort on their 401(k) accounts, even after three wild years in the financial markets. Many studies paint a similar picture: most 401(k) participants just don’t tinker much with their accounts.
It can be tough to get people, especially young adults and those earning modest pay, to sign up for 401(k) plans, contribute money and manage their investments. However, once they do sign up they tend to put their accounts on autopilot. They generally don’t change their investment elections or increase their contributions, even when their compensation rises. From an investment perspective, this could be a good or bad thing. Only time will tell.
Recognizing that individuals in general do have inertia when it comes to participating and managing their investments, companies that put together 401(k) plans are stressing features that require minimal effort. These may include “automatic” provisions related to enrollment, contribution increases, and suitable default investments if participants don’t make their own selections. Of course, participants always have the option to “opt-out” of these automatic provisions, but studies have shown that most do not, which is not surprising because it would take effort on their part to do so.
Employers and investment firms are learning to give 401(k) participants what they need, and not much more. It seems that the most effective plans are simple, understandable and capable of running on inertia.
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
It can be tough to get people, especially young adults and those earning modest pay, to sign up for 401(k) plans, contribute money and manage their investments. However, once they do sign up they tend to put their accounts on autopilot. They generally don’t change their investment elections or increase their contributions, even when their compensation rises. From an investment perspective, this could be a good or bad thing. Only time will tell.
Recognizing that individuals in general do have inertia when it comes to participating and managing their investments, companies that put together 401(k) plans are stressing features that require minimal effort. These may include “automatic” provisions related to enrollment, contribution increases, and suitable default investments if participants don’t make their own selections. Of course, participants always have the option to “opt-out” of these automatic provisions, but studies have shown that most do not, which is not surprising because it would take effort on their part to do so.
Employers and investment firms are learning to give 401(k) participants what they need, and not much more. It seems that the most effective plans are simple, understandable and capable of running on inertia.
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, July 16, 2010
SEP IRA Confusion
This week the Ed Slott and Company IRA Discussion Forum featured a question on whether or not a trust as a SEP IRA beneficiary should be any different than it would be with a traditional IRA account. The answer to that question is not really, but the relationship between SEP IRAs and traditional IRAs can be a confusing one. Want to see how? Read on to find out.
The “S” in SEP IRA stands for Simplified Employee Pension, but the simplified part is really more from the employer’s perspective, and not so much from yours. From your point of view, the SEP IRA may actually add some confusion, especially if you have a traditional IRA as well.
With SEP IRAs, an employer must cover all eligible employees for the plan to be valid. There is no age limit, so if you are 99 years old and still working for a company that is going to be making a SEP IRA contribution for its employees, you’ll get a contribution too. If you are self-employed and operate your own SEP IRA plan, this gives you a bit of an advantage over a traditional IRA, where contributions are not allowed once you reach the year that you will turn 70 ½.
But the SEP IRA is an IRA based plan and the minimum distribution rules that apply to your traditional IRA will also apply to your SEP IRA. That means that once you turn 70 ½, you must begin taking required minimum distributions - even if you are still working. Notice that just like your traditional IRA, a SEP IRA has no “still working” exception.
This combination of facts could potentially land you in an interesting scenario; kind of like a revolving door of SEP IRA money. If you are working for a company that is making SEP contributions and you are over 70 ½, at the same time the company will be required to make your contributions (if they make them for other employees), you will be required to take minimum distributions from that account.
Want another weird quirk about SEP IRAs? Do you remember the game monopoly? If you happened to grab the right “Community Chest” card you’d have seen “Bank error in your favor. Collect $200.” In reality, it’s rare the bank makes an error in your favor - and even if they do, it’s usually corrected before you’ve finished thinking about how to spend it. But if your employer makes a mistake with their SEP IRA contribution - and gives you too much - they can’t make you give any of it back. And because it’s in a SEP IRA, the IRA shield means they can’t go and get it either. The end result is that it’s kind of treated like you received a bonus and then contributed it to your own IRA. So no matter what, it’s subject to both FICA and FUTA taxes, and if you choose to withdraw it (or need to in order to avoid an excess IRA contribution), it will be subject to ordinary income tax as well.
Many of you probably have a sound grasp of the basic IRA rules. But it’s often the details that make or break someone as they reach for financial independence. As you work towards achieving your ultimate goals, you may want to consider consulting a knowledgeable advisor who has specialized knowledge in this area.
Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
The “S” in SEP IRA stands for Simplified Employee Pension, but the simplified part is really more from the employer’s perspective, and not so much from yours. From your point of view, the SEP IRA may actually add some confusion, especially if you have a traditional IRA as well.
With SEP IRAs, an employer must cover all eligible employees for the plan to be valid. There is no age limit, so if you are 99 years old and still working for a company that is going to be making a SEP IRA contribution for its employees, you’ll get a contribution too. If you are self-employed and operate your own SEP IRA plan, this gives you a bit of an advantage over a traditional IRA, where contributions are not allowed once you reach the year that you will turn 70 ½.
But the SEP IRA is an IRA based plan and the minimum distribution rules that apply to your traditional IRA will also apply to your SEP IRA. That means that once you turn 70 ½, you must begin taking required minimum distributions - even if you are still working. Notice that just like your traditional IRA, a SEP IRA has no “still working” exception.
This combination of facts could potentially land you in an interesting scenario; kind of like a revolving door of SEP IRA money. If you are working for a company that is making SEP contributions and you are over 70 ½, at the same time the company will be required to make your contributions (if they make them for other employees), you will be required to take minimum distributions from that account.
Want another weird quirk about SEP IRAs? Do you remember the game monopoly? If you happened to grab the right “Community Chest” card you’d have seen “Bank error in your favor. Collect $200.” In reality, it’s rare the bank makes an error in your favor - and even if they do, it’s usually corrected before you’ve finished thinking about how to spend it. But if your employer makes a mistake with their SEP IRA contribution - and gives you too much - they can’t make you give any of it back. And because it’s in a SEP IRA, the IRA shield means they can’t go and get it either. The end result is that it’s kind of treated like you received a bonus and then contributed it to your own IRA. So no matter what, it’s subject to both FICA and FUTA taxes, and if you choose to withdraw it (or need to in order to avoid an excess IRA contribution), it will be subject to ordinary income tax as well.
Many of you probably have a sound grasp of the basic IRA rules. But it’s often the details that make or break someone as they reach for financial independence. As you work towards achieving your ultimate goals, you may want to consider consulting a knowledgeable advisor who has specialized knowledge in this area.
Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Thursday, July 15, 2010
Conversion Timing, Gift Taxes Highlight Mailbag
It is time for another Slott Report Mailbag with 3 consumer 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.
My husband turns 70 in September. I turn 66 in August. I don't think we will have enough cash to pay for a conversion to a Roth IRA for both of us this year. In such case, which IRA should we convert first or should we convert a portion of each?
Thank you for your help. Your books have been so informative.
Editor's Note: CLICK HERE to purchase any of Ed Slott's books.
Answer:
You have several options. You can convert one of the two IRAs to a Roth IRA in 2010 or you can convert a portion of each. Assuming both IRAs are not of equal size perhaps you have enough liquidity to pay the income tax on one conversion. Keep in mind that for 2010 conversions you have the option of adding the conversion (assuming all pre-tax dollars) amount to your 2010 income tax return or spread it equally over tax years 2011 and 2012. If you decide to convert both IRAs in 2010 you can elect one method and your husband can elect the other method. One other factor is your husband's age. He will have to start taking required minimum distributions next year and the required distribution must be taken before any of the IRA can be converted. If you are not counting on his required distributions to pay your living expenses, you should consider converting as much of his IRA as you can afford to a Roth this year. That will reduce or eliminate his required distributions in the future.
2.
I just received a sizable gift check from my mother who is trying to give her 3 kids money now to avoid probate taxes for us later. She's 85 and sharp as a tack!
Can I just take this check or any future "extra" money and go open a Roth IRA account at any bank? How and when am I taxed on this new gift money? Should I just deposit it into my checking account and wait for a good rate opportunity for a Roth IRA CD?
I'm still working at age 64, make under $100,000/annually and don't plan on retiring until I'm ready for the grave. I can only afford to have 3% taken out of my pay for the IRA program here at work (we get 3% matching funds).
Am I pretty free to open Roth accounts whenever I have the extra money--up to some limit, I'm sure?
I just bought your book after watching your PBS show, but have not read very far yet. I like what you have to say. Thanks!
Answer:
Your mother can gift up to $13,000 per year to each child and not incur a gift tax. In addition it is not taxable to you when you receive it. You might be able to use some of the money to open a Roth IRA. The first requirement is that you have "earned" income which is generally W-2 income or self-employment income. Then it will depend on whether you are filing a single or joint tax return.
3.
I follow the website and also am a subscriber to the monthly newsletter and find them both very useful. My question is if I am in a high income bracket and make a non deductible Traditional IRA contribution in 2010, can I roll that amount over in 2010 to a Roth. I cannot contribute directly to a Roth, the reason for the extra step.
Thanks,
Matt
Answer:
Thank you for subscribing to our newsletter and viewing our website. Yes you can make a non-deductible traditional IRA contribution and then immediately convert to a Roth IRA. This is one of the few loopholes in the tax code. Your conversion will be subject to the pro-rata rule. If you have any IRAs that hold pre-tax funds, you will pay some income tax on your conversion. If you have no other IRAs, because you are making a non-deductible contribution to the traditional IRA you will have basis and your tax liability on the conversion will be zero or very little.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
1.
My husband turns 70 in September. I turn 66 in August. I don't think we will have enough cash to pay for a conversion to a Roth IRA for both of us this year. In such case, which IRA should we convert first or should we convert a portion of each?
Thank you for your help. Your books have been so informative.
Editor's Note: CLICK HERE to purchase any of Ed Slott's books.
Answer:
You have several options. You can convert one of the two IRAs to a Roth IRA in 2010 or you can convert a portion of each. Assuming both IRAs are not of equal size perhaps you have enough liquidity to pay the income tax on one conversion. Keep in mind that for 2010 conversions you have the option of adding the conversion (assuming all pre-tax dollars) amount to your 2010 income tax return or spread it equally over tax years 2011 and 2012. If you decide to convert both IRAs in 2010 you can elect one method and your husband can elect the other method. One other factor is your husband's age. He will have to start taking required minimum distributions next year and the required distribution must be taken before any of the IRA can be converted. If you are not counting on his required distributions to pay your living expenses, you should consider converting as much of his IRA as you can afford to a Roth this year. That will reduce or eliminate his required distributions in the future.
2.
I just received a sizable gift check from my mother who is trying to give her 3 kids money now to avoid probate taxes for us later. She's 85 and sharp as a tack!
Can I just take this check or any future "extra" money and go open a Roth IRA account at any bank? How and when am I taxed on this new gift money? Should I just deposit it into my checking account and wait for a good rate opportunity for a Roth IRA CD?
I'm still working at age 64, make under $100,000/annually and don't plan on retiring until I'm ready for the grave. I can only afford to have 3% taken out of my pay for the IRA program here at work (we get 3% matching funds).
Am I pretty free to open Roth accounts whenever I have the extra money--up to some limit, I'm sure?
I just bought your book after watching your PBS show, but have not read very far yet. I like what you have to say. Thanks!
Answer:
Your mother can gift up to $13,000 per year to each child and not incur a gift tax. In addition it is not taxable to you when you receive it. You might be able to use some of the money to open a Roth IRA. The first requirement is that you have "earned" income which is generally W-2 income or self-employment income. Then it will depend on whether you are filing a single or joint tax return.
For example: If you are single the phase out ranges for 2010 are $105,000-$120,000. After $120,000 you cannot contribute to a Roth IRA. If you are filing a joint return the phase out ranges for 2010 are $167,000-$177,000. Assuming you can contribute, the maximum amount you can contribute in 2010 is $5,000 plus an extra $1,000 if you are age 50 or older this year. If you do not qualify to contribute to a Roth IRA, you can contribute to a non-deductible traditional IRA. With the extra money you might also want to consider increasing your contribution to your company plan.
3.
I follow the website and also am a subscriber to the monthly newsletter and find them both very useful. My question is if I am in a high income bracket and make a non deductible Traditional IRA contribution in 2010, can I roll that amount over in 2010 to a Roth. I cannot contribute directly to a Roth, the reason for the extra step.
Thanks,
Matt
Answer:
Thank you for subscribing to our newsletter and viewing our website. Yes you can make a non-deductible traditional IRA contribution and then immediately convert to a Roth IRA. This is one of the few loopholes in the tax code. Your conversion will be subject to the pro-rata rule. If you have any IRAs that hold pre-tax funds, you will pay some income tax on your conversion. If you have no other IRAs, because you are making a non-deductible contribution to the traditional IRA you will have basis and your tax liability on the conversion will be zero or very little.
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
Wednesday, July 14, 2010
A Designated Beneficiary is Key for Employer Plans
You thought you had a hard time understanding the Tax Code? Even the government doesn’t know the rules for these rollovers! Just recently, I got a call from an advisor whose client had a form letter from a government Thrift Savings Plan (TSP). His mother and father had both died within months of each other and the end result is that the TSP balance is now going to his mother’s estate. The TSP letter gave the executor of the estate 60 days to move the funds to an inherited IRA or a check would be issued payable to the estate with 20% withholding taken from the check.
As of 2010 all employer plans (TSP’s, 401(k)’s, etc) must allow a designated non-spouse beneficiary the ability to do a direct rollover (direct transfer or trustee-to-trustee transfer) of inherited plan funds to a properly titled inherited IRA. The key word here is designated, because a non-designated beneficiary does not have this option. But just who or what is a designated beneficiary anyway?
The answer is simple. A designated beneficiary is a named beneficiary with a birth date, i.e. an individual (or a qualifying trust). You must name a beneficiary on the beneficiary form or the form will sometimes say that if no beneficiary is named the beneficiary is my spouse or my children. Then you have a named beneficiary with a birth date. An estate is NEVER a designated beneficiary and is not able to do a direct rollover of inherited plan funds to an inherited IRA.
Additionally, 20% withholding is only required on distributions that are eligible for rollover. A non-spouse beneficiary, such as the estate, is NEVER eligible to rollover a distribution of inherited retirement benefits whether they come from an IRA or an employer plan.
The moral here is that employers or IRA custodians may not always give you correct information. Always, always, always, check with an advisor with knowledge and experience in retirement plans. You sometimes can’t even trust the government.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
As of 2010 all employer plans (TSP’s, 401(k)’s, etc) must allow a designated non-spouse beneficiary the ability to do a direct rollover (direct transfer or trustee-to-trustee transfer) of inherited plan funds to a properly titled inherited IRA. The key word here is designated, because a non-designated beneficiary does not have this option. But just who or what is a designated beneficiary anyway?
The answer is simple. A designated beneficiary is a named beneficiary with a birth date, i.e. an individual (or a qualifying trust). You must name a beneficiary on the beneficiary form or the form will sometimes say that if no beneficiary is named the beneficiary is my spouse or my children. Then you have a named beneficiary with a birth date. An estate is NEVER a designated beneficiary and is not able to do a direct rollover of inherited plan funds to an inherited IRA.
Additionally, 20% withholding is only required on distributions that are eligible for rollover. A non-spouse beneficiary, such as the estate, is NEVER eligible to rollover a distribution of inherited retirement benefits whether they come from an IRA or an employer plan.
The moral here is that employers or IRA custodians may not always give you correct information. Always, always, always, check with an advisor with knowledge and experience in retirement plans. You sometimes can’t even trust the government.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Tuesday, July 13, 2010
Making the Most of Your Retirement Savings
If you want to have a comfortable retirement you are going to have to be a disciplined saver and make good investment choices.
We have talked many times about contributing to IRAs and company sponsored plans as an effective way of helping you accumulate retirement income. These types of plans are great places to invest on a tax-deferred basis. You don’t have to worry about paying taxes on capital gains or dividends throughout your career. The only thing that really matters from a tax perspective is how much money you have when you start making withdrawals after you retire. If you have invested in a Roth IRA, you have paid the income tax as you made your contributions and now you never need to worry about taxes as you take withdrawals.
The ideal investment strategy for retirement accounts is to find great performers and milk them for everything they are worth. This strategy however involves risk. If your risk tolerance is low, you might want to consider conservative investments with little or no volatility, such as fixed annuities. If you purchase an annuity make sure it is from a reputable and financially-stable insurance company in order to ensure that the money will still be there when it comes time for you to make use of it. Plenty of horror stories abound regarding annuities that weren’t all they were cracked up to be. Strong marketing and heavy-handed sales pitches can get you into trouble in a hurry. Be sure to do your homework before purchasing an annuity.
Income tax rates on qualified dividends and long term capital gains are scheduled to rise as early as next year. It is also anticipated that the rates on the top income tax brackets will increase as well. Investing in IRAs while accumulating assets for retirement will help you avoid current income tax and, if you qualify to make them, deductible IRA contributions will provide you with an immediate tax benefit. Rising tax rates in the future also mean that this is a good time to do a Roth conversion. Beginning this year everyone qualifies to do a conversion.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
We have talked many times about contributing to IRAs and company sponsored plans as an effective way of helping you accumulate retirement income. These types of plans are great places to invest on a tax-deferred basis. You don’t have to worry about paying taxes on capital gains or dividends throughout your career. The only thing that really matters from a tax perspective is how much money you have when you start making withdrawals after you retire. If you have invested in a Roth IRA, you have paid the income tax as you made your contributions and now you never need to worry about taxes as you take withdrawals.
The ideal investment strategy for retirement accounts is to find great performers and milk them for everything they are worth. This strategy however involves risk. If your risk tolerance is low, you might want to consider conservative investments with little or no volatility, such as fixed annuities. If you purchase an annuity make sure it is from a reputable and financially-stable insurance company in order to ensure that the money will still be there when it comes time for you to make use of it. Plenty of horror stories abound regarding annuities that weren’t all they were cracked up to be. Strong marketing and heavy-handed sales pitches can get you into trouble in a hurry. Be sure to do your homework before purchasing an annuity.
Income tax rates on qualified dividends and long term capital gains are scheduled to rise as early as next year. It is also anticipated that the rates on the top income tax brackets will increase as well. Investing in IRAs while accumulating assets for retirement will help you avoid current income tax and, if you qualify to make them, deductible IRA contributions will provide you with an immediate tax benefit. Rising tax rates in the future also mean that this is a good time to do a Roth conversion. Beginning this year everyone qualifies to do a conversion.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Monday, July 12, 2010
3.8% Surtax: What You Need To Know
This week the Ed Slott IRA Discussion Forum featured a question on the recent Health Care Legislation. The new laws will impact IRAs in a number of ways, including a new 3.8% surtax. Curious as to how this new surtax could impact your IRA planning? Read on to find out.
Beginning in 2013, a new surtax on net investment income will affect high income taxpayers whose incomes exceed certain threshold amounts. The threshold for those married filing jointly will be $250,000 and the threshold for single filers will be $200,000. These thresholds are NOT indexed for inflation.
Thankfully, IRA distributions aren’t considered investment income, but that doesn’t mean you can ignore them in your planning process. Why? Because while IRA distributions aren’t considered investment income, they will add to your other income, which could push you towards or over your applicable threshold.
For example, let’s say you are 75 and are single. As a single filer, your applicable threshold would be $200,000. If you normally receive $20,000 of Social Security payments and earn $150,000 of rental income (which is considered net investment income) from some vacation properties you passively rent, you’re a comfortable $30,000 ($200,000 - $170,000 = $30,000) under your threshold. Therefore, even though nearly all your income is investment income, you won’t be affected at all by the 3.8% surtax.
But now let’s say you had a sizable IRA and your required minimum distribution was $60,000. Now, your total income is $230,000 - which is $30,000 over your threshold. Even though your IRA distribution didn’t add any additional investment income, it’s going to cause $30,000 of your existing investment income (your passive rental income) to become subject to the 3.8% surtax…on top of your regular income tax. That’s another $1,140 of tax!
Unfortunately, the law is the law and you can’t change that - unless of course, you happen to be a Congressman. But on the bright side, since the surtax doesn’t take effect until 2013, you can start planning now to reduce your exposure to the surtax later. Such planning strategies might include Roth conversions or the purchase of municipal bonds - both of which will produce tax free income that isn’t subject to the net investment surtax and won’t cause existing investment income to become subject to the surtax.
If you think you may be subject to the new 3.8% surtax on net investment income in 2013, you may want to consider reviewing your situation with a qualified advisor. Be sure to make sure that they have specialized knowledge in this area.
Have more questions? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
Beginning in 2013, a new surtax on net investment income will affect high income taxpayers whose incomes exceed certain threshold amounts. The threshold for those married filing jointly will be $250,000 and the threshold for single filers will be $200,000. These thresholds are NOT indexed for inflation.
Thankfully, IRA distributions aren’t considered investment income, but that doesn’t mean you can ignore them in your planning process. Why? Because while IRA distributions aren’t considered investment income, they will add to your other income, which could push you towards or over your applicable threshold.
For example, let’s say you are 75 and are single. As a single filer, your applicable threshold would be $200,000. If you normally receive $20,000 of Social Security payments and earn $150,000 of rental income (which is considered net investment income) from some vacation properties you passively rent, you’re a comfortable $30,000 ($200,000 - $170,000 = $30,000) under your threshold. Therefore, even though nearly all your income is investment income, you won’t be affected at all by the 3.8% surtax.
But now let’s say you had a sizable IRA and your required minimum distribution was $60,000. Now, your total income is $230,000 - which is $30,000 over your threshold. Even though your IRA distribution didn’t add any additional investment income, it’s going to cause $30,000 of your existing investment income (your passive rental income) to become subject to the 3.8% surtax…on top of your regular income tax. That’s another $1,140 of tax!
Unfortunately, the law is the law and you can’t change that - unless of course, you happen to be a Congressman. But on the bright side, since the surtax doesn’t take effect until 2013, you can start planning now to reduce your exposure to the surtax later. Such planning strategies might include Roth conversions or the purchase of municipal bonds - both of which will produce tax free income that isn’t subject to the net investment surtax and won’t cause existing investment income to become subject to the surtax.
If you think you may be subject to the new 3.8% surtax on net investment income in 2013, you may want to consider reviewing your situation with a qualified advisor. Be sure to make sure that they have specialized knowledge in this area.
Have more questions? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.
By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC
Friday, July 9, 2010
Health Care Reform & Roth Conversion Mistakes
Ed Slott has written two very important articles in the last two-plus weeks that -- if you haven't read them -- are essential to understand the importance of 2010 year-end planning.
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 first was a June 24th article in Financial Planning titled "Strange Bedfellows". In this article, Ed talks about the impact of the Health Care Reform bill on IRAs and how it will affect tax rates moving forward. CLICK HERE to read the article.
- The second piece was a June 27th article in Investment News titled "Avoiding a Big Roth Conversion Mistake". He warns that if people don't use non-IRA funds to pay the income tax, they could run into steep penalties. CLICK HERE to read the article.
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
ROBS and SIMPLE IRAs Highlight Mailbag
It is time for another edition of The Slott Report Mailbag with 3 consumer questions, ranging from using retirement plans for business start-ups to a question on SIMPLE IRAs.
1.
I am looking at buying a condo in a depressed resort area for eventual appreciation using IRA funds. The unit would also be offered through VRBO (Vacation Rental by Owner). My wife and I would use this on a part-time basis and pay appropriate rental rates. I have been advised that this is permitted under the Pension Liquidity Plan and can set it up as follows:
Thanks!
Editor's Note: Ed Slott appeared on John Vaughn's radio show on Wednesday, June 23rd. The interview is available by clicking this link. Scroll down to the 06/23/10 show to listen.
Answer:
What you have described is what IRS refers to as a ROBS (Rollover for Business Start-Up) transaction. IRS has stated that they are closely scrutinizing these types of transactions as individuals who are unsophisticated in all the plan rules can very easily enter into transactions that are not allowed under the tax code. This can result in taxable distributions or plan disqualification. Be careful!
2.
Dear Ed and Company,
I currently have defined benefit and 401(k) plans set up for my business. I'm planning on terminating both and rolling them into my IRA this year. I was told by the IRS that because I "maintain" another plan (or plans) that I can't open the SIMPLE until the year following the terminations. Is that true?
Thanks,
Chip Gordy
Answer:
The rules of a SIMPLE plan state it it must be the only plan for the business. If you are planning on rolling your defined benefit and 401(k) funds into your new SIMPLE you may need to terminate those plans as of year-end 2010 and start the SIMPLE as of January 2011.
3.
I have just retired. I have left my 401(k) account with my former employer. My wife is the beneficiary on the account. The 401(k) expenses are minimal and the investment choices are good and varied. I have heard that when I die the taxes my wife would have to pay could/would be much higher than if I had moved the 401(k) into an IRA. Any truth to this?
Answer:
A spouse always has the opportunity of rolling inherited assets into their own account. Even if the plan liquidates your 401(k) and sends a check to your spouse, she can put those funds in her own IRA and she would not have to pay any taxes on that transaction. It is unlikely that she would be allowed to leave the inherited assets in the 401(k) plan. She would only pay taxes on whatever funds she takes out of the account as required distributions or amounts in excess of required distributions that are not rolled over to another tax deferred account.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
1.
I am looking at buying a condo in a depressed resort area for eventual appreciation using IRA funds. The unit would also be offered through VRBO (Vacation Rental by Owner). My wife and I would use this on a part-time basis and pay appropriate rental rates. I have been advised that this is permitted under the Pension Liquidity Plan and can set it up as follows:
- Roll my IRA into a 401(k)
- The 401(k) would then buy stock from C Corp and C Corp would purchase the property. The rents collected would be paid to C Corp.
Thanks!
Editor's Note: Ed Slott appeared on John Vaughn's radio show on Wednesday, June 23rd. The interview is available by clicking this link. Scroll down to the 06/23/10 show to listen.
Answer:
What you have described is what IRS refers to as a ROBS (Rollover for Business Start-Up) transaction. IRS has stated that they are closely scrutinizing these types of transactions as individuals who are unsophisticated in all the plan rules can very easily enter into transactions that are not allowed under the tax code. This can result in taxable distributions or plan disqualification. Be careful!
2.
Dear Ed and Company,
I currently have defined benefit and 401(k) plans set up for my business. I'm planning on terminating both and rolling them into my IRA this year. I was told by the IRS that because I "maintain" another plan (or plans) that I can't open the SIMPLE until the year following the terminations. Is that true?
Thanks,
Chip Gordy
Answer:
The rules of a SIMPLE plan state it it must be the only plan for the business. If you are planning on rolling your defined benefit and 401(k) funds into your new SIMPLE you may need to terminate those plans as of year-end 2010 and start the SIMPLE as of January 2011.
3.
I have just retired. I have left my 401(k) account with my former employer. My wife is the beneficiary on the account. The 401(k) expenses are minimal and the investment choices are good and varied. I have heard that when I die the taxes my wife would have to pay could/would be much higher than if I had moved the 401(k) into an IRA. Any truth to this?
Answer:
A spouse always has the opportunity of rolling inherited assets into their own account. Even if the plan liquidates your 401(k) and sends a check to your spouse, she can put those funds in her own IRA and she would not have to pay any taxes on that transaction. It is unlikely that she would be allowed to leave the inherited assets in the 401(k) plan. She would only pay taxes on whatever funds she takes out of the account as required distributions or amounts in excess of required distributions that are not rolled over to another tax deferred account.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
Thursday, July 8, 2010
eSeminar Series: Missing IRA Estate Plan
Ed Slott and Company's eSeminar Series Session, The Missing IRA Estate Plan, will take place on Tuesday, July 13th at 3 PM ET. The session will last 90 minutes and include Q&A with our IRA Technical Consultants.
Below is a preview of the material covered during the session:
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*Copyright 2010 Ed Slott and Company, LLC
Below is a preview of the material covered during the session:
- Using Life Insurance to protect IRA values
- Income in Respect of a Decedent (IRD) deduction
- NO Estate Tax discounts for IRA accounts
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*Copyright 2010 Ed Slott and Company, LLC
Wednesday, July 7, 2010
Wrinkle to Use in Once-Per-Year Rollover Rule
A recent Private Letter Ruling (PLR) takes advantage of a little known wrinkle in the IRA once-per-year rollover rules. An IRA account owner can only do one rollover, per year (12 months), per account. If such a mistake is made, there is no ability for the IRS to grant relief (as they can with 60-day violations). The once-per-year rollover rule applies when a distribution is made payable to the account owner and they can use or spend the funds while they are outside of the IRA account.
In PLR 201026039, the account owner and his spouse held their IRAs in CDs. When the CDs came due, they decided to move the funds in order to get a higher rate of interest. The account owner went to the financial institution and took the balance of his CD out in three checks. Due to medical problems with a family member he was unable to complete his rollover within 60 days. IRS granted his request for an extension of time to complete his rollover of the full amount distributed.
His distribution complied with the one-rollover per year per account rules despite the fact that he took his distribution in three checks. Why? Because he took all three distributions from the account on the same day. Therefore, the three checks were treated as one rollover distribution.
You should check with your advisor or tax preparer whenever you have a rollover question. IRS can grant a second chance in some cases but never if you have done more than one rollover from the same account in one year.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
In PLR 201026039, the account owner and his spouse held their IRAs in CDs. When the CDs came due, they decided to move the funds in order to get a higher rate of interest. The account owner went to the financial institution and took the balance of his CD out in three checks. Due to medical problems with a family member he was unable to complete his rollover within 60 days. IRS granted his request for an extension of time to complete his rollover of the full amount distributed.
His distribution complied with the one-rollover per year per account rules despite the fact that he took his distribution in three checks. Why? Because he took all three distributions from the account on the same day. Therefore, the three checks were treated as one rollover distribution.
You should check with your advisor or tax preparer whenever you have a rollover question. IRS can grant a second chance in some cases but never if you have done more than one rollover from the same account in one year.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
Retirement Fears: Amended Tax Returns
Mistakes happen. Sometimes, in terms of a Roth recharacterization, you may need to amend a tax return through no fault of your own.
This installment of Retirement Fears talks about what you need to look for when it comes to amending your tax return. Make sure you and your financial team know what forms are necessary and the time frame involved with each.
CLICK HERE to read the article on amending tax returns.
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
This installment of Retirement Fears talks about what you need to look for when it comes to amending your tax return. Make sure you and your financial team know what forms are necessary and the time frame involved with each.
CLICK HERE to read the article on amending tax returns.
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
Monday, July 5, 2010
The Hardship of Hardship Distributions
This week the Ed Slott IRA Discussion Forum featured a question on hardship distributions and how they are treated. Want to know what they are and how they are taxed? Read on to find out.
In general, an individual must wait until they reach age 59 ½ in order to withdraw money from a retirement account without being subject to the 10% penalty for early distributions. While this is the general rule, there are a number of exceptions that will allow a person to access their retirement account money earlier without paying a penalty (although they will still owe income tax).
Some exceptions to the 10% penalty, like the exception for higher education and a first time homebuyer, apply only to IRAs. Others, such as the age 55 or QDRO (Qualified Domestic Relations Order) exceptions apply only to plans. Still others, like the disability or IRS levy exceptions apply to both IRAs and company plans.
But what about a financial hardship exception? Does it apply to IRAs, plans or both???
Aha! Trick question - THERE IS NO EXCEPTION TO THE 10% PENALTY FOR FINANCIAL HARDSHIP!
If this surprises you, you’re not alone. In fact, you are probably thinking to yourself right now, “Gee, I could have sworn I’ve heard of a hardship distribution.” And do you know what? You’d be right! There is such a distribution, but it is only from plans, and it doesn’t avoid a 10% penalty.
Many company plans, perhaps like your own 401(k), do not allow an individual access to their retirement account money while they are young and working. Instead, they must often reach retirement age or leave the company (voluntarily or not).
Sometimes, although a plan will have these restrictions, there will be an exception to the plan’s rules in order to access the retirement money while a person is experiencing a financial hardship. The exception to gain access to the money though, is not an exception from either the income tax owed or the 10% penalty.
For example, let’s say John is 50 years old and is working for Company X. In general, company X’s plan does not allow for John to take distributions at this time, but there is an exception in the plan rules for a hardship exception. Now let’s say that John’s wife has lost her job and they are having trouble making their mortgage payments. John decides to use the plan’s hardship provision to gain access to his account in order to withdraw $20,000. As a result, and despite his financial hardship, John will owe income tax on the $20,000 distribution, plus a $2,000 penalty ($20,000 x 10%) for taking an early distribution.
Doesn’t really seem all that great now, does it? If you are thinking about taking such a distribution, it may pay to speak with a qualified advisor who has specialized knowledge in this area first. While they can’t make new rules or change existing ones, they may be able to find a more tax efficient means of meeting your obligations.
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 general, an individual must wait until they reach age 59 ½ in order to withdraw money from a retirement account without being subject to the 10% penalty for early distributions. While this is the general rule, there are a number of exceptions that will allow a person to access their retirement account money earlier without paying a penalty (although they will still owe income tax).
Some exceptions to the 10% penalty, like the exception for higher education and a first time homebuyer, apply only to IRAs. Others, such as the age 55 or QDRO (Qualified Domestic Relations Order) exceptions apply only to plans. Still others, like the disability or IRS levy exceptions apply to both IRAs and company plans.
But what about a financial hardship exception? Does it apply to IRAs, plans or both???
Aha! Trick question - THERE IS NO EXCEPTION TO THE 10% PENALTY FOR FINANCIAL HARDSHIP!
If this surprises you, you’re not alone. In fact, you are probably thinking to yourself right now, “Gee, I could have sworn I’ve heard of a hardship distribution.” And do you know what? You’d be right! There is such a distribution, but it is only from plans, and it doesn’t avoid a 10% penalty.
Many company plans, perhaps like your own 401(k), do not allow an individual access to their retirement account money while they are young and working. Instead, they must often reach retirement age or leave the company (voluntarily or not).
Sometimes, although a plan will have these restrictions, there will be an exception to the plan’s rules in order to access the retirement money while a person is experiencing a financial hardship. The exception to gain access to the money though, is not an exception from either the income tax owed or the 10% penalty.
For example, let’s say John is 50 years old and is working for Company X. In general, company X’s plan does not allow for John to take distributions at this time, but there is an exception in the plan rules for a hardship exception. Now let’s say that John’s wife has lost her job and they are having trouble making their mortgage payments. John decides to use the plan’s hardship provision to gain access to his account in order to withdraw $20,000. As a result, and despite his financial hardship, John will owe income tax on the $20,000 distribution, plus a $2,000 penalty ($20,000 x 10%) for taking an early distribution.
Doesn’t really seem all that great now, does it? If you are thinking about taking such a distribution, it may pay to speak with a qualified advisor who has specialized knowledge in this area first. While they can’t make new rules or change existing ones, they may be able to find a more tax efficient means of meeting your obligations.
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
Friday, July 2, 2010
Multiple Roth Conversions and More in Mailbag
We have 3 questions from concerned consumers who want to make sure they are not just giving money away in unwanted taxes to the federal government. Enjoy the 4th of July holiday with friends, family and fireworks! As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.
1.
Can I chose to pay federal income tax (and state) on some of my Roth conversions during 2010 and spread the other Roth conversions over two years (2011-2012), or do I have to do all/multiple Roth conversions at the same time?
Answer:
On Roth IRA conversions in 2010 you can add the conversion amount (taxable portion) to your 2010 tax return or add the conversion amount equally over your tax returns in 2011 and 2012. You must elect one or the other for all of your 2010 conversions.
If, however, you are married and your spouse is doing a Roth IRA conversion in 2010, they can choose a different tax option than you. Whatever method they chose would apply to all of their 2010 conversions.
For example: on your conversion you decide to spread the income from the conversion over years 2011 and 2012 and your spouse can chose to pay the income tax on the conversion in 2010. Also, keep in mind if you decide to spread the income over 2011 and 2012, IT MUST BE EQUALLY. You can not add different amounts for each year.
2.
I would like to start a business (buy a franchise and partial ownership in the franchise company) using my 401(k). I have heard about ROBS programs. Any thoughts with regard to the validity of the program? I am 36 years old and currently unemployed.
Answer:
The ROBS transactions are allowable under the tax code. However, IRS is paying very, very close attention to those who utilize the strategy. It is all too easy for an account owner to make a mistake and create a prohibited transaction in the new company. If the problem is serious enough, it could cause the entire 401(k) plan in the new company to be disqualified, which would mean that all funds in the 401(k) would become taxable to all plan participants.
3.
What are the income limits for converting Roth IRAs next year. We thought originally it was unlimited this year only and now we believe that it is unlimited going forward and anyone any year can convert their IRAs to Roth IRAs no matter what income they make.
James
Answer:
You are absolutely correct. The income limit of $100,000 has been eliminated permanently. Everyone, regardless of income, can now convert to a Roth IRA in 2010 and beyond.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.
*Copyright 2010 Ed Slott and Company, LLC
1.
Can I chose to pay federal income tax (and state) on some of my Roth conversions during 2010 and spread the other Roth conversions over two years (2011-2012), or do I have to do all/multiple Roth conversions at the same time?
Answer:
On Roth IRA conversions in 2010 you can add the conversion amount (taxable portion) to your 2010 tax return or add the conversion amount equally over your tax returns in 2011 and 2012. You must elect one or the other for all of your 2010 conversions.
If, however, you are married and your spouse is doing a Roth IRA conversion in 2010, they can choose a different tax option than you. Whatever method they chose would apply to all of their 2010 conversions.
For example: on your conversion you decide to spread the income from the conversion over years 2011 and 2012 and your spouse can chose to pay the income tax on the conversion in 2010. Also, keep in mind if you decide to spread the income over 2011 and 2012, IT MUST BE EQUALLY. You can not add different amounts for each year.
2.
I would like to start a business (buy a franchise and partial ownership in the franchise company) using my 401(k). I have heard about ROBS programs. Any thoughts with regard to the validity of the program? I am 36 years old and currently unemployed.
Answer:
The ROBS transactions are allowable under the tax code. However, IRS is paying very, very close attention to those who utilize the strategy. It is all too easy for an account owner to make a mistake and create a prohibited transaction in the new company. If the problem is serious enough, it could cause the entire 401(k) plan in the new company to be disqualified, which would mean that all funds in the 401(k) would become taxable to all plan participants.
3.
What are the income limits for converting Roth IRAs next year. We thought originally it was unlimited this year only and now we believe that it is unlimited going forward and anyone any year can convert their IRAs to Roth IRAs no matter what income they make.
James
Answer:
You are absolutely correct. The income limit of $100,000 has been eliminated permanently. Everyone, regardless of income, can now convert to a Roth IRA in 2010 and beyond.
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
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