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Spend 1 hour with America's IRA Expert and learn how to:

• Save your clients a fortune in future taxes
• Get the most out of 2010 Roth Conversion Planning and other unique tax planning opportunities

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*Copyright 2010 Ed Slott and Company, LLC


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

Starting July 2011 401(k) Plan Providers Must Disclose Fees

The US Department of Labor recently issued proposed rules designed to force companies that provide services to 401(k) retirement plans to spell out all the fees they charge. These regulations will go into effect in July 16, 2011. The comment period has just ended. The final rules may contain some changes. Any service provider paid more than $1,000 in compensation in connection with retirement accounts must provide detailed reports on fees, according to the new rules.

Many retirement plan participants are unaware that there could be many fees charged against their 401(k) accounts for recordkeeping, administration, investment advisory, brokerage and management services. In addition, there could be indirect fees and expenses charged. These fees are often shaved off the top of the account’s investment gains which can significantly impact the account balance over a long period of time.

All of this changes in July of 2011. Participants will know exactly how much it cost them to participate in the various options available in their employer’s 401(k) plan, and that could be an eye-opener for many. However, they will be in a position to make better informed investment choices - and reduce the impact of excessive fees on their account balances.

Remember, we are in a YOYO economy; You’re On Your Own. Watch for this information and use it for your benefit.

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

NEW Mailbag Highlights Income Limits

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
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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

Using An IRA To Cover College Expenses

It’s time for college students to head back to school. But how are you going to pay for this next year of college? Some people will be able to write the check. But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills. What if it isn’t enough? Can you use your retirement savings to help pay the bill?

First of all, consider whether you should use your retirement assets. Are you putting your retirement at jeopardy to give your student a chance to have a good life? Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement. The message is to look for all possible sources of cash before you consider using your retirement funds.

If you are over the age of 59 ½, you have access to your retirement funds without penalty. You will have to pay income tax on any distributions you take but the retirement funds are now available for you to use as you wish.

A problem exists if you are under age 59 ½ and are subject to the 10% early distribution penalty. Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception. The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse. You can apply the exception to the unreimbursed payment of tuition, fees, books, supplies and required equipment - in other words the expenses minus any financial aid. Room and board are qualified expenses if the student is enrolled on at least a half-time basis. The expenses must be paid in the same year that a distribution is taken from the IRA.

So good luck to all those students returning to college this fall. And good luck to those that are footing the bill. Use your retirement assets only as a last resort and don’t pay the early distribution penalty if you qualify for this exception!

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC

Technology Enhances 401(k) & 403(b) Plan Access

We knew it would not take long before enhanced technology caught up with retirement plans; and now it is here. Many plan participants have been able to manage their own accounts through computer applications while at work or at home. Recently, a major plan provider enhanced its free iPhone and iPod touch applications to provide workplace savings plan participants access to retirement account information. Their more than 14 million 401(k) and 403(b) plan participants are now able to quickly view balances, positions and year-to-date history, including their personal rate of return.

These applications, and many more to follow by this provider and other retirement plan providers, will give many plan participants greater ability to manage and keep abreast of their 401(k) and 403(b) plans while they are not at work. The same technology is already available to many IRA account owners with accounts at banks, brokerage firms and other IRA custodians. Just be careful out there and watch out for schemes to get your passwords and other personal information. Your employer, bank, or brokerage firm is not likely to send you emails asking for that information or notifying you to change or verify a password. Your retirement could be at risk!

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

Inside NEW Public Television Special

We have a link in the lower left-hand corner on this page with information on Ed's NEWEST Public Television Special, Lower Your Taxes Now & Forever! with Ed Slott.

Ed spoke to the Rockville Centre Patch to discuss the urgency behind his message and the reasons he is speaking out to the masses about important retirement planning issues.

Ed said, "I wanted to create consumer awareness for people being underserved by their financial advisors. They don't have the right advisor to navigate them when they take money out. It's what you keep after taxes that counts most."

CLICK HERE to read the entire article and don't forget to call your local PBS station for dates and times of airings in your area.

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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

Q of Week: Leaving IRA to a Minor

This week, the Ed Slott and Company IRA Discussion Forum featured a question about leaving an IRA to a minor beneficiary. Is this a potential part of your planning? If so, you’ll need to carefully evaluate your options. What are they? Read on to find out two of the best.

There are a number of effective options for naming an IRA beneficiary if you plan to leave your IRA to a minor. One option is to name a custodial account (UGMA/UTMA), for the benefit of the minor as the IRA beneficiary. For example, your beneficiary form might read “John Doe as Custodian for James Doe under the Uniform Gifts to Minors Act.” This strategy has several benefits. One benefit is that it won’t cost you anything to set up. In fact, the actual custodial account would likely not be set up until after you’ve passed. For IRAs with smaller balances, this may be a preferable option. Another benefit of using an UGMA/UTMA account as an IRA beneficiary for minors is that until the beneficiary reaches the age of majority, the account’s custodian has control over the funds. The age of majority varies from state to state between 18 and 21.

The major drawback of leaving your IRA to an UGMA/UTMA account is that once the beneficiaries reach the age of majority, the money is theirs and they can do whatever they want with it. While you can make your wishes known to those beneficiaries before your death, there is nothing to force them to adhere to those desires. That could mean your 18 year-old beneficiary now has access to thousands, or in some cases, even millions of dollars - perhaps not what you had in mind?

If the idea of an 18 (or 21) year-old suddenly having access to all of your IRA money leaves you a bit uneasy, there’s another strategy that can be used. Instead of naming an UGMA/UTMA account as the IRA’s beneficiary, you can name a trust. The biggest benefit of naming an IRA trust as the beneficiary of your IRA is that it allows you to have maximum control over what happens to those funds - even after your dead. In essence, a trust as an IRA beneficiary allows you to rule from the grave. In contrast to an UGMA/UTMA account, there is no age where the trust beneficiaries must be given control over the IRA funds. Plus, a trust allows you to write your own rules.

There are a number of downsides to the trust approach though. Besides the cost of setting up a trust (which could run several thousand dollars or more) the trust may also limit the beneficiaries’ ability to “stretch” distributions over their lives. In general, only individuals (people) can stretch distributions, but there are special trusts, known as see-through (a.k.a. look-through) trusts that also allow for the stretch provision. Unfortunately though, all applicable beneficiaries of an IRA trust must use the oldest beneficiary’s age for determining required distributions. That means that if you have one beneficiary who is 40 (i.e. your child) and another who is 7 (i.e. your grandchild), if they are both beneficiaries of the same IRA trust, the 7 year-old is still stuck using the 40 year-olds life expectancy. Another downside to naming a trust as an IRA beneficiary is that depending on the type of trust that’s set up, distributions from the IRA could end up being taxed at trust tax rates instead of individual rates. That can have a MAJOR impact of the ultimate value of the IRA received by your beneficiaries.

Regardless of which of the above strategies makes sense in your particular situation, there is one important thing to remember - after you have died, THE IRA IS NOT moved into the UGMA/UTMA or Trust account. If that mistake is made, the entire IRA is immediately taxable and the mistake cannot be fixed. Instead, only the distributions from the IRA are directed into the accounts.

Sound confusing? Well, it should. Deciding how to leave IRA money to a minor beneficiary is not easy decision. If naming such a beneficiary may be a part of your plan, consider speaking with a qualified 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

Seize 2010 Golden Opportunities Before Year-End on CD!

Ed Slott's NEW Webcast, Seize 2010 Golden Opportunities Before Year-End, is available through September 17th at www.irahelp.com.

CLICK HERE to listen to the 1-hour webcast RIGHT AWAY!

Also, you can capture Ed Slott's practical action plan for use in the final quarter of 2010. The webcast is NOW AVAILABLE ON CD!

CLICK HERE to order your copy today.

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

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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.

*Copyright 2010 Ed Slott and Company, LLC

Roths, Roths, and Conversions Highlight Mailbag

This week's Slott Report Mailbag discusses some complex, timely issues involving Roth conversions and Roth IRAs for individuals with disabilities. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

1.

Hello Ed and Company,

I have been disabled since I was a teenager and can't work. I get social security payments from my mother's account. I am taxed on this and on what little I can put in a mutual fund. I am now in my 40s and would like to set up a Roth IRA or some sort of tax free investment account. I have been told that since I do not work and do not have a 401(k) that I can not set up a Roth IRA. Is this true? I am disabled and have very little. I think it would be only fair that I should be able to get the same benefits of a Roth IRA that healthy working people get. What can I do?

Thank you,

Mary
Atlanta, GA

Answer:
Unfortunately the regulations for contributions to IRAs do not provide for individuals with disability income only. The law specifically states your contribution is based on earned income. This does seem unfair in your situation however.

2.

I understand that in 2010 traditional IRA rollovers to a Roth IRA must be reported either as income in 2010 or split 50/50 as income in 2011 and 2012. The choice of taxable year in which the income is reported must be the same for all of a taxpayer's IRA conversions in 2010. I am 63 years old and retired. In 2010 I converted a traditional IRA to a Roth IRA with the intention of splitting the income over 2011 and 2012. In 2010, can I also convert a portion of my 401(k) to a Roth IRA but report the income in 2010, or am I restricted to the same choice I have made for my traditional IRA conversion? Alternatively, can I take a cash distribution from my 401(k), report that income in 2010, even though I opt to spread my traditional IRA distribution over 2011 and 2012? I want to spread income over 3 years, because I am a New York resident, and New York gives a $20,000 exemption per person for pension and IRA distributions, and I don't want to forfeit the New York exemption in 2010.

Thanks!

Answer:
Interesting question. It is clear that each taxpayer must use the same method on IRAs converted to Roth IRAs. Since the tax election will be made on Form 8606 which is filed by the individual, not jointly, your spouse, if you are married, can convert to a Roth IRA in 2010 and use a different method than the one you select. For plans, IRS has not released any guidance yet. There is a possibility that you can make an election for plan conversions separate from the election you make for your IRA conversions. We will have to wait and see.

3.

I have a standard IRA account and a Roth IRA account. The standard IRA has about $10,000. Can I roll that over into my Roth and still make the $6,000 (over 50) contribution for 2011?

Thanks,

Steve

Answer:
You can certainly convert your traditional IRA to either a new Roth IRA or your existing Roth IRA account. A conversion does not eliminate your ability to make either an IRA or a Roth IRA contribution. Your ability to make contributions to a Roth IRA will depend on your level of income in 2010. Phase out limits are as follows:

Married filing jointly
$167,000-$177,000

Single or head of household
$105,000-$120,000

If you file separate, your phase out range is:
$0-$10,000

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

*Copyright 2010 Ed Slott and Company, LLC

Getting Out Of 72(t) (SEEP) Distributions

Just in case you had not noticed, times have been tough lately for a lot of folks. Account balances are down, layoffs continue to affect many businesses and individuals, and many people are still unemployed. All of this means that more individuals are tapping their retirement assets early through 72(t) distributions.

That brings up two questions.

What happens if you get another job and no longer need those early distributions from your IRA and what happens if the IRA balance dropped so much that the early distributions have entirely depleted the account?

There are only three ways to get out of a substantially equal payment early distribution plan, otherwise know as 72(t) or SEPPs. All three options are drastic ones. The general rule is that distributions must continue until the later of five years or until age 59 ½, whichever is later, in order to avoid the 10% early distribution penalty.

The most drastic way out is death of the account owner. A slightly less drastic way out is the disability of the account owner. Both of those events mean that the early distribution payments can be stopped. The definition of disability is very restrictive - the account owner must be unable to perform any meaningful employment.

The last way out is a little known provision that came into being in 2002. We call it the Enron clause as it was a result of the collapse of Enron and the collapse of Enron retirement account balances. If the IRA account balance declines to a level where the early distributions deplete the account entirely, the account owner can stop the early distribution schedule and will not be subject to the 10% early distribution penalty on all prior distributions.

So, if you get a new job and no longer need these distributions, there is no relief for you (other than perhaps a change to the RMD method but that is a subject for another day). The distributions must continue unchanged until you come to the end of your payment schedule.

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

What The Experts Are Doing With Own Roths

You hear plenty of experts preach the virtues of Roth IRAs while stressing the individualistic nature of retirement planning.

What are the experts doing with their OWN Roth IRAs?

The Wall Street-Journal asked the question many consumers are wondering, interviewing Seymour Goldberg, Robert Keebler, Natalie Choate and Ed Slott about their own retirement planning.

The answers are at this link.

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

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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.

*Copyright 2010 Ed Slott and Company, LLC

Are Roth Conversions Too Good To Be True?

We have written in this column many times about the benefits of a Roth IRA conversion. Commencing in 2010 the income limit has been repealed, making it possible for everyone owning a traditional IRA to convert it into a Roth IRA. Participants and beneficiaries with account balances in employer-sponsored retirement plans, such as 401(k)s and 403(b)s, can also convert those funds provided they are eligible to receive a distribution.

While this rule change was hailed by many in the press as a great thing, plenty of taxpayers remain skeptical. Consumers and practitioners are concerned about the possibility of Congress changing the rules at a future point, taking away some of the benefits of conversion. Without a crystal ball, however, it is impossible to know with any degree of certainty if something like that would ever happen.

One of the benefits of Roth IRAs is that no distributions are required to be made during the account owner’s lifetime. Also, provided certain conditions are met, withdrawals from a Roth IRA will be free of federal (and most state) income tax, regardless of whether it is paid to the original account owner or an inheriting beneficiary. The upfront payment of income tax at the time of conversion eliminates the imposition of income tax on the back end. However, a penalty tax could apply if the converted funds are withdrawn from the Roth too soon (i.e. within 5 years of the year of conversion if the account owner has not yet attained age 59 ½).

In an attempt to generate a high level of conversion activity in 2010, Congress is allowing taxpayers to choose whether to include the taxable amount of a 2010 conversion all in 2010 or prorate it evenly in 2011 and 2012. Some folks feel the 2-year option is best because it reduces the amount included in income annually, but others feel the 1-year option is the more prudent approach because of the guaranteed certainty of higher income tax rates after 2010.

And what we do know is that income tax rates are going up. This should be no surprise to anyone, considering the epic amount of debt and deficits with which Congress is grappling. The President has repeatedly called for higher taxes for top earners. A 3.8% Medicare surtax on high earner’s investment income is on tap for 2013. In 2011 the top tax rates are increasing: income tax from 35% to 39.6%, short term capital gains from 35% to 39.6%, long term capital gains from 15% to 20%, interest income from 35% to 39.6%, and qualifying dividend income from 15% to 39.6%. All of these tax increases bode well for converting in 2010 and paying the income tax in 2010. Of course, if you know your income will be significantly lower in 2011 & 2012 you might want to wait to add conversion-related income in those years.

In the short-term, the government is benefiting by the flood of Roth IRA conversions this year because the conversion amount is added to income in 2010 or 2011 & 2012. It will not have to wait until that individual attains age 70 ½ to begin collecting revenue.

Because there are no guarantees, individuals who remain unconvinced that the Roth IRA regulations will not change may want to consider making partial Roth conversions instead of one large one.

In the end, every IRA investor’s situation is different and no individual should make important financial decisions without first consulting with his or her tax and financial advisor.

By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC

Roth IRA Contribution Confusion - Part II

Last week, our question of the week focused on Roth IRA contributions. In particular, we discussed the fact that there are still restrictions in place that, depending on your income, may prevent you from making direct contributions. If you missed last week’s post or just need a refresher, click here.

This week, as promised, we discuss a strategy for getting money into your Roth IRA each year, no matter how high your income.

If you have earned income in 2010 but have modified adjusted income over $120,000 (single filers) or $177,000 (joint filers), you will be completely phased-out of Roth contribution eligibility. That doesn’t mean there’s no way to get your extra $5,000 ($6,000 if you are 50 or older) IRA contribution into a Roth IRA each year to continue building your tax-free retirement savings though. It just takes a little more work. Instead of contributing directly to a Roth IRA account, simply follow the following two step process.

Step #1 - Make a contribution to a traditional IRA.

If you have earned income and are under 70 ½, you can ALWAYS make a contribution to a regular IRA. It doesn’t matter whether or not you participate in a company plan or how much you make. Plan participation, however, may affect your ability to deduct the IRA contribution.

Step #2 - Convert the traditional IRA contribution to a Roth IRA

There are still Roth contribution limits, but there are no more Roth conversion limits. So once you make your annual contribution to a traditional IRA, you can skirt the Roth contribution limits by simply making a Roth conversion of $5,000 ($6,000 if 50 or older) each year.

Sound too ridiculous to be true? Well, it may be ridiculous, but it’s also true. Of course, like anything else there are a few small traps you should be aware of.

Trap #1 - IRA conversions are subject to the pro-rata rule. If you have other IRA money (besides your new contribution) - including money in SEP and SIMPLE IRAs - and your contribution was non-deductible, you may end up owing more tax that year than you thought (because a portion of your after-tax dollars would remain in traditional accounts).

Trap #2 - Traditional IRA contributions have an age limit, Roth IRA contributions don’t. If you have earned income, regardless of your age, you may make a Roth IRA contribution. On the other hand, once you reach the year in which you turn 70 ½, you may no longer make traditional IRA contributions. Since the strategy above requires you first make a contribution to a traditional IRA, if you are over 70 ½, it’s not a strategy that can work for you.

Roth IRAs are a great way to accumulate funds for retirement and protect against the risk of rising taxes in the future. Indeed, there are many out there who want to get as much money as possible into Roths now, at today today’s tax rates. $5,000 (or $6,000) may not sound like much, but added together and compounded over time, it can make a significant difference in your future.

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

Inherited IRAs Highlight Mailbag

Plenty of questions about required minimum distributions (RMDs) and inherited IRAs in this week's Slott Report Mailbag. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

1.

IRA Experts --

I made a contribution of $4500 on December 6, 2005. When can I take this out without penalty? Is there a hard-and-fast rule that requires me to leave it in for 5 years? (My previous withdrawal was $35000 on April 12 of this year, I contributed that amount on April 6, 2004).

Answer:
Contributions can always be withdrawn from your Roth IRA at any time without tax or penalty. Roth IRAs have ordering rules for distributions. The first money out is your contributions, then converted amounts (first in, first out), and lastly earnings. You cannot take out earnings tax and penalty free until 5 years after you established Roth IRA AND you are at least age 59 1/2.

2.

My wife is age 67 and has an IRA valued at approximately $200,000 and I (age 80) am the sole beneficiary. My wife just passed away on July 10 of this year. How do I treat the inherited IRA and when will my RMD begin?

Thank you,

Anthony Mastrangelo
Drexel Hill, PA

Answer:
First, sorry for your loss. You have two options. If you keep the account as an inherited IRA you have no required distributions until your wife would have been 70 1/2. If the account remains an inherited IRA after that, then the distributions are calculated using the Single Life Table to look up your factor each year. Your required distributions will be larger than they would be if you owned the account.

Option 2 is to roll the inherited IRA into your own name. You then take distributions each year based on your age and the Uniform Lifetime Table. This will give you a smaller required distribution each year. You can wait to do the rollover until the year your wife would have been 70 1/2. In either case, you should be sure to name a beneficiary on the account.

3.

I have a 22-year-old whose mother died and left her a $100,000 Traditional IRA among other things. Is there any way we can roll the inherited Traditional IRA to an inherited Roth IRA and spread the tax over the two years? Please tell me there is some way we can do this. Thanks for your help.

Answer:
Sorry. An IRA inherited by a non-spouse beneficiary can NEVER be converted to a Roth IRA. A conversion is treated as a rollover for tax purposes and non-spouse beneficiaries can never do a rollover.

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

IRA Resources From Ed Slott and Company

As the summer winds to a close, we just want to update you on some of the resources we are offering at the present time:

• Ed Slott's FREE 1-Hour Webcast, Seize 2010 Golden Opportunities Before Year-End. America's IRA Expert spends 1 hour with you to talk about year-end planning opportunities and how to combat high future tax rates looming ahead. CLICK HERE to register and listen TODAY!

• Ed Slott's 2010 Retirement Decisions Guide is a perfect IRA resource guide, featuring 89 ways to save and stretch your wealth. CLICK HERE to purchase a copy or take advantage of our bulk discounts for use during client presentations!

• Ed Slott's 2-Day IRA Workshop, Instant IRA Success: Spend 2 full days with America's IRA Experts on November 4-5 in La Jolla, CA. Listen to the free Webcast and receive a special incentive for use towards the full tuition price of the 2-day program! CLICK HERE for more information and to register.

• Ed Slott and Company's Instant IRA Success eSeminar Series: Can't make it to La Jolla? America's IRA Experts brings IRA Education Straight To You with 8 interactive sessions, including Q&A with our IRA Technical Consultants. CLICK HERE for more information and to register--IRA Essentials session takes place on August 24th!

• Ed Slott's IRA Advisor Newsletter: Monthly 8-page newsletter with the latest IRA updates and analysis. Just $125/year...just over $12 an issue for the latest information from America's IRA Experts! CLICK HERE to preview an issue and to order.

And remember, you can follow us in this space at The Slott Report for your daily dose of IRA information, including Thursday's consumer mailbag and Friday's Question of the Week. Also follow us on Twitter and Facebook for INSTANT IRA INFORMATION!

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

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*Copyright 2010 Ed Slott and Company, LLC

What To Do When Beneficiary Hasn't Taken RMDs

So here’s the scenario…You inherited an IRA from someone other than your spouse and no one told you that you had to take RMDs from that inherited account until now. How do you fix this situation?

First of all, don’t ignore the problem! There’s a 50% penalty on all required distributions (RMDs) that you do not take. Ignoring the problem just means that you owe IRS more money.

You should immediately contact the inherited IRA custodian and ask them if their custodial agreement defaults to a stretch option for beneficiaries or if it requires a full payout in five years. If it requires the latter option, then the account must be emptied by the end of the 5th year after the account owner’s death. You will only owe the 50% penalty if that five year date has come and gone. But if it has passed, then you will owe the penalty on the entire balance that was in the account as of year end of that 5th year.

For inherited IRAs that allow stretch distributions, you will need to go back and calculate all the distributions you missed. You will need the prior year-end account balances for each year you had to take a distribution. That balance gets divided by your life expectancy factor to get the amount of the RMD for the year. Each missed distribution must be taken from the inherited account. A word of caution here - distributions prior to 2002 must be calculated using the rules (and life expectancies) that were in effect at that time, not the current rules.

Form 5329 must be filed for each year you missed a distribution whether they are stretch distributions or taken under the 5-year rule. This is where you report the 50% penalty. The form can be filed as a stand-alone form. You can also request IRS to waive the penalty for good cause by simply including documentation with your tax return and/or form 5329, explaining why you missed the distributions and that since discovering the mistake, corrective action has been taken.

It is always a good idea to get some professional help with these calculations and forms. Don’t go it alone. You can find a list of Ed Slott trained advisors on our website, www.irahelp.com.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC

Moving Non-Traditional IRA Assets

You have non-traditional IRA assets like investments in real estate, mortgages and limited partnerships. You want to move those assets to a Roth IRA.

This can be very, very difficult.

Print out this week's Retirement Fears and show it to your financial advisor. Or you can just make sure to work with an educated financial advisor who already KNOWS this stuff. Go to www.irahelp.com to find an Ed Slott-trained advisor in your area.

CLICK HERE to read this installment of Retirement Fears.

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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

Jeffrey Levine a guest on 1110 AM Houston

Ed Slott and Company IRA Technical Consultant Jeffrey Levine will be a guest on "Straight Talk About Money" hosted by Ed Slott Master Elite IRA Advisor Michael Robertson from 6 pm to 7 pm Eastern Time (5-6 local time).

CLICK HERE then click on the "Listen" button to live stream the radio show.

Ed Slott's FREE 1-Hour Webcast

Ed Slott's FREE 1-Hour Webcast, Seize 2010 Golden Opportunities Before Year-End, is available at www.irahelp.com RIGHT NOW through September 17th.

During this 1-Hour Webcast, America's IRA Expert will tell you how to:

• Take action now and save your clients a fortune in future taxes
• Get the most out of Roth Conversions and other unique tax planning opportunities

Along with the audio Webcast is a slide show presentation you can use to take notes with and follow along.

CLICK HERE to register and LISTEN to the FREE Webcast.

Make sure to write "Slott Report" in the box that asks how you found out about the webcast. You can also share this Webcast with colleagues and friends. Use the sharing buttons below this post to pass along a wealth of IRA information!

If you have any questons, please call 215-557-7022.

Roth IRA Contribution Confusion - Part I

This week, the Ed Slott and Company IRA Discussion Forum featured a question about Roth IRA contribution limitations. Thinking about contributing to a Roth IRA in 2010? You better make sure you can, because surprise, those restrictions are still in place! Want to know if you qualify? Read on to find out.

Beginning January 1, 2010, everyone qualified to make Roth conversions from eligible accounts. The previous restrictions preventing those who were married but filed separate or had income (MAGI) over $100,000 were permanently repealed. But while the restrictions on converting to a Roth IRA may have been removed, the restrictions on contributing to a Roth IRA have not.

That’s right - no matter what your age, income, filing status, participation in an employer plan (get the picture?), you can convert tens of thousands, or even millions of dollars from your IRA (or other eligible account) to a Roth IRA. But if you want to contribute just $5,000 directly to a Roth IRA, you better make sure you qualify! Does it make any sense? Nope - but those are the rules.

So how do you know if you qualify to make a Roth contribution? It’s actually pretty easy. Essentially, it boils down to only two income tests; do you make enough income and do you make too much income?

Test One: Do you make enough income? In reality, we need to dig a little bit deeper than do you simply make enough income. We actually need to see if you make enough of the right kind of income. What’s the right kind in this case? Earned income. Earned income comes from sources like salaries, commissions, alimony and self-employment income. It does not include dividends, interest, social security, unemployment and other forms of passive income. If you (or a spouse) have earned income, you can potentially contribute the lesser of $5,000 ($6,000 if you are age 50 or older) or your total earned income to a Roth IRA this year - depending on the outcome of test two.

Test Two: Do you make too much income? Depending on your filing status, your ability to contribute to a Roth IRA in 2010 is phased out at varying income (MAGI) levels. If you make less income than the lower number in your phase out range, you may make a full Roth IRA contribution (up to the amount determined in question one). If you make more than the higher number in your phase out range you can’t make any Roth IRA contribution in 2010. Make somewhere in the middle and you can make a partial contribution. For 2010, the phase out ranges are:

Single: $105,000 - $120,000
Married Filing Joint: $167,000 - $177,000
Married Filing Separate: $0 -$10,000

And that’s it. If you can pass these two tests, you can make a Roth contribution this year - even if you are 99!!! But here’s something to chew on. Test one is more important than test two. Why? Because if you pass test one but not test two, there’s still a way to get your money into a Roth IRA this year. Want to know how? You’ll have to check back next Friday!

Of course, if you need to know the answer before then or want advice specifically tailored to your situation, you may want to speak with a qualified 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

RMDs and Inherited IRAs Highlight Mailbag

It is another busy week at The Slott Report Mailbag with a pair 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.

Hello Ed Slott and Company,

I currently have my traditional IRA account and my first RMD (required minimum distribution) is due this year. I'm single with no dependents. My IRA value is worth $346,000. My question is, "Is there anything that I can do at this time to reduce my RMD tax burden in the foreseeable future?"

Many thanks,

Michael Walsh
Hollywood, FL

Answer:
Your marital status has no bearing on your RMD. All account owners use the same table, the Uniform Lifetime Table, for calculating the RMD unless their spouse is more than 10 years younger, in which case they use the Joint Lifetime Table. You could reduce your RMD by marrying someone more than 10 years younger than you and naming them as the beneficiary of your IRA. Your only other option to reduce RMDs would be to convert all or part of your IRA to a Roth IRA. You would pay the tax upfront, but in future years you would have no RMDs from the Roth account and whatever you took out of the Roth after 5 years would all be income tax free. The RMD amount cannot be converted; it must be withdrawn before doing a conversion. Other types of tax planning can be one with investments you hold outside of the IRA to generate tax-free income or to generate deductions to reduce your overall income, and thus the taxes owed.

2.

I need to know when an IRA owner dies, what is the IRS timeline for when the beneficiary needs to take receipt of the funds, i.e. distribution or rollover to an inherited IRA?

Thank you,

Jim Allen

Answer:
An IRA inherited by a non-spouse beneficiary cannot be moved via a 60-day rollover. It can only be moved as a trustee-to-trustee (direct transfer or direct rollover) transfer between accounts. Any distribution payable to a non-spouse beneficiary is a taxable event and there is no fix for this. Most custodians like to get the assets moved to the inherited account as soon as possible, usually before any distributions are made to a beneficiary. This is so that distributions go out using the correct Social Security number. When there are multiple beneficiaries on an inherited account, the tax code says that the account should be split into separate inherited IRAs by the end of the year after the account owner's death in order for each beneficiary to use their own life expectancy.

If there is only one beneficiary, there really is no deadline for getting the IRA assets into an inherited account. The first distribution based on the beneficiary's life expectancy must be taken by the end of the year after the account owner's death. If the beneficiary must (or chooses to) use the 5-year rule, then there are no required distributions during the five year period. The only requirement is that the account must be emptied by the end of the fifth year following the year of the account owner's death. The beneficiaries distribution options are dependent on the tax code and ultimately on the options allowed in the IRA agreement.

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

Retirement Plans and Death: RMDs, Contributions

When an IRA, Roth IRA, or employer plan account owner dies, there are three common questions that always seem to be asked.

What required distribution does the beneficiary have to take in the year of death?

This will depend on when the account owner dies. If death occurs after April 1st of the year after he turned 70 ½, then the required distribution (RMD) is what the owner, himself, would have been required to take for the year. Any amount the owner did not take must be taken by the beneficiary before year end. If the IRA owner dies before reaching that April 1st date, then there is NO required distribution for the year of death, even if the owner is age 70 ½.

When does the beneficiary have to take their first required distribution?

The first RMD for a beneficiary, based on the beneficiary’s life expectancy, must be taken by December 31st of the year after the owner’s death. This is true for all retirement plans, including Roth IRAs.

Remember: All RMDs not taken are subject to a 50% penalty which is paid by the individual who should have taken it.

Can a contribution be made to an IRA/Roth IRA for a deceased account owner?

Regular IRA/Roth IRA contributions cannot be made for someone who is deceased. The logic is simple - if you are deceased then you don’t need to fund your retirement. However, the answer is different for employer plans. Deferrals and employer contributions based on compensation earned in the year of death may still go into the plan.

Next week: How to correct the situation when a beneficiary has not taken RMDs.


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

Ed Slott's 1-Hour Webcast

Ed Slott, America's IRA Expert, is offering a FREE 1-Hour Webcast complete with action steps you must take now to save your clients a fortune in future taxes!

Inside Ed Slott's 1-Hour Webcast, Seize 2010 Golden Opportunities Before Year-End:

• 2010 Roth Conversion Planning and other unique tax planning opportunities
• Detailed look at HIGHER taxes coming after 2010
• NEW Health Care Tax Strategies
• Moving Taxable Money to Tax-Free Money--the KEY to Success

...and much more.

CLICK HERE to register and listen to Ed Slott's 1-Hour Webcast. You can also click on the Webcast banner on the left side of the page.

Don't forget to use the social sharing buttons at the bottom to share this webcast with your friends and colleagues!

This 1 hour is just a snapshot of the information you will receive at Ed Slott's 2-Day IRA Workshop, Instant IRA Success, on November 4-5 in La Jolla, California.

CLICK HERE for more information on the 2-Day IRA Workshop.

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

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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.

*Copyright 2010 Ed Slott and Company, LLC

How Much Do You Need To Save For Retirement?

This is a very perplexing question. Unfortunately, there isn’t an easy answer, or even a very accurate calculation or rule of thumb to relay on. Perhaps the best advice is to save as much as you can when you can. Our lives tend to be very volatile. There are different phases in life when you have a greater ability to save, so you need to be flexible. When people get married and they have a double income with no children, their ability to save increases. Once you start having children, your income may shrink, perhaps there is only one spouse working, and expenses will increase, so your ability to save is reduced. As soon as the children finish school, your ability to save should increase.

Retirement means different things to different people. What does retirement mean to you? If you are thinking vacations and spoiling your grandchildren, you are going to need to save more than someone who plans to continue working, at least part time, well past age 65. You really need to sit down and think about your goals. When do you want to retire and what do you want your retirement to look like? If you get to your target age and you feel you don’t have enough money, you will need to make adjustments by working a bit longer or dialing back you lifestyle a bit. In other words, you will need to be flexible.

Although it is uncertain as to how much you need in retirement or how much is enough, you should start with a goal in mind. The different phases of your life will dictate how much you can save, but you do need to have that goal.

If you find you have enough at an earlier age, great. If you get to retirement and realize you over saved, if there is such a thing, that would not be the worst of sins. Your heirs will be very happy.

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