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The Most Pressing Year-End Retirement Planning Questions

Tick, tock, tick, tock. 2013 is almost here, and we at The Slott Report want to provide a few more important points to remember if you are still sorting through year-end retirement planning.

These are the questions I am getting most frequently as we near the end of the year.
  • Can I have more than one employer plan?
  • What is the maximum I can contribute when I have more than one plan?
  • I am covered by a plan at work, but can I still make an IRA or Roth IRA contribution?
  • I am over age 70 ½ and am self-employed. Can I contribute to a retirement plan?
Can I have more than one employer plan?
If you are an individual who is working for more than one employer or if you have a side business, yes, you can be covered by more than one employer plan. The rules can become complicated, though. There are rules for business that are related where one plan may be considered to cover employees at a second business. You also have to be careful of the same business having multiple plans, i.e. a SEP, a SIMPLE, and a solo 401(k). You should consider consulting with a plan specialist to ensure that all plans comply with the rules.

What is the maximum I can contribute when I have more than one plan?
Plans have maximum contribution limits. These will be spelled out in the plan documents. You do have a statutory deferral limit though. For 2012 the limit is generally $17,000 (there is an additional $5,500 for those age 50 and over). This is generally the maximum that can be deferred to all plans by one individual. It is a cumulative limit, not a per plan limit. There are some differences if you have a a governmental 457(b) and/or 403(b). Please make sure you work with a knowledgeable financial advisor to make sure you have the correct totals.

I am covered by a plan at work, but can I still make an IRA or Roth IRA contribution? 
You can always make an IRA contribution, as long as you have at least that much in earned income or some other form of "compensation" and you are NOT 70 ½ or older. The question is, can you deduct the contribution? There are income limits for taking a deduction. There are income limits for making Roth IRA contributions. As long as you have earned income and are under the income limits, you can make a Roth IRA contribution. The IRA and Roth limits are indexed for inflation each year and can be found in IRS Publication 590, which is available on its website at www.irs.gov.

I am over 70 ½ and am self-employed. Can I contribute to a retirement plan?
You can set up an employer plan such as a SEP IRA, SIMPLE IRA or a solo 401(k) for your self-employment income. You can make contributions as long as you have self-employment income. However, you will also have to take required distributions each year.

In all of the above situations, you should consult with a retirement professional to help you navigate the complexities of the tax code. Mistakes in this area can be very costly. You can find a list of Ed Slott-trained advisors at this link.

- By Beverly DeVeny and Jared Trexler

Disability Tax Code Benefits For Retirement Accounts

For many, disability is an unfortunate part of everyday life. Whether it be from injury, illness or otherwise, being disabled can be physically trying and mentally challenging. It can also be tough on your wallet, as being disabled often carries with it additional medical costs, not to mention a possible loss of earning power. Certainly no one in their right mind would ever choose to be disabled, but if life has dealt you this hand, there are a few benefits available under the tax code to help you make the most of your retirement accounts.

Below are three such benefits, discussed in greater detail. One important point to remember here though is that for each of these tax benefits, you have to be disabled as defined by 72(m)(7) of the tax code, which is a very restrictive definition. Essentially, this provision says that you are so disabled you cannot work at all and that your disability is expected to either result in death or be of an indefinite duration. It’s that strict.

10% Penalty Exception
In general, distributions from IRAs and other retirement accounts are subject to a 10% penalty if distributions are taken prior to the time you turn age 59 ½. There are a number of exceptions that can get you out of this penalty though. One such exception is the exception for disability. If you are disabled, as defined by the tax code, you can take penalty-free distributions at any age. However, regular income tax is still due on the early distributions. Your custodian will probably code your distributions with a “no known exception” even though you are disabled, so to get out of the penalty you will have to file Form 5329 and provide an explanation of your disability. It’s a good idea to have supporting documentation from one or more physicians as well.

Stop Your 72(t) Distributions
Another exception to the 10% penalty for early distributions is for a series of substantially equal periodic payments, more commonly known as 72(t) payments. While these types of payments can help you avoid the 10% penalty for a portion of your retirement savings, they come along with a very rigid schedule and set of rules. For instance, distributions must continue for the longer of five years or until age 59 ½. You also can’t add or subtract, roll into or roll out of an account from which these distributions are being taken. If these rules are broken in any way, the 10% penalty is retroactively applied to all pre-59 ½ distributions, along with interest. There are only two ways to break the schedule without incurring these penalties, and neither is good. Death is one way, and disability is the other.

Make an NUA transaction
For some, one of the biggest tax breaks in the entire tax code is the tax break for net unrealized appreciation, or NUA. In essence, this lump-sum distribution tax planning strategy allows you to trade ordinary income tax rates for long-term capital gains rates for a portion of your retirement savings. This particular tax break can only be used when you have appreciated securities (usually stock or a stock fund) of the company you work for inside your qualified plan, like a 401(k). There are a lot of rules to contend with in order to successfully use this strategy, but one of those rules is that an NUA transaction can only be made after a triggering event. Disability is one of those triggering events, but only if you are self-employed. If you’re not self employed, disability doesn’t help you here.

Disability can not only be hard on the mind and body, but also on the wallet. If you or someone you love is unfortunately in the predicament, every dollar may count. Using one or more of the three tax benefits above can help you keep Uncle Sam at bay so you get to keep more of your hard-earned money.

Article Highlights:

If you are disabled, you can receive these three benefits under the tax code:
  • The 10% penalty exception: You can take penalty-free IRA distributions at any time
  • Stop 72(t) distributions: You can break the schedule of 72(t) distributions
  • Make an NUA transaction: This transaction can only be made after a triggering event. Disability is one of those events.
 - By Jeff Levine and Jared Trexler

Ed Slott's Year-End Retirement Planning Alerts

Year-end retirement planning is in full swing. We are less than a week away from Christmas and in two short weeks 2013 will be here. Financial advisors and their clients are working hard to develop a proactive plan to guard against rising taxes. Ed Slott has your answers on gifting, RMDs (required minimum distributions) and QCDs (qualified charitable distributions) in three year-end planning videos found below.

As a reminder, you can also access these videos at Ed Slott and Company's IRAtv YouTube Page. You can join the over 150+ subscribers and receive updates when we post new videos, and you can sit back over the holidays and watch nearly 4 1/2 hours of streaming retirement, tax and IRA planning videos from America's IRA Experts (if you are so inclined).

Enjoy Ed Slott's year-end planning videos below.

Ed Slott's 2012 Year-End QCD Alert

Ed Slott's 2012 Year-End RMD Alert

Ed Slott's 2012 Year-End Gifting Alert

-Compiled by Ed Slott and Jared Trexler

Senators Propose Tax Relief for Hurricane Sandy Victims

We have spent a great deal of online real estate on the financial aftermath of Hurricane Sandy and the toll it took and continues to take on disaster relief efforts both structurally at shore points up and down the Jersey coast and into New York and financially on the tens of thousands who saw their homes, vehicles and personal belongings wash away with the "once-in-a-century" storm.

Several United States senators have taken another step in helping Hurricane Sandy victims. CLICK HERE to read our earlier coverage of the storm, and continue below for proposed tax relief for the hurricane victims.

tax relief for hurricane sandy victimsAs a result of the widespread damage in the Northeast from Hurricane Sandy, New York Senators Robert Menendez (D-NY) and Charles Schumer (D-NY) recently stated that they will introduce legislation that would expand the tax-related relief available to victims of Hurricane Sandy. Their proposed legislation would provide relief from the 10% early distribution penalty tax for distributions from IRAs and would likely mirror prior legislation that gave relief to victims of other storms and natural disasters.

For example, in the past, Congress enacted legislation that provided tax relief affecting IRAs and employer retirement plans for victims of hurricanes, tornadoes, and floods. This relief applied to victims in federally-declared (FEMA) disaster areas.

The prior legislation affected withdrawals from IRAs and were called Qualified Disaster Recovery Distributions. These were IRA distributions for specific disasters in specific areas. They were made to individuals who lived or worked in a disaster area or who suffered an economic loss as a result of the disaster. These distributions were limited to $100,000, taxable over three years instead of one, and were generally eligible for tax-free rollover within three years instead of 60 days.

In November 2012, the IRS provided help for Sandy victims. Some of the retirement plan initiatives the IRS announced included:

  • Easing the rules to allow company retirement plans to make loans and hardship distributions to Sandy victims. This rule does not apply to IRAs.
  • Postponing certain tax-related deadlines, such as the 60-day rollover period, the correction of excess contributions, etc. These postponements apply to IRA and company retirement plans.
Some of you have made charitable donations for Hurricane Sandy victims. If you use your IRA funds to do so, it is treated as a taxable distribution from your IRA. You can then claim a tax deduction if you itemize. Previously, qualified charitable distributions (QCDs) were available for IRA owners and beneficiaries who were age 70 ½ or older. QCDs were tax-free distributions from IRAs that were directly sent to a charity. Unfortunately, QCDs expired at the end of 2011. Congress has talked about renewing QCDs for 2012, but has not done so yet.

Article Highlights:
  • New York Senators propose tax relief for victims of Hurricane Sandy
  • Proposed legislation would waive the 10% early distribution penalty for IRA withdrawals and allow taxes to be paid over 3 years
- By Joe Cicchinelli and Jared Trexler

The Fiscal Cliff and IRS: Still No Extenders Bill, Alternative Minimum Tax Patch

Most of the talk of the fiscal cliff focuses on the impending tax increases and budget cuts and the impact that they will have on businesses, governments, and, ultimately, on taxpayers. One of the ways that taxpayers will be affected is caused by the impact of the fiscal cliff on IRS.

IRS has not yet released tax tables for withholding from wages paid in 2013. That is because we do not yet know what the rates are going to be in 2013. If we go over the cliff, rates will go up. If we retain the Bush tax cuts for another year, rates will remain the same. Or, we could have something in- between if that is the route Congress chooses to go. If anyone is counting, the 2013 rates should start in 18 days (today's post date is 12/14).

All the talk in Congress about the fiscal cliff seems to have pushed other legislation to the side. We still do not have an extenders bill for 2012. Without that piece of legislation, we have no alternative minimum tax (AMT) patch. What that means for IRS is that it does not know how to program its software for the 2013 tax filing season for filing 2012 tax returns. It also cannot prepare the forms necessary for filing tax returns. The result: delays in the start of the tax filing season and delayed refunds for many early filing taxpayers.

The result is worse if the AMT is not patched. It could take weeks for IRS to update its software and tax forms. It is projected that about 30 million additional taxpayers could be subject to the tax if it is not patched. Why do we have this ongoing problem, year after year? Because the tax was not indexed for inflation when it was enacted and Congress has not managed to come up with a permanent fix for this seemingly simple problem.

We deserve to know what our taxes will be, early in the year, so that we can do effective tax planning. Unfortunately, we may not have that luxury. We deserve the right to be able to file our taxes and get our refunds, if we qualify, sooner rather than later. Let's hope Congress acts in the best interests of the American sooner rather than later. It is time for compromise that helps to solve our problems and gives us some certainty.

Article Highlights:
  • The fiscal cliff discussion has pushed aside important legislation like the extenders bill for 2012
  • We don't have an alternative minimum tax (AMT) tax so IRS does not know how to program its software for the 2013 tax filing season
  • Result? Delays in the start of the tax filing season and delayed refunds for many early filing taxpayers
- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: I Just Inherited an IRA or Roth IRA From My Spouse. What Do I Do Now?

This week's Slott Report Mailbag answers what we call some of the "nuts and bolts" of IRA planning. We received questions on required minimum distributions (RMDs) and inherited IRAs - two of our most popular topics, and also two of the topics where we see the most mistakes and disaster stories. Away we go with another Thursday mailbag! As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


I forgot to take a required distribution or all of my required distribution or the company did not process my required distribution on time. What do I do now?

Send questions to [email protected]
A missed distribution, even if it isn’t your fault, is subject to a 50% penalty on the amount not distributed. You should take the distribution as soon as you realize it was missed. The penalty is reported on Form 5329 for the year of the missed distribution. IRS can waive the penalty for good cause. To get the penalty waived, you must take the distribution, file Form 5329 without the penalty payment, and include a letter to IRS requesting the waiver of the penalty. It is likely that you will not get a response from IRS. In this case that is good news, as it will mean that they have agreed to waive the penalty. They have three years to come back and say you owe it and they will then be entitled to collect the 50% penalty plus interest and penalties on that amount dating back to when the penalty should have been paid. So be sure you have a good reason for requesting the waiver to avoid being in a worse tax situation.


I just inherited an IRA or Roth IRA from my spouse. What do I do now?

Under the tax code you have three options, but your IRA custodian may limit these options. You will need to check with the custodian to see what your options are.

  1. You can leave the IRA where it is and remain a beneficiary. This is generally not recommended. When you start taking distributions they will be accelerated and your beneficiaries may not be able to stretch distributions over their lives when they inherit from you. However, it could be beneficial for a younger spouse who will need funds from the IRA to live on before attaining age 59 ½. Distributions from the inherited IRA will not be subject to the 10% early distribution penalty. Required distributions will begin in the year the account owner, not you, would have attained age 70 ½ or in the year after death if the owner was already 70 ½.
  2.  You can leave the IRA where it is and have it retitled in your own name and social security number. Some IRA custodians may not allow you to do this but it is a simple way for you to get the IRA in your own name. The account is treated as if it had always been yours and distributions to you will begin when you turn 70 ½ or in the year after death of the account owner if you are already 70 ½.
  3. You can move the funds to an IRA in your own name. This can be either a new account or an IRA that you already had in your name. If you are under the age of 59 ½, any funds you take out of an account you own will be subject to the 10% early distribution penalty. The account is treated as if it had always been yours and distributions to you will begin when you turn 70 ½ or in the year after death of the account owner if you are already 70 ½.
Whatever option you use, always be sure to name your own beneficiaries on the account you have inherited. Any required distributions that are missed will be subject to the 50% penalty and are reported on Form 5498 for the year the distribution was missed.

- By Joe Cicchinelli and Jared Trexler

Is the Way Down Off the "Fiscal Cliff" a Path of Capped Deductions?

Unless you've been locked in the cellar of a medieval castle since the November elections, you've likely heard about the fiscal cliff issue - the popular name given to the impending simultaneous tax increases and budget cuts. No doubt this raises concerns about how going over that cliff, if it happens, could affect you.

That's a significant concern and one you should at least consider, but you should also consider how possible “solutions” to the cliff could affect you as well. One idea that's been the topic of much discussion is a combination of spending cuts and increased revenue through capping tax deductions, which both Republicans and Democrats agree benefit the wealthy disproportionately. That has left many, perhaps including you, wondering how they would be impacted.

If you're concerned about losing your deduction for an IRA contribution, you probably don't have much too worry about. As I discussed earlier this year in a separate article, the IRA deduction is an above-the-line deduction, also known as a deduction to arrive at AGI (adjusted gross income).
To read that article or for more information about how above-the-line deductions work click here. 

The IRA deduction, like many above-the-line deductions, has a built in limit. For instance, the maximum IRA deduction for 2012 is $5,000 for those under 50 and $6,000 for those 50 and over. Traditional IRA contributions can be made until the year you turn 70 ½. Similarly, the above-the-line deductions for a self-employed person’s retirement plan contributions, health savings account contributions and for the deductible portion of self-employment tax also have built-in limits. Those above-the-line deductions that don't have built in limits, such as the moving expense deduction, are generally very narrow in nature and are hardly the types of deductions that significantly reduce a person's tax liability year after year.

As a result, it's unlikely that the discussion on limiting deductions would include these above-the-line deductions. Instead, the conversation is likely to focus on below-the-line deductions, also known as itemized deductions. Not everyone uses these deductions on their tax return. That's because you get a choice; either you use the standard deduction or you can use itemized deductions. You obviously choose the avenue to the lowest tax bill.

One reason why itemized deductions are being targeted is that they are disproportionally taken by those with higher incomes. An article posted on CNNMoney.com on Monday highlighted this fact. The article points out that in 2010 less than 30% of those who had income between $30,000 and $50,000 itemized their deductions, but get this…a whopping 96.8% of those with incomes of $250,000 or more did. As a result, although some families with lower incomes would be affected by a limit on itemized deductions, the wealthiest taxpayers would no doubt be disproportionately affected.

So what are the itemized deductions you should be most concerned about losing and what should you do now to prepare in case those deductions are limited? Obviously, that depends on a number of factors and will vary from person to person, but chances are that if you are itemizing, you are also claiming either a deduction for state and local taxes, charitable contributions or for mortgage interest. Let's take a look at how limiting each of these could affect you in a little greater depth.

State and Local Taxes
If you itemize, chances are you are taking a deduction for state and local taxes. In fact, well north of 90% of those who itemize include this deduction when preparing their return. That percentage is even more staggering when you consider that there are still some states, including Florida and Texas, that don't charge state income tax. If you do live in one of those states and pay more in sales tax than you do in state tax, you are allowed to deduct that total instead. You can't deduct both.

Unfortunately, there's really not a lot you can do here to plan ahead. State income tax is generally charged on income when you constructively receive funds - basically that's when they are made available to you. But it is highly unlikely your employer is going to forward you your 2013 salary before year-end just so you can pay your state income tax this year and claim the deduction on your 2012 return.

However, if you generally deduct sales tax instead of state income tax or are planning on making a big purchase soon like say, a boat, you might want to accelerate that purchase and make sure it's completed before year-end.

Note: As of the end of 2011 the ability to deduct state and local sales tax was eliminated. Many people, however, believe Congress will either extend this break later this year, or retroactively early next year. The information in this section relating to sales tax, and in particular the accelerating of large purchases assumes this tax break is made effective for 2012.

Charitable Contributions
If you itemize your deductions, chances are you are one of the 90% of itemizers who take at least some sort of a charitable deduction. Unlike some other deductions, the tax break for charitable contributions is one deduction you actually have some control over. In fact, you have virtually total control over the deduction since you are the one who decides how much to give to charity in any given year. If you are concerned about a possible limitation of this itemized deduction, you could consider accelerating charitable gifts you planned on making in 2013 or later to 2012. Doing so would allow you to take deductions before any limitation would kick in.

There is, of course, some downside to making such a move. One disadvantage of accelerating your charitable donations into 2012 is that if you can take a deduction for them next year, they could, in a way, be worth more then. Remember, as of now tax rates are scheduled to go up next year for virtually everyone and those in the highest brackets will almost surely pay more. If you are in a higher tax bracket next year, a charitable deduction could eliminate income that would be taxed at a higher rate. Of course, that assumes itemized deductions aren’t limited to 28%, a separate idea limiting the value of itemized deductions that’s been bantered around.

One other item to keep in mind if you decide to accelerate charitable contributions is that there are actually already some restrictions on the amount you can deduct. In general, if you are donating cash, you can deduct up to 50% of your AGI as a charitable contribution. If you are donating property, such as appreciated stock, that deduction is limited to 30% of AGI for donations to most charities.

Mortgage Interest Deduction
Here's another deduction you don’t have too much control over. Your mortgage interest “is what it is.” In fact, you have probably done your best to minimize this deduction. Why would you do that? Well, if you are like most people, before you purchased a mortgage you shopped around for the best rate. A better rate means less interest and less interest means… yep, you guessed it - less of a deduction! Not to mention that as you pay your loan off over the years, less and less of your payment goes towards interest and more goes towards principal, which, despite reducing your mortgage interest deduction, helps you build equity and is generally a good thing.

If you currently own a home and rely on the mortgage interest deduction to make ends meet, it's worth preparing a “what if” budget anyway to see how you might be affected. On the other hand, if you are looking to purchase a home, you may want to run your numbers assuming a limited deduction. The last thing you ever need as a new homeowner is to be coming up short each month because you were counting on a bigger tax refund.

Limiting deductions is just one way lawmakers have proposed averting the fiscal cliff, but it is by no means the only solution being discussed. Let's just hope that whatever comes to pass allows us all to climb back down from the cliff and get back to base camp in one piece.

Article Highlights:
  • More high-income earners itemize deductions on their tax forms
  • Three itemized deductions to keep an eye on during the "Fiscal Cliff" negotiations are: state and local taxes, charitable contributions and mortgage interest deduction 
- By Jeff Levine and Jared Trexler

Fiscal Cliff Week: The Search For Tax Revenue May Affect Donations to Charities

In the current debate over the upcoming fiscal cliff, limiting income tax deductions is being discussed as a way to increase federal tax revenue. Charities could be adversely affected.

When you give money to a charity, you get a tax deduction when you itemize your deductions. If income tax deductions are limited or capped, an idea that has surfaced in the debate over the fiscal cliff, charities could be negatively impacted. Limiting charitable deductions could discourage contributions to charities, in some cases substantially.

As our government’s role in providing a safety net may shrink, the demand for services provided by charitable organizations will grow. In our current economy, many charities have seen large increases in demand for services such as emergency housing, food and family services. Budget cuts that reduce funding from the government will further exacerbate this problem.

Very few people argue that charitable deductions should be eliminated. The problem is that they reduce federal tax revenue by about $40 - 50 billion per year. They are being eyeballed for cuts along with the mortgage interest deduction and the state/local income tax deduction. While you must pay mortgage interest and state income taxes whether you get a deduction or not, you don’t have to give to charity. Charitable giving is completely optional.

President Obama would cap charitable deductions for people in the highest income-tax bracket at 28%, down from 35% now. That would affect individuals with incomes of about $200,000 and couples with incomes of $250,000 or higher. As a result, many charities are encouraging donors to give more this year in case the charitable deduction is reduced.

Although the special tax break for charitable IRA rollovers, known as “qualified charitable distributions” (QCDs) expired in 2011, Congress has discussed renewing it, but has not done so yet. QCDs allowed IRA owners or beneficiaries who are actually 70 ½ years old or older to directly transfer up to $100,000 per year from their IRA (tax-free) to a charity. QCDs can be used to satisfy your required minimum distribution (RMD) from your IRA.

To lock in the favorable tax benefits of a QCD, some advisors have recommended that you consider making an IRA transfer directly to a charity in 2012 in case QCDs are retroactively renewed, especially if you were planning on giving to a charity anyway. For example, if you haven’t taken your RMD yet, consider sending the RMD amount directly from your IRA to the charity. If QCDs are not reinstated, you’ll be in the same position you would have been in if you had actually received your RMD and then made a charitable contribution. The IRA distribution is taxable but you get a charitable deduction if you itemize. There is no downside risk to doing so. On the other hand, if QCDs are retroactively reinstated, you’ll be in a better position because your RMD will be satisfied through a tax-free QCD.

 Article Highlights:
  • One challenge of the fiscal cliff is raising revenue without discouraging donations to charities
  • Using your IRA for charitable giving is taxable unless Congress retroactively reinstates qualified charitable distributions (QCDs)
-By Joe Cicchinelli and Jared Trexler

Year-End Roth IRA Rules

A misconception we see frequently is individuals thinking they have until April 15th to do a Roth conversion for the prior year. The Roth conversion rules are not the same as the Roth IRA contribution rules.

In order to have a 2012 Roth conversion, the funds must be out of your IRA or employer plan by December 31, 2012. They do not have to be in the Roth account by that date, but they must be out of the distributing account. This will produce a 1099-R for 2012 and the income due to the conversion will be included on your 2012 tax return.

Another misconception is that employer plan funds must go to an IRA before being converted to a Roth IRA. This used to be the case, but is no longer true. Your plan funds can go directly from your plan to your Roth IRA. This is a conversion and any taxable amounts moved to the Roth IRA will be taxable for the year of the conversion.

The Roth contribution rules allow you to make a 2012 contribution up to April 15, 2013. Unlike Roth conversions, there are income limits on Roth contributions. You must have “compensation,” which is generally your earned income, in order to make a contribution that is at least equal to the amount of the contribution.

Your ability to make a contribution is phased out when your income is too high. For 2012, if you are married filing jointly, your ability to make a contribution is phased out when income is between $173,000 - $183,000. If you are a single filer the phase-out range is $110,000 - $125,000 and if you file married-separate, your phase-out range is $0 - $10,000.

You can even make Roth contributions after age 70 ½, as long as you still have earned income or some other form of “compensation.” You can also make Roth contributions while you are making 401(k) or similar employer plan contributions.

Roth IRAs can be a terrific addition to the array of retirement assets an individual counts on in retirement - but, they are not right for everyone. If you have any questions or concerns about Roth IRAs, you should consult a knowledgeable financial advisor. You can find a list of Ed Slott-trained advisors on our website, www.irahelp.com.

Article Highlights
  • Before 12/31 - Funds being converted to a Roth IRA must be out of an IRA or employer plan
  • By 4/15 - Roth IRA contributions must be made for the prior year
  • There are income limits for making Roth IRA contributions
-By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: If I Terminate My Employment in January 2013, Can I Contribute to My Roth IRA?

This week's Slott Report Mailbag looks at Roth contributions and the prerequisites necessary to make a contribution. We also answer a question on investing inherited IRA money in an IRA annuity. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


Send questions to [email protected]
If I terminate my employment in January of 2013, can I contribute to my Roth IRA?

You can contribute to a Roth IRA next year if you have compensation from employment. If you have no compensation of your own but you are married and your spouse has compensation, you can make a spousal Roth IRA contribution using his/her compensation. In either case, your total income cannot exceed $178,000 for 2013 to make a full Roth IRA contribution.


I converted an IRA to a Roth IRA in December of 2010. I have to pay the final taxes on it this tax year.

I had wages of $23,000.00 this year and plan to make a $6,000.00 contribution this year into my Roth IRA. I am retired and this could be the last year that I have wages. I have heard that other income qualifies for contributions to a Roth IRA.

Is this income stock dividends? Is there any other income that qualifies as income, so I can make a contribution to my Roth IRA in future years?

Any help would be greatly appreciated.

Chuck Hawkins

You need compensation to make a Roth IRA contribution. Compensation includes wages, tips, and earned income from self-employment. Stock dividends are not considered compensation.


Dear Ed,

I have run across your articles on the web. I have a question that you may have answered previously. My wife is 57 and is the recipient of a beneficiary IRA worth about $100K from her step-mother, who was already taking distributions. My wife is now taking required minimum distributions (RMDs) each year on her life expectancy. We moved it from her step-mom's custodian to our investment advisor's firm and retitled it properly.

It is currently in various mutual funds. Can she invest this into an annuity for purposes of gaining a fixed income and reducing stock market risk?

Many thanks for your advice and commentary,

Best regards,
Andy Field

Yes. She can invest the inherited IRA money in an IRA annuity, which is sometimes called a qualified annuity. She will have to continue taking death distributions from that inherited IRA annuity.

-By Joe Cicchinelli and Jared Trexler

Accelerating the Sale of Appreciated Capital Gain Property: A Strategy Worth Considering

As you are now no doubt aware, there are any number of ways which you might pay more in taxes for 2013 than you will this year (in case you missed it, click here to read my article on 10 of those ways). One of those many ways is when you sell long-term capital gain property. Common types of capital gain property are stocks, bonds, mutual funds and real estate. To be considered “long-term,” you must have held the investment for more than one year.

Currently, the maximum rate you will pay on the sale of most long-term capital gain property is 15% of the gain. Next year, that’s scheduled to jump to 20% (a 33% hike), and if your unfortunate enough to get hit with the new 3.8% health care surtax as well, you could pay up to 23.8%, which is almost 60% more in tax than you would ever have to pay this year!

One of the nice things about investing though is that you can, in some ways, control your tax liability. For instance, suppose you purchased $10,000 of XYZ Corp. in your regular brokerage account several years ago. Now that stock has appreciated in value and is worth $20,000. How much tax do you owe? You might be tempted to say $1,500 (15% times your $10,000 total gain), but that wouldn’t necessarily be the case. In fact, it would only be the case if you chose to sell your investment. That’s because during the time you own a capital investment, such as a stock, bond, real estate, etc., gains and losses are generally deferred.

Most people - including most CPAs - try to put off paying taxes for as long as possible, and usually that’s a good thing. After all, isn’t that the reason so many of us contribute to a traditional IRA, 401(k) or similar type of tax-deferred account? As a result, people often hold onto investments for long periods of time. In fact, sometimes people are so averse to paying tax that they hold onto an investment long after they should, perhaps incurring investment losses that far exceed any tax they would have paid.

If, however, there was ever a time to sell appreciated property before you otherwise intended to, it could very well be now. Why not sell your long-held investment now and lock in the low 15% rate still in effect through the end of this year? Sure, you will be paying taxes before you have to, but you could be paying them at a significantly lower rate than you would in the future. In some sense, it’s
very similar to a Roth IRA conversion, where you pay taxes on your retirement account sooner than you would otherwise have to, but with the idea of locking in today’s “low” tax rates in the process.

What if you really like a stock and don’t want to be without it? No problem. You could sell your XYZ stock at 10:00 AM tomorrow to lock in the current 15% long-term capital gains rate and buy it back one minute later at 10:01 AM. You might be thinking to yourself right now, “Isn’t there some sort of rule stopping me from doing that? Don’t I have to wait more than 30 days or something like that?” If this thought is running through your mind, you’re probably thinking about the “wash sale” rule.

Fortunately, in our example, the wash sale rule doesn’t apply. The wash sale rule deals with losses, but here, we’re talking about selling investments with a gain. When/if you repurchase the same investment, your new cost basis will be the amount you paid when you repurchased it. Any future gain could still be taxed with the 20% rate - 23.8% with the surtax - but the tax would only apply to the gain above your new, higher basis.

Should you choose to take advantage of this strategy, I have one additional suggestion. Consider using non-investment money, such as money in a savings or money market account, to pay the tax. You’re probably not making much in the way of interest on those funds these days and this way, if you decide to reinvest your funds, you’re not reducing the amount to be invested by the tax you voluntarily chose to accelerate paying. You should not, however, leave yourself without enough money to meet your ongoing expenses and cover yourself in the event of an emergency.

Of course, like most planning strategies, this idea is not for everyone. Here are four groups of people who should probably not “sell early” to lock in today’s cheaper tax rates.

#1 - You expect to be in the lowest brackets in the future
If you expect your income to decrease substantially in the future, you may not want to sell your long-term capital gain property now. Although the maximum rate you could pay on the gain is 20%, plus an additional 3.8% for the health care surtax, if your income is fairly modest, you might owe as little as 10%.

#2 -You’re terminally ill
It’s hard to write about stuff like this, but it’s also an important consideration. If you are very ill and probably won’t sell your investment before you pass, you’re probably better off holding onto it. Capital assets receive what’s known as a “step-up in basis” after death. This means that whatever the value is on your date of death, that’s your heir’s new basis. So let’s assume you bought a building in 1950 for $50,000 and now it’s worth $2,000,000. If you sell the property before year-end you’re looking at close to a $300,000 tax bill. That’s better than it would be next year, but, on the other hand, assuming it’s still worth the same $2,000,000 at the time of your death, your heir could sell it for that price and pay no income tax whatsoever.

#3 - You’re never going to sell
This is really kind of an extension of #2. If you plan to hold your investment forever, there’s no point in selling now. Remember, if you never sell a capital investment, you’ll never trigger the capital gains tax, no matter how much gain you have. Plus, as noted above, when you ultimately pass those assets to your heirs, they will get a step-up in basis and may be able to sell the property on their own with little or no tax consequence.

#4 - You’re going to give it away to charity
When most people think about making charitable contributions, they usually think about donating cash or putting it on their credit card. You can, however, donate capital assets, such as stock, which in some cases may be a better move. When you donate capital assets to a charity, you don’t have to pay tax on any of the gain, plus, you get to take a charitable deduction for the full value of your investment (subject to the overall charitable contribution limits). For example, let’s say you bought ABC stock for $10,000 in 1990 and now it’s worth $110,000. If you donate that stock to charity, you’ll avoid the $15,000 ($100,000 gain x 15%) capital gains tax you would have owed had you sold the stock, plus you’ll get a $110,000 charitable contribution deduction (subject to the overall limits). The cherry on top is that for the charity, the $110,000 in stock is an equivalent donation to $110,000 since qualified charities don’t pay any income tax, including the capital gains tax on appreciated investments.

A Final Word
If you’re not one of these people, you should probably check with your tax or financial professional to see if there are other factors that may make this strategy favorable or not. Remember though, in order to lock in today’s low rates, you’ve got to sell by December 31st, so don’t wait too long, or this opportunity might pass you by.

Article Highlights:
  • Currently, the maximum rate you will pay on the sale of most long-term capital gain property is 15% of the gain. Next year, that’s scheduled to jump to 20% (a 33% hike)
  • Use non-investment money, such as money in a savings or money market account, to pay the tax
  • Selling capital gain property is not for everyone, like if you are expecting to be in a lower tax bracket in the future, if you are terminally ill, if you are never going to sell or if you are going to give it to charity
-By Jeff Levine and Jared Trexler

Using Your IRA to Pay For Higher Education

If you are thinking about going back to school but don't have the money, you can potentially use your IRA to pay for higher education expenses.

using your IRA to pay for educationUnfortunately, the distribution from your Traditional IRA will be taxable. You are also depleting your retirement funds for a non-retirement reason, which is not ideal. However, even if you are under age 59 ½, the 10% early distribution penalty that normally applies will be waived if you paid for higher education expenses during the year. In order to have the 10% early distribution penalty waived, you must follow certain rules.

Qualified higher education expenses while you are attending a qualified education institution include include tuition, books, supplies, and required equipment. If you are at least a half-time student, then room and board are also qualified expenses. You can’t include expenses that were paid with funds from Pell Grants, tax-free scholarships, or distributions from a Coverdell Education Savings Account.

An eligible educational institution is any university, college, vocational school, or other post-secondary (i.e., after high school) institution that is eligible to participate in student aid programs of the U.S. Department of Education. Notice that it includes vocational schools as well, so it’s not just limited to college expenses. It includes virtually all accredited public and private post-secondary schools. Your school should be able to tell you if it’s an eligible education institution.

In addition to using your IRA for your own higher education expenses, the rules allow you to use it for the expenses of certain relatives. You can use your IRA for the expenses of your spouse, or the children or grandchildren of you or your spouse. There is no dollar limit on how much of your IRA you can use. Remember though, that while you won’t have to pay IRS a 10% early distribution penalty, the distribution is still taxable.

Article Highlights:
  • Using your IRA for higher education expenses is taxable
  • The 10% early distribution penalty is waived
  • Higher education includes the expenses for you, your spouse, your children, and your grandchildren
-By Joe Cicchinelli and Jared Trexler

RMD Rules: Year-End Rules of the "Game"

The end of the year is rapidly approaching. It is time to make sure that all required distributions are taken from retirement accounts.

Who must take a required distribution?
  • IRA owners who turn age 70 ½ this year or earlier - including individuals with SEP and SIMPLE IRAs who are still working for those employers
  • Plan participants who turn age 70 ½ this year or earlier - unless the employer plan allows them to defer distributions to the year they retire (not available for 5% or more owners of the business)
  • Beneficiaries of all retirement plans, including Roth IRAs, of individuals who died in 2011 or earlier
  • Individuals with 72(t) (SEPP, SOSEP, early distribution payment plans) must be sure they have taken all of their annual distribution amount to avoid the 10% early distribution penalty recapture provisions
Just a reminder - IRA distributions can be taken from any IRA,  but employer plan distributions must be taken from each plan. Of course there is an exception - it is for 403(b) plans. A 403(b) distribution can be taken from any 403(b) plan.

Required distributions are based on the prior year-end account balance. IRA account balances must be adjusted to add back in any rollovers or transfers that are outstanding at the end of the year and any prior year Roth conversion amounts that are recharacterized in the current year.

A final reminder - the qualified charitable distribution (QCD) option is not yet available for this year (2012). It expired at the end of 2011 and has not yet been extended by Congress. This is the provision that allowed IRA owners to transfer amounts directly from their IRA to a qualifying charity and not include the amount (up to $100,000) in their income for the year.

Article Highlights
  • Who must take a required distribution?
  • Aggregating required distributions
  • Adjusting year-end account balances
  • No qualified charitable distribution (QCD) for 2012...yet
-By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can An Employer Have Both a SEP IRA and SIMPLE IRA Plan For Their Employees?

The Slott Report Mailbag is back with three consumer questions that run the gambit of IRA-distribution and retirement planning. Can you use an IRA as security for a loan? How do you handle inherited IRAs for you and your wife? Can an employer have both a SEP and a SIMPLE plan for their employees? You have come to the right place for the answers. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
Send questions to [email protected]


Can an IRA or any qualified account be used as a personal guarantee? I do not have the funds to put up a personal guarantee for the purchase of weekly goods to run my business and want to know if I can use the IRA as a personal guarantee.

No. IRAs cannot be pledged as security for a loan. If you do pledge the IRA as collateral for a loan, the amount you pledged will be taxable to you, plus a 10% early distribution penalty if you’re under age 59 ½.


I have several questions that I would appreciate you answering.

1. Is the 2008 Edition of Ed Slott's Book, "PARLAY YOUR IRA INTO A FAMILY FORTUNE" the latest edition?

2. Stretch IRAs: My wife and I each have Individual IRAs, we are the beneficiaries for each other's IRA, with our children (2) as contingent beneficiaries, each at 50%. My wife's IRA is much smaller than mine, and if she passes first I would expect to disclaim her IRA, allowing it to pass to our children.

If I pass first I have suggested that she disclaim as much as 65% of my IRA.

We understand that in either case, inherited IRAs would need to be set-up in the format for that.

My question pertains to the situation where I pass first, my spouse disclaims part of my IRA, the Inherited IRAs are set up correctly, and then she passes. Can the remaining portion of my IRA be transferred into the ("my") existing Inherited IRAs, or do two more inherited IRAs need to be set up, and if so how would they be titled? Do you discuss this in your book?

Thank you for your response to these questions.


C.W. (Mike) Craychee

After your death, she must address the part of your IRA that she did not disclaim before she dies. If she does not make that part her own IRA via a spousal rollover, and then she dies, that part will continue to be an inherited IRA. It will go to the beneficiary she named on that inherited IRA, or it will most likely go to her estate if she didn’t name a beneficiary. If instead, she makes the inherited account her own IRA via a spousal rollover before she dies, she should name your children as the beneficiary of her IRA. After she dies, those funds will be inherited IRAs for each child and they can use their own life expectancy (stretch IRA) to take distributions. Under any scenario, your children will end up with two inherited IRAs, one inherited from their father and one inherited from their mother. IRAs inherited from different individuals cannot be combined.

2008 is the latest version of "Parlay Your IRA Into a Family Fortune." You can purchase it here.

3. Can an employer have both a SIMPLE and a SEP?

An employer that has a SIMPLE IRA plan cannot maintain another qualified plan, such as a SEP, in which any employees receive contributions. An employee who works for two different employers in the same year could be covered by a SEP from one employer and a SIMPLE IRA plan from the other.

-By Joe Cicchinelli and Jared Trexler

Holiday Wish List of Tax Code Changes

The holiday season is upon us once again. There are a lot of things we associate with this time of year, but one of the most common has to be exchanging gifts with those we love. I can remember, as a child, writing out my wish list each year and the excitement I’d have wondering which gifts I might actually receive. Recalling those days I thought I would once again prepare a wish list, but with a little twist. Below you will find my holiday wish list to Congress and the IRS for changes I’d like to see made to the tax code.

#1 - Get rid of the importance of ½ birthdays
59 ½ is generally the age at which you can take penalty-free distributions from your IRA. This is a “hard date,” meaning that you must actually be 59 ½ on the date you take a distribution in order for it to be penalty free. In addition to 59 ½, there’s also 70 ½, which is the age you are when you must begin taking required minimum distributions (RMDs) from your IRA accounts. Unlike the age 59 ½ rule, the age 70 ½ rule applies to the whole year you turn 70 ½, so the first money distributed from your IRA in that year is automatically deemed to be your RMD and is not eligible for rollover. Seriously folks, is this really necessary? Aren’t the IRA rules and the Tax Code complicated enough without adding in the unnecessary complication of ½ years? I mean, what is it that’s so terrible about nice, easy-to- understand numbers like 60 and 70 that we had to use the oddball 59 ½ and 70 ½ date markers?

#2 - Add a penalty exception for extreme financial hardship
I am not a fan of accessing IRA money before retirement. After all, that’s what the account is supposed to be for, right? But sometimes, people run into tough times that necessitate they dip into their savings unexpectedly. If you withdraw any of your IRA funds before age 59 ½, you are generally subject to income tax and a 10% additional penalty for an early distribution. Unfortunately, that often means that even when people are in the direst of situations, and when every last cent counts, they are hit with a significant penalty merely because they haven’t met some arbitrary age designated by lawmakers decades ago. I believe most people should do a better job of saving for their golden years, but I also understand that sometimes “life happens.” I think the tax code should understand that too.

#3 - Get rid of required minimum distributions
So let me get this straight… You work your whole life, diligently put aside money into a retirement account each year and carefully invest and monitor your portfolio and retirement plan with the help of a team of qualified professionals. Basically, you do everything right. In fact, you do things so right that by the time you’re 70 ½ years old, you have enough money set aside in non-retirement accounts that you don’t need any of your IRA money to live off of. You’d like to leave it alone so it can continue to grow tax-free, but you can’t. You’re 70 ½ and now, whether or not you like it, and whether or not you need it, you’re forced to start taking money out of your IRA to satisfy RMDs. Your taxed on that money, and taking that money may actually cause more of your other money (i.e. Social Security) to become taxable. In my book, that’s not right. Change it.

#4 - Make qualified charitable rollovers a permanent fixture in the Tax Code
OK, I’ll be honest, this one make the list for two reasons. First off, QCDs are a great way to encourage certain IRA owners to donate some of their retirement funds to the qualifying charity of their choice. I think we can pretty much all agree that the more that gets donated to charities, the more good they can do (and the less the government ultimately has to be responsible for). The second reason, to be honest, is a bit selfish (but hey, this is my wish list after all, right?). I am worn out from all of the “Are QCDs coming back?” questions. So far, QCDs have been enacted into law three times and each time, the provision has either been extended at the last moment or has expired and been brought back (retroactively) shortly after. It’s clear our lawmakers like this provision, so why don’t we stop with these temporary measures and just pass a permanent provision?

#5 - Allow IRA beneficiaries to convert inherited accounts
Want to hear what, for my money at least, is one of the dumbest rules in the whole Tax Code? OK, here goes… If you inherit a 401(k) or similar plan account from someone, you can convert your inherited plan funds to a properly titled inherited Roth IRA. On the other hand, if you inherit an IRA from someone, including a SEP or SIMPLE IRA, the account can never be converted to an inherited Roth IRA.

This dichotomy arose out of a series of seemingly unintended consequences of several laws and IRS guidance, most notably the Pension Protection Act. It makes absolutely no sense whatsoever and I can’t think of even one good reason it hasn’t been corrected yet. Let’s put all beneficiaries on an equal playing field.

-By Jeff Levine and Jared Trexler

Charities, IRAs and Hurricane Sandy

Many areas in the Northeast were declared federal disaster areas as a result of Hurricane Sandy. The IRS has provided help for the victims of Hurricane Sandy. Some of the retirement plan initiatives the IRS has announced include:
  • Easing the rules to allow company retirement plans to make loans and hardship distributions to Sandy victims. This rule does not apply to IRAs.
  • Postponing certain tax-related deadlines, such as the 60-day rollover period, the correction of excess contributions, etc. These postponements apply to IRA and company retirement plans.
Many of you have asked how you can help. One way is to donate money or goods to charities that are helping the victims. In order to bring much needed resources and funds to help victims of Hurricane Sandy, the IRS announced an expedited review and approval process for new charities in order to provide relief for the victims. The IRS also continues to encourage you to use existing charities currently working on immediate aid efforts -- the American Red Cross for example.

The IRS reminds you that existing charitable organizations, including churches, synagogues, and other places of worship, are often able to administer relief programs more efficiently than newly formed charities, since they tend to already have fund-raising and distribution infrastructures in place.

The IRS also offers Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations, which gives helpful information.

Some of you have asked if you can use your IRA to make charitable donations for Sandy victims. The answer is yes, but you need to be aware of the tax consequences. If you use your IRA funds to donate to a charity, it will be treated as a distribution from your IRA. Accordingly, it will be taxable to you. If you are under age 59 ½, you are also subject to a 10% penalty. You can then claim a tax deduction (if you itemize). The deduction is subject to certain limits, so it might not completely offset the total tax cost of the IRA distribution.

Previously, Qualified Charitable Distributions (QCDs) were available for IRA owners and beneficiaries who were age 70 ½ or older. QCDs were tax-free distributions from IRAs that were directly sent to a charity. Unfortunately, QCDs expired in 2011. Congress has talked about renewing QCDs this year but has not done so yet.

Article Highlights
  • IRS gives some relief for victims of Hurricane Sandy
  • You can use IRA funds to donate to charities helping Sandy victims
  • IRAs used for charitable donations are taxable income to you
-By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: What is the Best Way to Leave My Roth IRA to Grandchildren?

You want to leave your Roth IRA to your grandchildren. You are worried about required distributions at age 70 ½ if you are still working. You want to know all of the tax specifics of a year-end Roth conversion. You have come to the right place, a special post-holiday Monday edition of The 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. Find one in your area at this link.

Send your questions to [email protected]
1. I have converted some of my IRA to a Roth IRA, which I want to leave to my grandchildren who are minors. What is the best way to do this?

Minors should not be named directly on the beneficiary form. They cannot sign the necessary paperwork to establish the inherited IRA, they cannot manage the investments, and they cannot request the required distributions (RMDs) each year. An intermediary needs to be named to act for the minors. The type of intermediary will depend on the size of the inheritance for the children. For a sizable account, generally the best thing to do is to set up a trust for the minors and name the trust as the beneficiary of the IRA. All the beneficiaries of the trust will have to use the age of the oldest trust beneficiary for calculating RMDs. In the trust you can stipulate the age the beneficiaries must attain in order to have access to the inherited Roth IRA funds.

For smaller accounts, you might be able to name a guardian for the minor either in your will or on the beneficiary form. You should check with the IRA custodian to see if either option is allowed without the necessity of a court appointment. Another option would be to name an UGMA (Uniform Gifts to Minors) trust as the beneficiary. In either of these scenarios, the grandchild would have access to the inherited account when he/she reaches the age of majority - either 18 or 21.

2. I will be 70 ½ this year and am still working and contributing to my 401(k). What required distributions will I have to take this year?

You will have to take required distributions (RMDs) from any IRAs (including SEPs and SIMPLEs even if you were still working for the company that sponsors the plan) that you have and from any plans of employers for which you no longer work. There is an exception to the RMD rules for employer plans such as 401(k)s and 403(b)s if you are still working for that employer. If you are not a 5% or more owner of the company and if the plan allows, you can delay taking RMDs until you separate from service. Once you separate from service, you have a required distribution for the year of separation. You can defer taking that distribution until April 1 of the following year but you would then have to take the RMD for that year also by the end of the year. So you would end up having to take two distributions in one year. If you want to roll your employer plan funds over to an IRA, you will have to take any undistributed RMDs before you can roll the balance of the plan funds to an IRA.

3. I am ready to do a Roth conversion. When I go through with it, what part is taxable?

If you have both pre- and after-tax amounts in your IRA and are doing a partial conversion, the pro-rata tax rule will apply. The formula is on IRS Form 8606. Basically, you take all the after-tax funds in all your IRAs and divide that amount by the year-end account balance in all your IRAs. The percentage is the percent of the amount converted that will not be taxable. You must include SEP and SIMPLE IRAs in these balances.

If you are converting assets in kind, i.e. the assets themselves are moving to the Roth IRA account, the value used will be their fair market value as of the date they are transferred to the Roth IRA. For most stocks, bonds and mutual funds this will be easy to determine. For non-publicly traded assets, you will need to have an appraisal done. If you are converting annuities to a Roth IRA that have riders for guaranteed benefits, the current fair market value of those riders must be calculated by the insurance company as part of the valuation of the asset on the date of conversion.

-By Joe Cicchinelli and Jared Trexler

Planning NOW: 3 Questions to Ask Before the End of the Year

Thanksgiving is here - and the end of 2012 (believe it or not) is right around the corner. That means "year-end planning" time, and below we offer 3 questions you should ask (and find answers to) before year-end.

1) Should I convert all or a portion of my IRA to Roth IRA in 2012?

Right now, in 2012, the highest federal income tax rate is just 35%. In 2013, the highest rate is scheduled to be 39.6%, or roughly 5% higher. Of course, the highest rates are just for those lucky enough to enjoy incomes substantial enough to get to that point. In 2012, that meant close to $400,000 of taxable income, which is your income after all of your deductions and exemptions have been factored in.

So what if you’re in a lower bracket? No big deal right? Not so fast. Although President Obama campaigned on a platform that called for the Bush-era tax cuts to remain in effect for married couples with incomes less than $250,000 and single filers with incomes less than $200,000, those extensions still require Congressional approval. While both parties agree that they would like to see these cuts extended, they disagree about other aspects of the Tax Code, and thus, a deal on those cuts is far from guaranteed.

If Congress does not extend the Bush tax-cuts for those with incomes below the aforementioned limits, pretty much everyone will be impacted. Even those with the lowest levels of taxable income would see their tax bill rise, as the lowest bracket that currently exists, 10%, is set to be eliminated altogether and replaced with a 15% rate. Meanwhile, the 25% tax rate that many middle income Americans enjoy would be replaced with a 28% rate. Those who are currently in the 28% and 33% marginal brackets would see those rates increase to 31% and 36% respectively. Bottom line… If nothing changes, no one is safe from higher taxes. So regardless of whether your income is high, moderate or low, now is a good time to consider a Roth conversion, locking in today’s “low” tax rates for your hard-earned retirement funds.

What happens if you convert now and Congress acts late this year - or even early next year - to extend your current tax rates? That’s a good, no wait - great - problem! Maybe the conversion is still right for you, but if not, don’t forget the Roth recharacterization. Remember, as long as you file your return or your extension on time, you can recharacterize, or undo, your 2012 Roth conversion until October 15, 2013 and get all the tax you paid on the conversion back.

2) What can I do to minimize my exposure to the 3.8% health care surtax?

Beginning in 2013, a new 3.8% surtax on net investment income is set to kick in for certain taxpayers. If you are a single filer and have income of more than $200,000 or are married and have income of more than $250,000, you could be hit with the surtax. The tax is only going to be assessed on the income above your applicable threshold that’s attributable to net investment income. That means there are two ways you reduce your exposure to the surtax if you are likely to be impacted.

Strategy #1 - Reduce your overall income so that your total income drops below your applicable threshold

Strategy #2 - Reduce your net investment income

Approaches to these strategies include transitioning taxable bonds to tax-free municipal bonds, increasing the use of life insurance, using non-qualified annuities to help “shield” capital gains, dividends and interest from being taxable and, of course, Roth conversions.

#3 - Should I sell any of my taxable investments before the end of the year?

Right now, in 2012, the maximum tax rate you can pay on most long-term capital gain investments is 15%. Next year, the maximum rate on the same investments is scheduled to be as high as 23.8% when you factor in both the scheduled increase in long-term capital gains rates and the health care surtax (see question #2). That means that you could pay nearly 60% more in taxes if you sell appreciated long-term gain property next year, or after, instead of 2012.

Normally, when you sell investments at a gain, it’s also a good idea to see if you can sell some investments at a loss to offset those gains, resulting in a lower, possibility $0 tax bill on your sales.

This is commonly known as tax-loss harvesting, a strategy frequently employed by many tax professionals and portfolio managers. While tax-loss harvesting is still worth considering before the end of the year, it may also pay to “keep losers in the till” until next year, when they will be “worth” more since they could cancel out gains that would be taxed as high as 23.8%, as opposed to canceling out gains taxed at a maximum of 15% this year. Long-term and short-term capital gains and losses are first netted separately, and then against each other.

Article Highlights
  • Have the Roth conversion conversation because taxes are on the rise in 2013
  • Plan to combat the 3.8% surtax on net investment income due from the implementation of Obamacare
  • Think about whether you should sell any of your taxable investments before the end of the year
- By Jeffrey Levine and Jared Trexler

Successor Beneficiaries: The "Beneficiary's Beneficiary"

It is vital that IRA owners name both primary and contingent beneficiaries. Failure to have a beneficiary in place at death could result in the loss of the extended payout, that is, the stretch IRA. Why? If the IRA owner’s beneficiary dies before the IRA owner and no contingent beneficiary was ever named, the IRA owner’s estate is usually the default beneficiary. The estate does not have a life expectancy to use for stretch distributions.

Contingent (or secondary) beneficiaries inherit the IRA only when the primary beneficiary dies before the IRA owner or when all the primary beneficiaries timely disclaim the IRA. A contingent beneficiary is NOT the same as a “successor beneficiary.”

Most custodians allow a beneficiary to name a successor beneficiary. Basically, a successor beneficiary inherits the IRA if there’s any money left in it after the original beneficiary dies. Successor beneficiaries are sometimes called the “beneficiary's beneficiary.” Unlike a contingent beneficiary, which is named by the IRA owner during his or her lifetime, a successor beneficiary is named by the beneficiary after the death of the IRA owner.

It is important for every beneficiary to name a successor beneficiary as soon as they inherit so that there will be someone named to continue the single life expectancy payout schedule if the beneficiary dies early. This applies to all non-spouse beneficiaries, or spouse beneficiaries who do not make the IRA their own IRA. Having a successor beneficiary will avoid probate and other related estate problems in the beneficiary’s estate. If the beneficiary names a successor beneficiary, the remaining IRA balance will go directly to that beneficiary with no probate, claims or other legal obstacles.

When the original beneficiary dies and the successor beneficiary inherits, it does not change the stretch period of the original beneficiary. The successor beneficiary does not get to use his or her own life expectancy, but instead uses the remaining stretch period of the original beneficiary.

Article Highlights:
  • Successor beneficiaries inherit IRA funds after the original beneficiary dies
  • Having a successor beneficiary avoids probate and other related estate problems at the death of the beneficiary
- By Joe Cicchinelli and Jared Trexler

RMDs MUST Be Taken Before Doing a Rollover

A required minimum distribution (RMD) is not eligible for rollover.

In an IRA, what this means is that when you have a required distribution for the year and you take a distribution payable to yourself, only the amount over and above the RMD amount can be put back into another IRA. This is true even if you take the distribution in January and you were planning on taking your RMD in December.

Example: Tom has six IRAs invested in IRA CDs. He always takes his RMD from CD #4 in November each year. This year his RMD is $1,000. CD #2 comes due in February this year. He wants to move it from Bank A to Bank B. Bank A issues Tom a check payable to Tom for $30,000. He walks across the street and puts all $30,000 into a new IRA CD with Bank B. Tom has a problem. Only $29,000 of that check from Bank A is eligible for rollover to the new IRA CD at Bank B. Tom cannot rollover his RMD of $1,000. Tom is no longer eligible to contribute to an IRA because he’s age 70 ½ or older, so he now has an excess contribution of $1,000 in the IRA account at Bank B.

An IRA account owner can avoid this problem if they do a trustee-to-trustee transfer of the IRA funds. An RMD can be transferred from one account to another. A transfer is where the IRA owner does not have the ability to use the funds while they are moving from one account to another.

In an employer plan, all distributions from the plan are treated as rollovers by the tax code. You can have either a direct rollover - the funds go directly from the plan to the IRA account with the plan participant not able to use the funds while they are in transit - or you have an indirect rollover - the funds go to the plan participant and there is 20% mandatory withholding on taxable amounts that are eligible for rollover. Since the RMD cannot be rolled over, the plan should first issue one check to the plan participant for the RMD before issuing any checks for a direct rollover. When the check for all the plan funds is issued to the plan participant, he can only roll over any amounts in excess of the RMD as in the example above.

When the RMD amount is rolled over to an IRA, you have an excess contribution in the IRA account. It can be corrected with no tax consequences if it is removed by October 15th of the year after the excess contribution. However, it cannot be corrected by simply removing the excess amount. You must tell the IRA custodian that you are removing an excess contribution and you must do a net income calculation on the amount of the excess contribution. In the example above, Tom has an excess contribution of $1,000. He must remove the $1,000 plus any earnings or losses attributable to that $1,000.

If the excess contribution is not removed, there is an excise tax of 6% per year for each year that it remains in the account. The tax is reported on Form 5329 which should be filed with the tax return for each year the penalty is due. When the form is not filed, the statute of limitations does not start to run on the excess contribution. This can leave the taxpayer open to substantial penalties in addition to the 6% penalty. IRS can assess interest on the unpaid penalties, failure to file penalties, and, in some cases, accuracy related penalties.

 Article Highlights:
  • A required minimum distribution is NOT eligible for rollover
  • Required distributions MUST be taken before completing a rollover of other rollover-eligible funds
  • Required distributions that are rolled over become excess contributions in the IRA
- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can I Combine an Inherited IRA With My Own?

This week's Slott Report Mailbag covers some common questions we receive each week. One question deals with the date of a person's first required minimum distribution (RMD), another with a family member using their IRA to purchase their son's mortgage and a third on combining an inherited IRA with an individual's own IRA. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


ed slott IRA, tax, retirement planning questions
Send questions to [email protected]
I just turned 70 on October 1, 2012. My friend was 70 on March 1, 2012. Her advisor told her she has to take a required distribution from her IRA this year (2012) but my advisor told me I don’t have to take one this year. Who is right?

Both of your advisors are right. The first distribution must be taken in the year you turn 70 ½. Since you turned 70 in October, you will not be 70 ½ until April of next year so your first distribution is due next year. Your friend who turned 70 in March was 70 ½ in September so she must take her first distribution this year. You will figure your distribution based on the age you are on the last day of the year. You will be 71 when you take your first distribution in 2013. Your friend will be 70 when she takes her first distribution in 2012.


My son is having trouble refinancing his mortgage. I have plenty of cash in my IRA. Can my IRA purchase my son's mortgage?

Absolutely not. Your son is a disqualified person so there can be no transactions between your IRA and your son. That would be a prohibited transaction. The IRA would be considered disqualified and the entire amount distributed to you on the first day of the year of the transaction. You would owe income tax on the entire distribution (except for any after-tax amounts in the IRA). The 10% early distribution penalty would apply to all taxable amounts if you are under age 59 ½ and no exceptions to the penalty applied.


I inherited a very small IRA from my father. Can't I just combine it with my own?

No. IRAs inherited from non-spouse beneficiaries cannot be combined with your own IRAs. If you do so, it’s treated as a taxable distribution from the inherited IRA and contribution to your own IRA. Any contribution in excess of your allowed annual contribution would be an excess contribution and subject to the 6% excess contribution penalty each year it remains in your account.

- By Joe Cicchinelli and Jared Trexler

Tax Deadline Relief for Hurricane Sandy Victims

Hurricane Sandy, also known as "Super-Storm Sandy," did considerable damage in the Northeast part of the United States. As a result, the IRS issued several news releases describing the postponement of certain tax-related deadlines for victims affected by Hurricane Sandy. These postponements also apply to IRA and other retirement plan deadlines. The relief applies to many counties in New Jersey, New York, and Connecticut.

ed slott and company hurricane sandy tax relief deadline

The IRS can extend certain tax-related deadlines for taxpayers affected by a federally declared disaster area. Affected taxpayers not only include individuals living in the disaster area but also people or businesses not located in the disaster area but whose records necessary to meet a tax deadline are located there. The relief also applies to relief workers helping out after the disaster.

The postponement affects deadlines for things such as the 60-day rollover period, IRA contributions, recharacterizations, SEP contributions, making employer plan loan payments, the correction of excess contributions, etc. Deadlines that fall on or after October 27, 2012 (October 26 for New Jersey counties), and on or before February 1, 2013, are postponed to February 1, 2013.

If you were affected but you live or have a business located outside the covered disaster areas, you must call the IRS disaster hotline at 866-562-5227 to get tax-related relief.

The IRS news releases are available on the IRS website. You should know that the IRS often updates disaster-related news releases, so you should consider rechecking the news releases to see if anything has changed. Detailed descriptions of the disaster areas and the relief are available on the IRS website (http://www.irs.gov/uac/Tax-Relief-in-Disaster-Situations).

Note: If you take an IRA distribution because of a storm related reason, the IRS relief does not excuse you from paying income taxes or early withdrawal penalties, if applicable, on your IRA withdrawal. 

- By Joe Cicchinelli and Jared Trexler

"Gifting" an IRA to Take Advantage of the Gift Tax Exemption? You CAN'T Do It

ed slott gift tax exemptionThe unified gift and estate tax exemption is scheduled to drop from $5,120,000 to $1,000,000 as of January 1, 2013. This has prompted IRA account owners, and some advisors, to consider gifting retirement assets to children and grandchildren. For Roth IRA owners this would seem to be an especially attractive strategy. Who wouldn’t want to move an income-tax-free asset that has no step up in basis out of their estate to their beneficiaries?

Unfortunately, IRAs, including Roth IRAs, cannot be transferred, assigned or gifted during the account owner’s lifetime. It just can’t be done. The tax code prohibits this. This includes “moving an IRA into a trust,” but that is a topic for another day. The only exception to the “no transfers during life” rule is for a transfer to an ex-spouse as part of a divorce.

What happens if you have already done this? The amount gifted is considered a distribution to you. If the funds were pre-tax IRA funds or certain distributions from a Roth IRA, the distribution will be taxable to you and could also be subject to the 10% penalty if you are under 59 ½. A large enough distribution can put you in a higher tax bracket, reduce your deductions and credits, expose your Social Security payments to income tax, and perhaps even make you subject to the alternative minimum tax (AMT).

As for the recipient of your gift, they do not have an IRA. If the funds are put into an IRA in their own name, they could have an excess contribution to their IRA. Excess contributions are subject to a penalty of 6% a year on the amount of the excess for each and every year it remains in the IRA. The penalty is reported on IRS Form 5329 each year. If the form is not filed, the statute of limitations on the penalty does not start to run so IRS can snag you years after the event.

So, do your beneficiaries a favor and hold on to your IRA accounts. Make sure your beneficiary forms are up to date and let your beneficiaries know that they should talk to a qualified advisor when they eventually inherit your IRA funds. You can find a listing of Ed Slott trained advisors on our website, www.irahelp.com.

Article Highlights:
  • Gift tax exemption scheduled to drop to $1,000,000 for 2013
  • IRA owners are asking if they can "gift" their IRA to their beneficiaries now
  • Tax code does not allow for "gifting" an IRA 
- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Is a Roth Conversion Right For Me?

We now turn our focus from the election (although the issues remain) to year-end financial planning and helping both consumers and financial advisors obtain the expert information they need to come together and form a perfect retirement team.  This week's Slott Report Mailbag includes questions (and our answers) on inherited IRAs and tax forms and a 3-part question on the Roth conversion process. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


Send questions to [email protected]
If I am a non-spouse beneficiary and take the full amount of the inherited IRA, will I receive a tax form at the end of the year in my name, in the deceased name or will both receive forms?

The custodian will send you IRS Form 1099-R showing a death distribution from an inherited or beneficiary IRA. It will be in your name and Social Security number because you will be responsible for paying the income tax on it. The custodian should not send the decedent a Form 1099-R on the funds you withdrew.



I've read Ed Slott's IRA books and watched his TV programs on PBS, and I've learned much from doing so. Here are my questions.

1. I'm considering converting my IRA to my Roth IRA soon (either full or partial, TBD). I'm almost 61 years old and opened my Roth IRA about 10 years ago and have been contributing to it annually since then. If I convert, do I have to wait 5 years to withdraw amounts, or will I be able to withdraw amounts from my Roth IRA (including amounts that I will convert) without incurring an early distribution penalty? I assume since I'm over 59-1/2 and have had the Roth IRA open for 10 years that ALL amounts (existing and converted) will be tax free and penalty free, is that correct?

2. Must I convert before 12/31/12 to be taxed at current tax rates or will I be able to convert up until the time I file my taxes for 2012 (approx. next April 15, 2013) and be taxed on the conversion at the same tax rates or will I be subject to higher tax rates if I convert after 12/31/12?

3. I "think" converting is the right thing to do, but I'm a little nervous about it. Ed makes a very strong case for converting. I've ran calculators, and it "appears" I would be coming out ahead. Do you have any resource on helping me decide to convert or not?

Thank you!

Terry Gregory
Atlanta, Georgia

1. In this case, because you are over age 59 ½, there is no longer a 10% early distribution penalty. You do not have to wait five years to take any funds from your Roth IRA because all distributions from this point forward are “qualified” (tax and penalty free) because you’re over age 59 ½ and you’ve had a Roth IRA for more than five years.

2. The funds must be actually distributed from the Roth IRA in 2012 to be taxed at the current (lower) tax rates. Technically you have 60 days from the date of the distribution to do the conversion, so you could take the funds out in late December 2012 and complete the conversion in January 2013. It’s easier though to do both the distribution and conversion in 2012. You cannot take a distribution in April 2013 and have it taxed for 2012.

3. The best resource is an educated advisor. Please see our website for a list of Ed Slott trained Elite IRA Advisors.

- By Joe Cicchinelli and Jared Trexler


Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

Can I transfer money from my IRA to my husband's Roth IRA? I am 35, and he is 36.

Thank you!

Gail Clements

No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.