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Showing posts with label IRS. Show all posts
Showing posts with label IRS. Show all posts

3 Tips For Tax Time Preparation

The holidays are over. New Years has come and gone. Now, of course, it's time to get ready for - cue the Andy Williams' music - "the most wonderful time of the year." Tax time!

tax time prep tipsWhat? You mean you prefer the holiday season over the tax season? Shocking… or not so much. Unfortunately, while most people wouldn’t mind turning back the calendar a few months and having a second Thanksgiving or other celebratory day, the fact of the matter is here we are in 2014 and it’s time to prepare for the annual rite of passage that is “The filing of the tax return.” To help make that task a little easier this year, here are 3 simple, but key tips to keep in mind.

  1. Get Yourself Organized - Get a folder and label it “2013 Tax Information” - but don’t just get any folder. Get yourself a good, sturdy folder that can last a few years without turning into a cloud of dust, and preferably, one with sides so that your important documents, receipts, etc. don’t fall out. Start throwing everything tax-related into the folder. If you’re not sure whether or not a particular item is important, throw it in there anyway and let your tax preparer decide. As a CPA, I can tell you it’s always easier for me to look through a client’s info and put aside what’s not needed than it is to try and track down information that’s missing. Don’t just gloss over this step either thinking it’s too elementary. Year after year we see the same thing … The people with the best records tend to pay less tax. You can also go one better. Once you open that 2013 folder, open a second one and label it “2014 Tax Information” and start early in the year to put all tax related items in there as they occur so it’s fresh in your mind, rather than trying to remember a year’s worth of activity at one time. This way you are less likely to miss anything during the year. This habit will pay off. It will relieve stress and lower your tax bill. Who wouldn’t sign up for that!
  2.  Check Your Mail… Carefully - During the holiday season everyone loves to check the mail in anticipation of the latest holiday card or that $5 check Great Aunt Gertrude has been sending every year for the last 30 years. After the holiday season though, it’s back to normal. For most people, that means bills, bills and more bills. Naturally, some people “manage” this problem by ignoring it in hopes that some Magic Bill Fairy will come and wipe away all the problems. It’s not a good idea, but hey, that’s just human nature. Unfortunately, not checking your mail and paying your bills late is never a good idea, but not closely checking your mail for the first few months of the new year can have even worse consequences. That’s because during the first few months of the year you typically receive a lot of tax information. Important tax documents, like W-2s, 1099s and maybe even some K-1s may be arriving, all of which are important to report on your return. Remember, that information isn’t just being reported to you, it’s also being reported to the IRS. So if you miss seeing a 1099 from one of your investments or, perhaps, a retirement account, and don’t report it on your return, you can pretty much count on receiving one of those dreaded letters from the IRS in the future. If you’re lucky, IRS might just ask you to pony up what you rightfully owe, plus interest, but in some cases, failing to report the proper income on your return can lead to sizable penalties. 
  3. Don’t Jump The Gun - Many people put off filing there returns until close to the April 15th deadline, but there are always some who don’t want to have the dreaded task hanging over their heads and simply like to get this off their plate as soon as possible. This year, however, you can’t check “File my tax return” off your to-do list until at least January 31. Due to some funding issues, the IRS had a 2-week vacation last fall (Thanks Congress!) that caused certain delays, inevitably pushing back the start of this year’s filing season. The due date, however, of April 15th, has not changed, so if you’re not one of those early birds, be sure you still file your return or extension by that date. And remember, extension or not, any tax you owe is still due by April 15th.
- By Jeffrey Levine and Jared Trexler

60 Day Rollover Waiver When IRA Was Involved in a Ponzi Scheme

IRS Private Letter Ruling 201342017 is a ruling that involved a Ponzi scheme in an IRA. An IRA owner we will call "Alex" asserted that his failure to complete his IRA rollover within the 60-day rollover window was because his financial adviser engaged in a Ponzi scheme.

60-day IRA rollover ponzi scheme IRSAlex had an IRA annuity. He opened a self-directed IRA with a different firm (Company E) to invest in income producing real estate. "George" was the president of Company E. Alex closed out his IRA annuity and transferred the balance to the self-directed IRA. Shortly afterwards, his IRA was invested in real estate.

Alex intended that the funds transferred from his IRA annuity to the self-directed IRA would remain in an IRA. But later, as a result of a federal investigation, Alex learned that George had engaged in a Ponzi scheme.

As it turned out, Company E was not even qualified to act as an IRA custodian, so Alex’s "IRA" was not a qualified IRA. As a result, the movement of his IRA money into the non-IRA account was not a tax-free direct (trustee-to-trustee) transfer between IRAs. Instead, it was treated as a taxable IRA distribution when the funds were paid out of his IRA annuity and not rolled over to an IRA within 60 days.

To avoid the taxes, Alex wanted to roll the money back into an IRA, but the 60-day period was over. He asked the IRS for a 60-day rollover waiver as a result of the Ponzi scheme.

Fortunately, the IRS gave him more time to do the rollover. Alex proved that the reason he didn’t timely complete the rollover was due to George’s misrepresentation and fraud with respect to the money Alex trusted him to invest inside an IRA.

-By Joe Cicchinelli and Jared Trexler

Automatic Waivers of the 60-Day IRA Rollover Rule

Whenever you receive an IRA distribution, you have 60 days from the day you receive it to roll it over, tax-free, to another IRA. The failure to complete a rollover within 60 days means the funds aren't eligible for rollover, and that means the IRA distribution will be taxable to you. Also, if you’re under age 59 ½ at the time, the 10% early distribution penalty will apply. But in some cases, you can get more time to complete a tax-free rollover.

You can apply for an IRS private letter ruling (PLR) and ask the IRS for more time to complete a rollover due to extenuating circumstances (known as a hardship waiver of the 60-day rollover rule), but the IRS charges a fee of up to $3,000. Plus, you’ll likely have to pay a CPA or lawyer to draft the PLR request.

There are some cases when you won’t need a PLR because you qualify for an automatic waiver of the 60-day rule. The 60-day rollover rule is automatically waived if all of the following occurred:
  • You delivered the IRA funds to your IRA custodian within 60 days
  • You followed all of the custodian’s procedures for a rollover (e.g., you signed the proper documents)
  • The funds are eventually rolled over to your IRA within one year of when you received the IRA distribution
  • The reason that the IRA funds weren’t timely deposited into your IRA was solely due to a mistake by the receiving IRA custodian.

In other words, the automatic waiver applies when you did everything correctly within 60 days, but the financial institution made a mistake and didn’t complete the rollover as you had instructed. Assuming you or the custodian finds the mistake within one year, and the custodian agrees it was their fault, the automatic waiver applies and you won’t have to apply to the IRS for a hardship waiver. It is also probably a good idea for you to have some written proof from the custodian that it qualifies for the automatic waiver. For example, perhaps the custodian could put a note in your file or give you a letter in case the IRS ever questions you about the rollover.

- By Joe Cicchinelli and Jared Trexler

Ruling to Remember: IRS First in 60-Day IRA Rollover Ruling

Private Letter Ruling 201347025 is an IRS first when it comes to the 60-day rollover rule. A taxpayer we will call "Ron" asserted that his failure to accomplish IRA rollovers within the 60-day rollover window was due to inaccurate advice from an IRS agent.

IRS 60-day rollover window rulingRon owned stock in a company and participated in the company's stock purchase program. In June 2011, the company used a monetary amount to make a stock purchase. Rather than treat the transaction as an ordinary stock purchase within Ron's IRA, the custodian listed the transaction as a distribution on Ron's account statement. Ron immediately contacted the company and discontinued participation in the stock purchase program.

In July, the company sent Ron a check for the Amount plus earnings on the company stock. However, the returned funds were inadvertently transferred to a non-IRA investment account with the custodian. The mistake was not discovered until after the expiration of the 60-day rollover period.

Soon after, Ron contacted an IRS employee about the transaction and whether he should apply for a 60-day rollover waiver. Ron said that IRS advised him that he would receive a waiver, to take an amount out of an IRA, return it to his account and then re-execute the transfer of that amount into the IRA upon receipt of the waiver. He acted on that advice, but since it wasn't returned within a 60-day period, the transfer was treated as a distribution.

Ron went for a private letter ruling and IRS waived the 60-day rollover requirement for both of the distributions from his IRA.  

Ruling to Remember: Waiving the 60-Day Rollover Requirement

In this month's Ruling to Remember, we look at Private Letter Ruling 201339002, wherein a Taxpayer we will call Sue claimed that her old financial institution never adequately explained the 60-day rollover rule, costing her the ability to roll an IRA distribution over to a new IRA at a new financial institution.

IRS private letter rulingSue received a distribution from three IRAs and subsequently shopped around at different financial institutions for more favorable interest rates. Roughly two months later, she opened a rollover IRA at a new bank. However, that new bank informed her that the new amount could NOT be accepted as a rollover contribution because it was past the 60-day rollover period

Sue filed a private letter ruling with the Internal Revenue Service to waive the 60-day rollover requirement due to bank error for failing to notify her of the 60-day rollover requirement. IRS has the authority to waive the 60-day rollover requirement for a distribution from an IRA when the individual who failed to complete the rollover couldn't because of financial institution error, death, hospitalization, postal error, incarceration, and/or disability.

In this case, Sue presented no evidence as to how her former financial institution committed any errors. The ability to rollover her IRA within the prescribed 60-day period was, at all times, within her control. IRS denied her request.

What You Need to Know:
YOYO - you are on your own. The financial institution is under no obligation to inform you of the 60-day rollover period.

- By Beverly DeVeny and Jared Trexler

IRS Releases 2014 Retirement Plan Limits

Many of the retirement plan annual limits are indexed for inflation. IRS has just released the plan limits for 2014. We look at those limits in some detail below.

Contribution Limits
IRA contributions are unchanged at $5,500. Catch-up contributions remain at $1,000.
Plan deferral limits are unchanged at $17,500. Catch-up contributions remain at $5,500.
The SEP contribution limit is now 25% of $260,000.
SIMPLE deferrals are unchanged at $12,000. Catch-up contributions remain at $2,500.

IRA Deductibility
Any individual with earned income who has not reached the year they turn 70 ½ can make an IRA contribution. However, if they are covered by an employer plan or if their spouse is covered by a plan, they may not be able to deduct that IRA contribution.

Single - The ability to deduct a contribution now phases out between $60,000 - $70,000.
Married filing jointly - Deductibility now phases out between $96,000 - $116,000 when the contributor is the one covered by the plan. Deductibility now phases out between $181,000 - $191,000 when the spouse of the contributor is the one covered by the plan.
Married filing separate - The limit remains between $0 - $10,000.

Roth IRA Contribution Income Limits
Not everyone can make a Roth IRA contribution. Unlike an IRA, a Roth contribution can be made at any age. However, the individual must have earned income, but that income cannot exceed certain limits.

Single - The ability to make a Roth contribution now phases out between $114,000 - $129,000.
Married filing jointly - The ability to make a Roth contribution now phases out between $181,000 - $191,000.
Married filing separate - The limit remains between $0 - $10,000.

- By Beverly DeVeny and Jared Trexler

Don't Rely on the Financial Organization (IRA Custodian) to Track Your 60-Day IRA Rollover Period

When you receive an IRA distribution that is payable to yourself (a rollover), you have 60 days after you receive the distribution to complete a tax-free rollover. If you don't complete the rollover within that 60-day period, the IRA distribution is not rollover eligible, which means it’s taxable to you. Furthermore, if you are under age 59 ½ when you took the IRA withdrawal, you will also be hit with an IRS 10% early distribution penalty, unless an exception applies, such as disability, excessive medical expenses, first-time home purchase, and some others. So, keeping track of the 60-day IRA rollover period is important to keep your IRA nest egg growing on a tax-deferred basis and to avoid an unnecessary tax bill.
60-day IRA rollover window

It’s your job to monitor the 60-day period, not the financial organization that’s holding your IRA funds (known as the IRA custodian). Certainly some IRA custodians, as a customer service, will try to monitor the 60-day period for you, but technically it’s not its job to do that. In fact, not only does the custodian not have to monitor that, it also doesn't have to tell you about the consequences of not doing a timely rollover (i.e., that you will owe taxes on your IRA distribution).

Some people have learned this rule the hard way. In the process of asking the IRS for more time to do a rollover due to extenuating circumstances (known as a hardship waiver of the 60-day rollover rule), some taxpayers have tried to blame the custodian for failing to tell them about the rule or the tax consequences of not doing the rollover. Unfortunately, the IRS typically has denied their requests because the custodian was under no obligation to tell them about the 60-day rule or the tax consequences of not timely doing a rollover.

However, in some situations, the IRS has waived the 60-day rollover rule due to “custodian error.” In these situations, if the custodian took on the responsibility to inform IRA owners of the rollover rules and didn’t meet that responsibility or gave wrong information, then in some cases, IRS ruled that the custodian’s error warranted extending the 60-day rollover period. But getting a 60-day waiver from the IRS is time consuming and expensive. For you to claim custodian error and get a waiver, the custodian will generally have to admit it made a mistake; which oftentimes it won’t do.

You are really on your own to complete a rollover within 60 days; better yet, use IRA trustee-to-trustee transfers to move your IRA funds, because transfers aren’t subject to the 60-day rule.

- By Joe Cicchinelli and Jared Trexler

The Government Shutdown Could Cause You Tax Problems

For over a week now, the federal government has been partially shut down - what some news outlets have called a slim down - thanks to Congress' inability to come together on any sort of agreement that would have prevented, or at least delayed the issue at hand.

For some, the government shutdown has been little more than an afterthought and fodder for the talking heads on TV. For many, however, the government shutdown couldn't have come at a more inconvenient time and could lead to problems. That's because the October 15, 2013 extended due date for tax returns is now less than a week away and one government agency that has been significantly impacted by the shutdown is the Internal Revenue Service. In case, you didn't know it, IRS is actually an arm of the U.S. Treasury Department and, thanks to the shutdown, has less than 10% of its staff reporting for work.

Although you wouldn't be alone if the first thought to go through your mind was, "Awesome, no one's there to collect my tax!" you might want to temper your enthusiasm. In fact, the IRS' forced scale back means you still have all the responsibilities of filing your return (if you have not done so already), without much of the help. Here's why...

The government shutdown has no impact on when you must file your tax return. If you filed a timely extension earlier this year and have until the October 15th extended deadline to file your 2012 tax return, you must still file it by that deadline in order to avoid possible penalties. And even though the IRS will be operating with a skeleton crew of sorts, they will still cash your check promptly, if you owe any taxes. On the flip side though, if you've overpaid your taxes and, after filing your return, you're entitled to a refund, that refund could very well be delayed. How long? That's a good question without a definite answer, but needless to say, the longer this shutdown drags on, the longer it may take to get your refund.

Need help filing that return? That might be a lot more problematic too. If you call an IRS hotline with a question on a "normal" day, it can be challenging to get a timely answer, if you can even get an answer at all. But now? Simply put, impossible. In response to having its workforce slashed by over 90%, IRS has closed its hotlines. Walk-in assistance centers are also closed.

In addition to your refund being delayed, if you happen to be waiting for IRS to respond to a private letter ruling (PLR) request, be prepared to continue to do so. Worse yet, if you're waiting on IRS to respond to a PLR related to a retirement account issue, you can probably all but forget about getting a response until IRS is able to expand its workforce again. Out of the nearly 9,000 IRS workers still reporting for duty, only about 20 work in the Tax Exempt and Government Entities Division, which, despite its unrelated name, is actually the division of IRS primarily responsible for issuing rulings related to retirement accounts. Here is the Internal Revenue Service's full 2014 government shutdown contingency plan.

As if that's not enough of a kick in the pants, here's the "best" part of the whole situation. Although Congress can't agree on much, they already decided that when they finally come to an agreement - whenever that might be - they will incorporate retroactive pay for furloughed government workers into that agreement. Think about that for a second. That means that, at the end of the day, the IRS professionals who could be answering your questions by phone, timely processing your refund or performing other tasks to assist you will,
instead of doing those jobs, be paid to sit at home on the couch and watch TV. Nice. But don't blame the IRS or its workforce for this one. This is a mess that was created by, is being perpetuated by, and will eventually be resolved by Congress.

If you're wondering if there's any good news - anything at all - to come from the IRS' bare bones workforce... yes, there is. IRS has announced that during the shutdown, audits will be suspended. This may be of some benefit for a few individuals, but if you file your tax returns on time, accurately and completely, the chance of being audited is minimal anyway.

The government shutdown is, of course, a fluid situation and it’s possible that at some point, even without an agreement in Congress, IRS could find ways to expand its workforce, or be forced to reduce it further. Stay tuned to the Slott Report for any major changes.

- By Jeffrey Levine and Jared Trexler

Video Alert: IRS, Taxes and Same-Sex Married Couples

The Slott Report has extensively looked at IRS' DOMA guidance as it relates to taxes, IRAs and same-sex married couples through IRS Rev. Ruling 2013-17. Now, we have put all key points into a video alert at Ed Slott and Company's YouTube Page, IRAtv.

IRS taxes same-sex marriageThe video below with Ed Slott and Company IRA Technical Consultant Jeffrey Levine talks about the tax and retirement planning issues related to Rev. Ruling 2013-17. You can also click here to view the video.

-By Jeffrey Levine and Jared Trexler

IRS Issues DOMA Ruling

On August 29th, IRS issued Revenue Ruling 2013-17 to clarify some of the federal tax issues raised by the U.S. Supreme Court’s ruling in the Windsor case.

IRS DOMA federal taxesIn case you have not been keeping up with the news for the last couple of months, the Supreme Court ruled that Section 3 of DOMA (Defense of Marriage Act) was unconstitutional thus making same-sex marriages “legal” at the federal level. The Court’s decision left the definition of marriage up to the individual states.

Federal agencies, such as IRS, are now left with the task of revising their policies to accommodate the current interpretation of the law. The IRS came out with their first official pronouncement in Rev. Rul. 2013-17.

IRS has decided to keep things simple. For federal tax purposes, any same-sex marriage performed in a state or country that legally recognizes that marriage will be recognized at the federal level. The current state of residence of the married couple will be ignored. For example, a couple who got married in Connecticut, a state allowing same-sex marriages, could live in Florida, a state not allowing same-sex marriages, and they will now be treated as married for federal tax purposes.

The effective date of Revenue Ruling 2013-17 is September 16, 2013. The Ruling also says that tax returns that are within the legal amendment period can be amended. That will generally apply to returns filed for 2010, 2011, and 2012. Going forward, same-sex couples who are legally married will be required to file their tax returns as married - the same as opposite-sex couples.

The Ruling also stated that domestic partnerships and civil unions will NOT be recognized as “marriages” for federal tax purposes.

IRS has said that there will be further guidance issued for retirement plans.

 - By Beverly DeVeny and Jared Trexler

Ruling to Remember: Waiver of the 60-Day IRA Rollover Requirement

A taxpayer we will call "Greg" asserted that his failure to accomplish a prompt rollover of his distributed IRA funds within the prescribed 60-day IRA rollover window was due to the medical condition and death of his mother.

The story goes...

Greg received a statement from his company in early December, indicating a retirement plan distribution less federal income tax withholding. Upon receipt of the statement, Greg called his former employer and was informed that a check representing his investment in an employer retirement plan had been mailed to him a few days prior.

Greg maintained that he told his former employer that he had never requested or received the check. Nearly three months later, the former employer re-issued the check and about one month after that, Greg deposited the full amount into his IRA. Greg also asserted that he was the primary caregiver of his mother starting in mid-August (prior to the issued statement) until her death in early April of the following year (after the check issuance was resolved), allowing for a hardship exception to the 60-day IRA rollover window.

He requested a private letter ruling (201330047) with IRS to waive the 60-day IRA rollover requirement with respect to the distribution discussed above.

As it turns out, Greg didn't need the waiver. IRS ruled that documentation shows that the distributed amount was successfully deposited into his IRA within 60 days after the check was actually received. The waiver was denied since there was no need for the waiver.

Notes: The 60-day IRA rollover window begins after the check is RECEIVED, NOT when it is ISSUED. Also, if the check is made out to the new custodian instead of the individual, there is no 60-day rollover period.

- By Beverly DeVeny and Jared Trexler

The Price of Procrastination: What Happens When You Miss the 60-Day IRA Rollover Window

When it comes to moving retirement account money from one IRA (or other eligible retirement account) to another, Congress has given you a couple of options. On one hand, you can have the money sent right from one institution to another. This is known as a trustee-to-trustee transfer, or a direct rollover, and is the preferred way to move money, as it avoids a lot of problems.

60-day IRA rollover periodOn the other hand, Congress also allows you to move money indirectly. In other words, instead of having money sent right from one account to another, you can receive the money from your retirement account (i.e. a check made payable to you). If you choose to use this method of moving money, you have 60 days, starting with the date you receive the money, to get the money back into another retirement account… or face the consequences. And those consequences can be quite expensive.

IRA distributions that are not timely rolled over are added to your income and are taxable in the year you take the distribution. So, for instance, if you take $100,000 from your IRA and fail to timely roll it over, you will pay tax on an additional $100,000. If you have an effective tax rate, between state and federal taxes, of 30%, you will owe $30,000 to Uncle Sam. If you’re under age 59 ½, you will also get hit with the 10% early distribution penalty, unless an exception applies. That would bring your total tax bill to $40,000. Obviously, the bigger your distribution, the more that failing to timely roll it over will cost you. Larger distributions could easily trigger income tax of several hundred thousand dollars or more.

So is there any way rectify such a mistake? In fact, there may be. It’s called a private letter ruling (PLR), and depending on why you missed the 60-day deadline, you may be able to get a favorable one, but even then, your mistake will cost you.

PLRs are a bit like mini court cases between you and the IRS, where you can ask IRS for an extension of the 60-day window, but they aren’t free. The typical fee for a PLR is $10,000, but there are actually “bargain” rates for 60-day PLRs that range from $500 to $3,000, depending on how large the distribution you are trying to rollover is. That’s not all though. You’re probably going to have to pay some professional, like a CPA or attorney, to prepare your ruling, and those professional fees could easily come to $10,000 or more.

Just because you pay the IRS fee doesn’t mean all is forgiven though. IRS is not required to, and does not, approve all PLR requests. Successful requests generally involve situations where the 60-day deadline was missed due to some event outside of your control, such as an illness, where the money was not used for any other purpose while outside of your retirement account and where you had a true intent to do a rollover.

If you are successful in your PLR request, IRS will give you more time to complete your rollover and avoid the taxation (and perhaps, the 10% penalty) on your distribution. However, if you’re unsuccessful, your stuck paying the PLR fees and all the taxes and penalties you owed on your distribution.

So here’s the deal… try to move money directly, via trustee-to-trustee transfer or direct rollover. If you absolutely have to use a 60-day rollover, keep one eye on the clock, because if you miss the deadline, you may not be happy with the price of procrastination.

- By Jeffrey Levine and Jared Trexler

Examining What Federal and State Organizations and Entities Are Involved with IRAs

Last Tuesday, Senator Orin Hatch of Utah introduced new IRA-related legislation to the Congressional floor. The purpose of the bill had nothing to do with taxes, as you might first suspect, but rather, was introduced in an effort to strip the Department of Labor (DOL) of some of its power over IRAs. In particular, the provision, part of the Secure Annuities for Employee (SAFE) Retirement Act of 2013, would remove oversight of the duty of care rules for IRAs from DOL and return them to the Treasury Department, which oversaw them until a 1978 executive order. The duty of care issue relates to the standard of care IRA advisors are held to when providing advice to clients.

Federal and state organizations with IRA controlFor those not deeply familiar with IRAs, this may sound a little odd. After all, what does the Department of Labor have to do with retirement accounts anyhow? The reality of the situation, however, is that many federal and state organizations and entities have some sort of control, power or determination as to how IRAs are treated. Below is a brief list of some of these entities, but to be sure, this list is far from exhaustive.

Congress - Congress is the primary entity responsible for creating the federal laws that govern IRAs. These laws include everything from who has oversight over those helping individuals with their IRAs to how IRAs are taxed and at what amounts to who has to take required minimum distributions and how large those distributions must be. If you are unhappy with any of the rules for IRAs, or think they are a bit too complex, chances are it will take congressional action to make a change. On the other hand, if you happen to love the IRA rules and think they are just “oh-so-easy” to understand, you have Congress to thank.

The Department of Labor - As mentioned above, the Department of Labor has control over the duty of care rules applicable to IRAs. However, they also have the ability to affect IRAs and other retirement accounts in a very important way. The Department of Labor is actually the government entity responsible for determining what is, and what is not, a prohibited transaction.

Under the tax code, there are some things you simply cannot do with your retirement account, and these are known as prohibited transactions. Needless to say, prohibited transactions are a really bad thing. The entire IRA in which the prohibited transaction occurred is treated as having been distributed on January 1st of the year the prohibited transaction occurred, even if the prohibited transaction only involved a mere fraction of the account. That could lead to a significant tax bill, as well as the 10% penalty for those under 59 1/2 at the time.

Treasury Department/IRS - The Internal Revenue Service, or IRS, is a branch of the federal Treasury Department. Obviously, IRAs are affected by the IRS since it is the government body responsible for calculating and collecting your taxes. IRS, though, also serves another important function. Although Congress writes the laws that govern IRAs, it is IRS that is responsible for writing the regulations which explain those laws and issuing other guidance, such as notices, announcements and revenue rulings, that help clarify those rules and allow us to better understand how the laws work.

Individual states - States actually have a lot of say over IRAs for a variety of reasons and different state organizations are responsible for different aspects. For instance, it's up to each individual state to determine how much, if it all, they will tax IRA distributions. Similarly, it's up to individual states to determine if they will allow IRA deductions for IRA contributions on their state’s income tax return.

States also have control with a variety of other IRA related issues. For instance, state law determines whether or not IRAs receive creditor protection. States also generally have control over property law, so when you leave your IRA to certain beneficiaries, state law could have some say as to how those assets are passed. Plus, state laws cover when minor beneficiaries reach the age of majority and have control over certain inherited assets.

-By Jeffrey Levine and Jared Trexler

July Ruling to Remember: Private Letter Ruling Tackles 60-Day IRA Rollover Rule

This month's IRA Updates looks like Private Letter Ruling 201324022, in which IRS waived the rollover requirement due to a fraudulent withdrawal by the husband in this case. We look at the case and the ruling below.

A taxpayer we will call Debra asserted that her husband, who we will call Bill, took a distribution from her IRA without her knowledge or consent on January 5, 2009. Debra contended that her failure to accomplish a rollover within 60 days was due to the fraudulent withdrawal of amounts from her IRA without her consent.

When Debra and Bill wed in 2001, he completed powers of attorney documents as part of the couple's estate planning. Debra understood and intended that the power of attorney be valid for contexts in which she became incapacitated, disabled, or otherwise unable to make her own financial decisions. She did NOT understand or intend to empower Bill to make all financial decisions on her behalf.

Bill took a distribution from Debra's IRA and asserted orally and in writing that he was acting in his capacity as Debra's power of attorney and that he needed the distribution for Debra's medical expenses. Debra asserted that she did NOT need the distribution for medical expenses nor did she communicate any such need to Bill. She then discovered that Bill lost the entirety of distributed funds because of a gambling addiction.

Debra revoked the power of attorney and provided substantial documentation of Bill's gambling addiction, including a statement from a treating physician. Debra requested a ruling from the Internal Revenue Service to waive the 60-day rollover requirement, allowing her to re-deposit the distributed funds back into her IRA.

The IRS ruled in her favor and granted a period of 60 days from the ruling letter's issuance to redeposit funds into her IRA.

Lesson to Learn:
IRS will generally grant waivers of the 60-day rollover period when the problem is something that is out of the account owner's control. They will consider factors such as illness, mistakes by a custodian, delays in the mail, and fraudulent transactions. This PLR highlights the issue of powers of appointment. While they can be very helpful when an individual is truly unable to take care of their affairs, they can also be used to commit fraud. Consider carefully the powers you give over your finances to others and the circumstances that will allow them to act.

ROBS Plans and IRS Form 5500

In late 2009 IRS started a project on rollovers as business start-ups (ROBS). This is a strategy that has been heavily marketed by several companies and targets individuals that want to finance business ventures using their retirement funds. They are directed to establish a self-directed IRA, a corporation, and a 401(k) plan for the corporation. The plan allows participants to roll in IRA funds.

ROBS transactions and IRS Form 5500The individual funds the self-directed IRA with their existing retirement funds and then rolls funds from the IRA to the newly established 401(k) plan. The plan then uses the funds to purchase shares of the newly established corporation’s stock (generally it purchases all the shares). If you followed all of this, here is where we end up: the retirement money is now in the checking account of the corporation and no taxes were paid.

All of this is, in theory, allowed under the tax code. Understandably though, IRS has some concerns about this strategy - which you might have gathered from its mere use of the acronym “ROBS.” As a result of the ROBS project, IRS has found that there is an almost universal misunderstanding of the rules regarding the annual filing of IRS Form 5500.

According to IRS, there is an exemption for the Form 5500 filing requirement IF plan assets are less than $250,000 and the plan has deferred compensation for only the business owner and/or their spouse who wholly own the business. In the case of a ROBS arrangement, the owner of the business is not the individual but instead, is the company plan. Remember the cash flowed into the plan which then bought all the shares of stock in the company so the plan is the business owner.

If you have done a ROBS transaction or if any of your clients have done this, make sure that Form 5500 is timely filed for the business. The form must be filed by the last day of the 7th calendar month after the end of the plan year. For a calendar year business, that means the form must be filed by the end of July.

-By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can Inherited Retirement Plan Funds Be Converted to an Inherited Roth IRA?

Summer is almost here, as the unofficial start to the summer season begins with Memorial Day weekend. To celebrate, we open some IRA, tax and retirement planning mail and answer several of your most pressing questions. This week's Slott Report Mailbag looks at some intricate IRA issues along with a question about the provisions in the new tax law. 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.


Mr. Slott:

Can non-spouse beneficiaries of an employer-sponsored 403(b) TSA plan convert inherited TSA funds to inherited Roth IRAs?

Thank You,
ed slott IRA, tax, retirement planning questions
Send questions to [email protected]

Walter Orlosky

Inherited plan funds can be converted via DIRECT rollover (i.e. not a 60-day rollover) to a properly titled inherited Roth IRA. There are certain requirements that must be met. The beneficiary must inherit the plan funds as a named beneficiary, not through the estate or a non-qualifying trust. The funds must go as a direct rollover from the plan to the inherited account; they cannot be made payable to the beneficiary. Any required distributions from the plan are not eligible for rollover and should be paid out from the plan first.

The transfer of the inherited plan funds to an inherited Roth IRA will be a taxable event to the beneficiary. The beneficiary will have required distributions from the inherited Roth account. Because of these two factors, a Roth conversion by a beneficiary might not make sense, particularly if they have their own retirement funds they could be converting instead.


Congress (finally!) approved the required changes to the Internal Revenue Code in early January, but apparently the federal government has not yet published the regulations with the specifics on in-service Roth IRA conversions. My plan's recordkeeper tells me that without the regulations in hand, they cannot set up software to process conversions of funds from traditional 401(k)s, 457(b) plans, etc. for people who have not separated from their employers.

Is there some date when the regulations will be finalized? We're halfway through the year, and I would like to get started on it this year and have enough time to adjust my paycheck withholding to cover the taxes due on my first increment of conversion.

Sandra Brock

There is no way of knowing when IRS might be releasing regulations. They have now scheduled several furlough days where all of IRS will be shut down due to the sequester. This could push the release back even further.


Does the 3.8% investment tax apply to retirement funds? For example, if I take a lump-sum distribution of my 401(k) plan, which holds employer stock, will the basis be taxed at 3.8% on top of income tax and will the NUA (net unrealized appreciation) be taxed at 3.8% on top of capital gains at the time I sell the stock?

Connie Carroad

The investment surtax of 3.8% does not apply to most retirement payments. It could apply to certain non-qualified annuity payments. However, the retirement payment will increase your income and could put you over the threshold to where the surtax will apply.

Example: The surtax will apply if MAGI (modified adjusted gross income) is over $250,000 (individuals married, filing jointly). A couple’s MAGI is $235,000. Then they take a distribution from an IRA of $25,000. This increases their MAGI to $260,000 ($235,000 + $25,000 = $260,000). They are now $10,000 over the threshold and some of their investment income would be subject to the surtax.

5 Things To Know About Disability Exception to 10% Early IRA Distribution Penalty

Retirement funds, like the money in your IRA, should generally be preserved for use in your retirement. This is not exactly a novel concept, but one that often bears repeating. That being said, sometimes events happen beyond your control that might require you to access your retirement funds before you intended. If you happen to be younger than age 59 ½, then your distributions could not only be hit with income tax, but a 10% penalty.

disability exception to 10% early IRA distribution penaltyThere are, however, a number of excuses, more formally known as exceptions, that you can use to get out of the 10% penalty and lessen your tax burden. One such exception is for disability. Below, we discuss five important facts you need to know about this exception if you plan on trying to use it to avoid the 10% penalty.

1) This Exception Applies To Plans and IRAs
Some exceptions to the 10% penalty only apply if your distribution comes from an IRA. Others apply only to distributions from a plan, like a 401(k). The disability exception, however, is one of a handful of exceptions that you can use to get out of the 10% penalty regardless of what type of retirement account your distribution is coming from.

2) It Must Be Your Disability if it’s Your Retirement Account
Some exceptions to the 10% penalty allow you to take other family members into consideration when you take a distribution. For instance, the higher education exception to the 10% penalty can be used when you have higher education expenses, but it can also be used to help pay for a spouse’s, child’s or even grandchild’s higher education expenses. In contrast, if you plan on using the disability exception to the 10% penalty, you must be disabled and the distribution must come from your own account. You cannot use another family member’s disability to claim the exception for distributions from your own retirement account.

3) You Must Be Really Disabled
In order to claim the disability exception to the 10% penalty, the tax code says that you must be unable to do any work and the disability is going to be of indefinite duration or is likely to result in death. That’s a pretty strict definition. It is not having to change careers as a result of an injury or even “retiring on disability” if you are still able to work in another capacity. If you can still work in some “substantially gainful” way, you aren’t disabled enough, per the tax code, to claim the disability exception.

4) Your 1099-R Will Still Indicate the 10% Penalty Is Owed
When you take a distribution from a retirement account, the account’s custodian sends you (and IRS) a 1099-R to report your distribution. In addition to showing the amount of the distribution, there’s a box (box 7) on the 1099-R that discusses the type of distribution. There is a code (code 2) that indicates there’s a known exception to the 10% penalty and the distribution is not subject to this additional tax, but don’t count on seeing it on your 1099-R if you’re planning on claiming the disability exception. Custodians are not generally in the business of determining whether or not you’re disabled, and if you are, how disabled you are. So chances are, any 1099-R you receive will show a code 1 in box 7, which means that there is no known exception to your distribution. That means it’s up to you to tell IRS the 10% penalty doesn’t apply.

5) You Get Out Of The Penalty By Completing Form 5329
And how do you tell IRS the 10% penalty doesn’t apply to you because you are disabled? Simple, you file IRS Form 5329 with your tax return. Along with properly completing the form, you should submit at least one signed letter from a licensed physician attesting to the severity of your disability. That will generally satisfy any questions IRS might otherwise have. Remember, just as your custodian is not really equipped to say how disabled you are, neither is IRS. So if you can proactively provide appropriate evidence from a doctor, it’s usually enough to satisfy IRS that you are, in fact, disabled enough to claim the exception.

-By Jeffrey Levine and Jared Trexler

Non-Deductible IRA Contributions: What You Need to Know

In order to make an IRA contribution, you must be younger than age 70 1/2 for the year and also have wages or compensation from your job. Once you make your IRA contribution, then you have to figure out whether it's tax deductible or not.

non-deductible IRA contribution
If either you or your spouse actively participates in an employer retirement plan at work, then you might not be able to take a tax deduction, depending on your income. If you, or your CPA, determine that you aren’t eligible to take a tax deduction for your IRA contribution, then your IRA contribution is nondeductible.

If you make an IRA contribution that isn’t tax deductible, you must file IRS Form 8606 to report it as nondeductible. You will now have what’s known as “basis” in your IRA (money that isn’t taxable when you later take a withdrawal). Even though you may not get a tax deduction, nondeductible IRA contributions will give you tax-deferred interest just like all of your other IRA money; plus, you are saving more money for your retirement.

When you have basis, you’ll also have to file Form 8606 in any year you take a distribution from any traditional IRA, including SEP and SIMPLE IRAs, to calculate the nontaxable portion of your withdrawal.

If you don’t file Form 8606 to report nondeductible contributions, then there’s a $50 IRS penalty. But worse than that, if you can’t prove you have basis, all of your future IRA distributions will be treated as fully taxable.

Roth IRA contributions are also not tax deductible, but you don’t file Form 8606 to report Roth contributions. If you discover that your IRA contribution isn’t tax deductible, you are better off making a Roth IRA contribution instead. Assuming your income isn’t too high, the Roth IRA funds grow tax-free, not just tax-deferred. The income limits for making a Roth IRA contribution for 2013 are $178,000- $188,000 if you’re married filing jointly or $112,000 - $127,000 if you’re single.

For example, if you’re married filing joint and you and your spouses’ total income is below $178,000, you can make a full Roth IRA contribution of $5,500 (or $6,500 if you’re age 50 or older).

-By Joe Cicchinelli and Jared Trexler

Sequester Hits IRS

The sequester is coming! The sequester is coming! That is all you heard in February and March.

The sequester is automatic federal budget cuts that took effect on March 1, 2013. The intent was to reduce the federal deficit. The cuts took effect because Congress couldn’t come to an agreement on more sensible budget cuts. March 1st came and went and we didn’t really see or feel the effects of the budget cuts.
IRS sequester
Then it hit the air traffic controllers. They were forced to take furloughs, days off without pay. Flights were delayed because of the staff shortages in the control towers. The security lines were longer because of staff shortages. And the media featured all of this very prominently. Congress responded to all of this negative publicity by restoring the budget cuts to the FAA almost immediately.

Now the sequester is coming to IRS, which is dealing with its own internal issues as most are well aware. IRS will be closing its offices for five days before the end of this year - May 24, June 14, July 5, July 22, and August 30, 2013. Everything will be shut down on those days - its offices, all toll-free hotlines, the Taxpayer Advocate Service and all taxpayer assistance centers. There will be no processing of tax returns, compliance-related activities or acceptance or acknowledgement of electronically-filed returns. But, you get NO extension of tax-related deadlines. Deposits made through EFTPS will be processed as usual.

Taxpayers will have extra time to comply with IRS requests if the due date is on a furlough day. Web- based tools and some automated services will be available on furlough days. IRS says they may need to schedule another day or two of furloughs in order to save enough in expenses to meet the amount the sequester cut from its budget.

Will there be a public outcry over these furloughs as there was over the FAA furloughs? I am guessing not. So if you have IRS business to conduct, make a note of these dates on your calendar. Once again, our government’s fiscal problems are not shared equally by all taxpayers.

-By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can I Convert My Non-Deductible IRA Contributions to a Roth IRA?

This week's Slott Report Mailbag discusses Roth IRA contributions, conversions and the availability of certain employer-sponsored retirement plans.  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.


For the last 15 years, I have been putting money in my traditional IRA. I have also been maxing out on my pension at work. Since I never took a deduction for my IRAs, I would like to transfer my traditional IRA to a Roth IRA. What difficulties will I have with the IRS?

John Di Paolo

IRA, tax, retirement planning questions
Send questions to [email protected]
You should have no problem converting your non-deductible IRA contributions to a Roth IRA as long as you have been filing IRS Form 8606 with your tax return in each year that you made a non-deductible contribution. The conversion of IRA funds to a Roth IRA is taxable. Because you have non-deductible contributions, those amounts aren’t taxed when they are converted but the earnings will be. There is a pro-rata rule that will apply at the time of your conversion. It can be found on Form 8606. All of your IRA accounts are looked at as one account and will be part of the pro-rata calculation. Your conversion to a Roth IRA will be partly taxable and partly after-tax based on the ratio of all of your after-tax amounts divided by the total balances in all your IRA accounts.



Can I contribute to my company 401(k), Health Savings Account (HSA), and a Roth IRA in the same tax year? If so, what are the income and contribution limits?

My wife and I are both in out middle 50s and have an AGI (adjusted gross income) of about $100,000 annually. For 2013: 8% of my paycheck is withheld for our company 401(k) (maximum % the company will match funds). I have $6,500 that will be funding a HSA and would also like to contribute to a Roth IRA (if tax code permits).

Michael in Mount Vernon

There are no income limits to contribute to a 401(k), however, the income limits for contributing to a Roth IRA for 2013 are $178,000 - $188,000 if you file jointly. The tax code allows you to contribute to all three if you meet the requirements for all of them.


If a company already has a SEP IRA, can they contribute to an IRA for certain employees as well?

Best regards,


Yes. An employer-sponsored IRA arrangement allows an employer to contribute to IRAs of any employees he or she chooses. The IRA contribution is treated as wages to the employees.

-By Joe Cicchinelli and Jared Trexler