Reporting IRA Distributions, Contributing to a Roth IRA Highlight Mailbag

This week's Slott Report Mailbag includes consumer questions about reporting IRA distributions, the proper life expectancy table to use with 72(t) payments and the ability to contribute to a Roth IRA if you are already part of a company plan.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

1.

Hello,

I have a couple of questions.  My mom passed and left a traditional IRA for $4,500 dollars.   I am 62 years old and on unemployment.  I want to take it out, but don't know if I have to report it.  The other question is should I just take it out as cash or have federal tax deducted from it?  This is all very confusing to me.   If I don't cash it could I also have the option of just putting it somewhere else?  I just don't want to get in trouble. Thank you for any clarity.

Christine

Answer:
Any distribution you take from an IRA will be reported to you and to IRS on a 1099-R form.  You will have to include the distribution in your income for the year.   In most cases, you will have to pay income tax on the distribution unless your mother did not take a deduction for the funds when she put them in the IRA.  As an alternative, you can leave the funds in an inherited IRA and take required distributions from the IRA each year.

2.

Good morning,

My employer makes an annual contribution to a SEP-IRA account for me.  Does this preclude me from contributing to a Roth IRA?

If so, if the employer contribution is less than $6,000 (I am 66 years old), can I contribute the difference to a Roth IRA?

Thank you for your assistance.

Martha P. Willis


Answer:
You can make a contribution to a Roth IRA (so long as you have earned income equal to or greater than your contribution) even though your employer is contributing to a SEP IRA for your benefit.   In the year you contribute to a Roth IRA, and if you are filing a joint tax return, your ability to contribute to a Roth IRA begins to phase out at $169,000 and if income is over $179,000 in 2011 you cannot contribute to a Roth IRA.

The contribution limit for 2011 is $5,000 per person.  However, if you are age 50 or older by 12/31/11 you could add another $1,000 for a total of $6,000.

3.

Dear Mailbag,

As an active South Carolina Retirement System member I was eligible for service retirement several years ago and elected to participate in the Teacher and Employee Retention Incentive (TERI) program when completing an application for service retirement.

Questions: I want to minimize taxes and use as much of this money for retirement as possible.   What would you suggest doing with the approximately $150,000 at the end of my 60 months.  Is a Roth IRA a good option?

Thanks, so much for your advice.

Answer:
We like Roth IRAs but one may not be good for everyone.  There are many factors to consider and you should consult with a qualified financial advisor.   If you don't have one, you can go to our web site, www.irahelp.com, and click on "Find an Advisor" in your area.  All the advisors listed have been trained by Ed Slott and Company and are qualified to help you make an informed decision.

4.

We are currently set up with 72(t) distributions from an IRA.

My husband is considering the one time change from the amortization method to the RMD method. Can you tell me which life table should be used to calculate the Required Minimum Distribution.  I am NOT 10 years younger than him.  I was told two different things from the custodian, one said he would have to use the single life expectancy table, and the other said he could choose to use either the joint or the single?

We would really appreciate your input.

Thank you!


Answer:
He can use either the single life expectancy table or the uniform lifetime table.  Both tables are found in IRS Publication 590.  Generally, you want to create the largest possible distribution amount from the smallest possible account balance. You can do this best by using the Single Life Table.  Once you have chosen a table however, you cannot change it until the end of your 72(t) schedule.

By Marvin Rotenberg and Jared Trexler
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