Get FREE Money in a SIMPLE IRA Plan

If your employer offers a SIMPLE IRA Plan, make sure to participate in it to get free money. A SIMPLE (Savings Incentive Match Plan for Employees) IRA Plan is a company retirement that is set up by a business that has less than 100 employees. The rules require that each employee must establish his own SIMPLE IRA to receive the contributions.

A SIMPLE IRA plan is very similar to a 401(k) plan in that you have the opportunity to defer money from your paycheck and save towards your retirement. If you decide to participate in your employer’s SIMPLE IRA Plan, you choose how much you want to defer, within limits set by the IRS. The most you can defer for 2014 is $12,000 if you are under age 50 (or $14,500 if you’ll be age 50 or older this year).

The contribution you make, known as a salary deferral contribution, will save you money on taxes. Specifically, your salary deferral contribution is subtracted from your wages, so it’s not subject to federal income taxes in the year it is earned. The result is that your “pre-tax” contribution gives you a tax break for saving for your own retirement.

After you make a salary deferral contribution, your employer will match it. In a SIMPLE IRA Plan, the employer will typically match your salary deferral contribution, dollar-for-dollar, up to 3% of your pay (there are other options for the employer match). For example, let’s say your salary is $50,000 and you decide to make a 6% salary deferral contribution of $3,000 for the year. The employer match, which will also be deposited into your SIMPLE IRA, will be $1,500 ($50,000 salary X 3%). So the total amount that’s deposited into your SIMPLE IRA will be $4,500 (your $3,000 salary deferral + $1,500 employer match). This amount is yours and will grow tax-free while it’s in your SIMPLE IRA.

If you don’t choose to make a salary deferral, then you generally won’t get an employer contribution. Essentially, if you choose not to participate in the SIMPLE IRA Plan, you’re giving away free money (i.e., the employer match).

- By Joe Cicchinelli and Jared Trexler

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The 60-Day IRA Rollover Cheat Sheet - What Counts and What Doesn't

IRS has announced that they are going to go along with the Tax Court decision in the Bobrow case, but they won’t do so until at least January 1, 2015. What's this mean? Going forward, you will only be able to do one 60-day IRA-to-IRA rollover per year. No longer will you be able to do one 60-day rollover per IRA account within the same time frame.

A 60-day rollover is one where you receive a distribution from your IRA account made payable to yourself. You can cash the check and do anything you want with the money while it is outside of your IRA. You have 60 days from the date you receive the distribution to redeposit the IRA funds into the same or another IRA. If you do so, the distribution and subsequent rollover are a non-taxable event (reportable, but non-taxable).

The following 60-day rollovers DO count in the once-per-year rollover rule.

• Rollovers from one IRA to another IRA - this includes SEP and SIMPLE IRAs
• Rollovers from one Roth IRA to another Roth IRA

The once-per-year rollover rule applies separately to IRAs and Roth IRAs. Thus you can do one IRA-to-IRA 60-day rollover and one Roth-to-Roth 60-day rollover in the same year. The year is a full 12 months, not a calendar year.

The following 60-day rollovers do NOT count in the once-per-year rollover rule.

• Rollovers from IRAs to Roth IRAs, also known as Roth conversions
• Rollovers from IRAs to non-IRA employer plans like 401(k)s and 403(b)s
• Rollovers from non-IRA employer plans to IRAs or Roth IRAs

Once the new rules kick in, you’ll still be able to do as many transfers as you want during the year. In a transfer, IRA assets go directly from the old custodian to the new custodian. You don’t have access to the funds while they are out of your IRA.

- By Beverly DeVeny and Jared Trexler

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New IRS Publication 560 - Retirement Plan Info for Small Businesses for 2013

The IRS updated the 2013 version of Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) For use in preparing 2013 Returns. This publication contains basic information on employer retirement plans such as simplified employee pension (SEP), savings incentive match plan for employees of small employers (SIMPLE), and qualified retirement plans.

The “What’s New” section of the publication highlights the increased contribution limits for various employer plans for 2013 and 2014 as a result of annual cost-of-living adjustments. For example, for 2013 the maximum SEP contribution limit is 25% of up to $255,000 of compensation, limited to a maximum annual contribution of $51,000. The limit increases to up to $260,000 of compensation capped at $52,000 for 2014.

In the “Reminders” section of the publication, the new rules for in-plan Roth rollovers are explained. Beginning in 2013, a company retirement plan with a designated Roth account (for example a Roth 401(k) feature), can allow you to roll over amounts into the designated Roth account from your other accounts in the same plan, regardless of whether the you are eligible for a distribution from your other accounts.

Despite the fact that the law has made it easier for you to make an in-plan conversion to a Roth account, that doesn’t necessarily mean that you’ll actually be able to do it. The main reason is that an employer’s retirement plan isn’t required by law to offer a Roth option. So, if your plan doesn’t have this feature in it, you can’t do an in-plan Roth conversion. If it does, you should speak to a qualified advisor before doing so because once you do an in-plan conversion, you can’t change your mind. That means that, no matter what happens, you’ll owe taxes on that conversion.

While IRS publications are useful, they have their limits. They do not contain all the rules you need to know on a given topic nor can they ever be used as a substitute for the information contained in the Tax Code, IRS regulations, or received from a competent tax advisor.

Ed Slott's 2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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IRA Annual Fair Market Value Summary

By now you should have received a statement from your custodian about your IRA's fair market value (FMV). The custodian that houses your IRA is required by IRS rules to send you certain information about your IRA by January 31 of each year.

One of the pieces of information the custodian has to send you is your IRA’s year-end FMV. Specifically, your IRA’s December 31, 2013 FMV must be reported to you by January 31, 2014. This rule applies to all IRAs, including SIMPLE, SEP and Roth IRAs. It also applies to beneficiary (inherited) IRAs. Even if you didn’t make any IRA contributions or rollovers in 2013, you still will be sent the year-end FMV information. The FMV is critical for calculating the required minimum distribution.

If you made any contributions or rollovers in 2013, then those contributions will likely be reported on the year end-statement as well. Custodians have to report to you any contributions you made for 2013 on either IRS Form 5498, or a substitute statement such as the FMV statement. The due date for reporting those 2013 IRA contributions to you is June 2, 2014.

But sometimes a custodian won’t send you a copy of IRS Form 5498, but will instead use the annual FMV statement as a substitute for that IRS form. If the custodian does this however, certain information must be on the statement so you know there’s important IRA information on it. For example, the custodian must put the words “This information is being furnished to the Internal Revenue Service” and tell you exactly which information is being sent to the IRS, such as rollovers, annual contributions, and the year-end FMV.

Another piece of information that may be on your annual FMV statement is about required minimum distributions (RMDs). If you are an IRA owner (not a beneficiary) and are age 70 ½ or older this year, the custodian has to tell you that you have to take an RMD for this year. This information is often printed on your annual FMV statement as well.

Ed Slott's 2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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IRA Qualified Charitable Distributions Expired for 2014

As we begin 2014, many of you who are charitably inclined have asked us about the status of QCDs (qualified charitable distributions). QCDs, known as charitable IRA rollovers, are a way of moving your IRA money tax-free to a charity.

First some back story: QCDs were first created by the Pension Protection Act of 2006. They were originally effective from August 17, 2006 through the end of 2007, and then Congress extended them through 2009 - and then through 2011. Last year, the American Taxpayer Relief Act of 2012 (ATRA), which was signed into law in January 2013, brought back QCDs once again. One of the provisions of ATRA was to provide retroactive treatment for QCDs for 2012 and to extend them through 2013.

However, as of this writing, QCDs expired at the end of 2013.

Many of you have asked us if Congress will again reinstate QCDs for 2014, as they have so many times before. That’s anyone’s guess at this point, but because Congress has reinstated them so often since their inception in 2006, we’ll review the QCD rules in the hope that they are reinstated for 2014.

A QCD transfer is not taxable to you, and you won’t get a charitable tax deduction. You must be at least age 70 ½ when you do the transfer and you are limited to $100,000 per person, per year. If you’re married, you can each transfer up to $100,00 from your own IRAs for a total of up to $200,000 per couple. QCDs applied only to IRAs or inactive SEP and SIMPLE IRAs, not to employer plans. The contribution to charity would have had to be entirely deductible if it were not made from an IRA. There could be no benefit back to you.

Remember that QCDs expired at the beginning of 2014, but visit us often here at The Slott Report for further updates.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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Age 55 Exception to the 10% Early Distribution Penalty

Think of The Slott Report as your retirement planning problem solver. With over 1,000 articles on IRA, tax and retirement planning, you are bound to find answers to most, if not all, of your pressing questions. From time to time, we like to package a popular topic's frequently asked questions into one article for easy viewing.

Most of us know about the 10% early distribution penalty, and still many of us know there are certain ways to avoid it. One of those ways is the "age 55 exception." We look at the "age 55 exception" FAQs in the question-and-answer segment below.

Question: What is the "age 55 exception?"

Answer: The age 55 exception is one of the exceptions to the 10% early distribution penalty for retirement plan distributions taken prior to 59 1/2. It allows certain individuals to take distributions from their retirement plans at 55 or later (instead of 59 ½) without being subject to the 10% penalty.

Question: Is the age 55 exception available for all retirement plans?

Answer: No. The age 55 exception is only available for distributions from company plans, such as 401(k)s and 403(b)s. It DOES NOT apply to distributions from IRAs or IRA based plans, like SEP and SIMPLE IRAs.

Question: Are all distributions from plans exempt from the 10% penalty after you turn 55?

Answer: No. The age 55 exception to the 10% penalty only applies to distributions made from a plan if you separate from service in the year you turn 55 or older. Furthermore, the exception would only apply to distributions from that company's plan, not other plans of a different company.

Question: What if I separate from service on January 1st, but turn 55 in December of the same year? Can I use the age 55 exception?

Answer: Yes, because you would be turning 55 in the same year you separated from service. The year, in this case, is the same calendar year.

Question: What if I separate from service after at 55 or later and rollover my plan balance to an IRA?

Answer: Any distributions taken from your IRA before you reach age 59 1/2 will be subject to the 10% penalty (unless another exception applies). Remember, this penalty exception only applies to distributions from company plans. Once you roll money over to an IRA, the ability to use the exception is lost.

Question: If I qualify for the exception and need to take money out of my retirement before I reach age 59 1/2, but want to roll money over to my IRA, can I leave some money in my plan and roll over the rest to my IRA?

Answer: Yes, at least from the tax code's perspective. You will have to double check with your company plan, however, and make sure they will allow you to do so.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Jeffrey Levine and Jared Trexler

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Slott Report Mailbag: What Happens If I Name a Minor as My IRA Beneficiary?

This week's Slott Report Mailbag looks at naming minors as IRA beneficiaries, something we cover in some depth in other articles, as well as the RMD (required minimum distribution) rules around annuities. 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.

1. If you make a non-deductible IRA contribution, can that amount be converted to a Roth IRA tax-free if you have a 401(k)?

Answer:

Send your questions to [email protected]

Having a 401(k) plan doesn’t affect the taxation of an IRA conversion. The taxation depends on whether or not you have any other IRA funds, including SEP and SIMPLE IRA funds. The pro-rata tax rule applies, which means if you do have other IRA funds that contain pre-tax money, then the conversion of the non-deductible IRA contribution amount won’t be tax free. It will be partially taxable and partially tax free using the percentage of your pre-tax funds in all your IRAs to all your after-tax tax amounts (such as nondeductible contributions). You will have to file Form 8606 with your income tax return to report the conversion and to do the pro-rata calculation. You can find the form on the IRS website, www.irs.gov. Click on “Forms and Publications.”

2. If I were to purchase an immediate annuity with all the funds in my only taxable IRA, what impact does that have on RMDs (required minimum distributions) when I'm age 70 1/2?

Answer:
IRA annuities must meet the RMD rules; however, depending on the type of annuity you buy, the RMD amount may be larger than the RMD if you didn’t buy an annuity. When an IRA annuity starts paying out, (“annuitizes”) the annual distributions are the RMD for the annuity.

3. In your books you talk about leaving a Roth IRA to grandchildren to stretch the IRA. Are minor grandchildren permitted to inherit assets from a Roth IRA? If the IRA were invested in mutual funds, what would happen to them if I die while the grandchildren are minors?

Thank you for your assistance.

Sincerely,

Martha Willis

Answer:
Minors can be the beneficiaries of any IRA, including a Roth IRA. Regardless of what the IRA is invested in, upon your death, your grandchildren will need to take death distributions, typically over their own single life expectancies. Those Roth IRA distributions generally will be tax free to them. However, there is a problem. Minors cannot sign IRA agreements, manage investments, or manage the distributions that come out of the IRA. You will need to have a guardian or a trust in place to do this for the minors. You should check with your IRA custodian to see what their procedures are when a minor inherits an IRA, and you may need to consult with an attorney about setting up a trust. Be sure to ask an attorney about their IRA knowledge and how or where they acquired that knowledge. An improperly drafted trust or the wrong moves after your death can mean the end of the IRA with income tax being due all at once.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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You Don't Have to Keep Your SEP IRA Funds in a SEParate IRA

A SEP, or Simplified Employee Pension Plan, is an IRA-based employer retirement plan that’s very similar to a profit sharing plan. All SEP contributions are made by your employer. The employer decides how much to contribute for the year, anywhere from 0% to 25% of an eligible employee’s compensation with a maximum of $51,000 for 2013. After your employer decides how much to contribute, that contribution will be deposited into your IRA. Note that SEP contributions can never be made into your Roth IRA or your SIMPLE IRA.

From the IRS’ standpoint, it doesn’t matter if your SEP contribution for the year is put into your Traditional IRA or your SEP IRA. That’s because SEP money is treated like your other IRA money with regards to how it’s taxed, the IRA rollover rules, and the required minimum distribution (RMD) rules at age 70 ½ and later. So, if you want to have your SEP contribution deposited into your existing Traditional IRA, that’s fine as far as the IRS is concerned. Your SEP funds don’t have to be kept in a separate IRA. However, your financial institution may want you to keep them separate.

If the IRA only contains SEP funds, it’s often called a SEP IRA. For tax purposes though, all of your Traditional IRAs, including your SEP IRAs, are treated as one IRA. Therefore, there’s no tax advantage to keeping SEP funds in a SEP IRA. So if you ever want to move or combine your SEP IRA money with your Traditional IRA money via a rollover or transfer, that’s allowed. While some institutions won’t allow you to combine SEP funds with other IRA funds, you could simply roll over or transfer your SEP funds to a Traditional IRA with a different institution that does allow it.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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Who Can You Trust? Misinterpreting the SIMPLE IRA Rules

You have your IRA at a large, reputable firm. They are going to give you accurate information, right? Not always. Consider the following:

A small business owner establishes a SIMPLE IRA plan for his employees in 2009. A SIMPLE IRA plan allows participating employees to defer some of their wages to the plan, similar to a 401(k) plan. One of the rules for SIMPLE IRAs is that funds cannot be moved to any non-SIMPLE IRA for the first two years of participation in the SIMPLE. The employees who begin participating in the SIMPLE in 2009 cannot move their funds to another type of account until 2011. SIMPLE IRA funds can be moved to another SIMPLE IRA at any time.

In 2012, the business owner transfers his SIMPLE IRA from Company A to Company B, a large, reputable firm. Company B knows that the funds are coming from an existing SIMPLE IRA plan and accepts the transfer into a SIMPLE IRA with their company.

In 2013, the business owner becomes unhappy with Company B and wants to transfer his SIMPLE IRA to Company C. Company B refuses to let him transfer the funds. Their reason - you haven’t had the account for two years. In vain, the advisor tells them that the SIMPLE IRA was established in 2009. He reminds Company B that they accepted it as a transfer of an existing account. He points out that it is being transferred to another SIMPLE IRA. Nothing will budge them. They have nominated themselves as the SIMPLE police and what they say goes, no matter what. The advisor has escalated his request, but has yet to find anyone in the company with a better understanding of the SIMPLE IRA rules.

The client is faced with the option of taking a distribution of the account balance payable to himself and doing a 60-day rollover into either his new SIMPLE IRA or to an IRA. We never recommend 60-day rollovers, but here the client may have no choice. All because the large, reputable firm misinterpreted the two-year rule for SIMPLE IRAs.

If your IRA custodian tells you something that doesn’t sound quite right, check it out. Ask someone else. Ask to see where it says that in the IRA agreement or in the tax code. Or ask an Ed Slott trained advisor. You can find a list of our trained advisors on our website at www.irahelp.com. Mistakes can be costly to you.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Beverly DeVeny and Jared Trexler

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IRA Contributions When You Contribute to an Employer Retirement Plan

I am maxing out my 401(k) or I am contributing to a 401(k), can I also make an IRA contribution? We get asked that question a lot.

The answer is, YES. But, you may not be able to deduct your IRA contribution.

First, let's talk about the contribution. Participation in any employer retirement plan, including IRA based SEP and SIMPLE plans, does NOT impact your ability to make an IRA or a Roth IRA contribution. The only qualification is that your earned income must equal or exceed the amount you contribute. You can make a contribution for yourself and for a non-working or lower wage earning spouse as long as you file your income tax return as married filing jointly.

For 2013, the contribution limits are $5,500 per person, and if you are age 50 or older during the year, you can contribute an extra $1,000 for a total of $6,500 per person. You cannot contribute $5,500 to an IRA and $5,500 to a Roth IRA. The maximum you can contribute is $5,500, which can be split between an IRA and a Roth IRA if you wish.

Now let’s talk about deducting your IRA contribution. If you are covered by an employer plan and file your tax return as married filing jointly, for 2013, your ability to deduct your IRA contribution phases out when your adjusted gross income is between $95,000 and $115,000. If you are filing your return as single, the phase-out range is $59,000 to $69,000. If you are not covered by a company plan but your spouse is covered, the phase-out range for you is $178,000 to $188,000. If you file married-separate, your phase-out range is $0 to $10,000.

If you cannot deduct your contribution and you decide to make the contribution to a Roth IRA instead, you have a different set of rules. If your income is too high, you cannot make a Roth IRA contribution. For 2013, when you are married filing jointly, the phase-out range for making a Roth contribution is $178,000 to $188,000. If you are single, the phase-out range is $112,000 to $127,000, and if you are married filing separate, the phase-out range is $0 to $10,000.

As with most IRA rules, what seems simple has its complications. For an Ed Slott-trained advisor, please go to our website: www.irahelp.com. Don’t be a do-it-yourselfer. Mistakes made in IRAs can be very costly.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Beverly DeVeny and Jared Trexler

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Contributing to More Than One Retirement Plan for the Year

While many Americans aren't saving enough for retirement, there are others who are saving a lot (true story). In fact, some of you have asked whether it's possible to contribute to more than one retirement plan for the same year. The answer is generally yes, but there are certain traps you need to be aware of before jumping in to the savings game feet first.

If you are making an IRA contribution for 2013, the maximum contribution you can make is $5,500 (or $6,500 if you’re age 50 or older this year). This limit applies to both IRAs and Roth IRAs. Although you can contribute to both an IRA and Roth IRA, the combined limit is $5,500 or $6,500 depending on your age. You can’t contribute the maximum to both an IRA and a Roth IRA. For example, if you are age 50 or older this year, the maximum combined IRA and Roth IRA contribution you can make is $6,500. You could choose to make a $3,000 contribution to your IRA and the remaining $3,500 to a Roth IRA. As long as you don’t exceed your $6,500 limit, you can split the IRA contribution any way you want.

If you also participate in a retirement plan with your employer that allows you to make salary deferral contributions, you can do that in addition to your IRA contributions. For example, if you participate in your employer’s 401(k) plan for the year, the maximum amount you can defer is $17,500 if you are under age 50. If you’re age 50 or older, the maximum deferral is $5,500 more, for a total of $23,000 for the year. The IRS calls this the “annual deferral limit.” Note that your plan may set a lower dollar limit.

If you happen to participate in more than one employer retirement plan during the year, the annual limit must be combined for plans such as 401(k)s, SIMPLE IRAs, and 403(b)s. The annual limit applies no matter how many plans you participate in during the year. So, if you switched jobs during the year, and participated in more than one plan, you have to keep track of the annual deferral limit to make sure you don’t exceed the limit. If you do exceed the annual deferral limit, you will have to remove the excess and the interest it earned from the plan by April 15th to avoid tax problems.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Joe Cicchinelli and Jared Trexler

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Slott Report Mailbag: Back to Basics with Key IRA Questions

We are going back to basics in this week's Slott Report Mailbag with questions revolving around the foundation of IRA planning. Converting and accessing funds and avoiding penalties are the fundamental keys you and your financial team grapple with each day. 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.

1.

Can I convert my employer plan or IRA to a Roth IRA?

Answer:

Send questions to [email protected]

All funds in traditional IRAs, SEP IRAs, and employer plans such as 401(k)s are eligible to be converted to a Roth IRA. Funds in a SIMPLE IRA can also be converted AFTER the SIMPLE account has been open for two years. A conversion before that date will be subject to a 25% penalty tax on the amount withdrawn AND the funds are not eligible for transfer to any other type of plan except another SIMPLE. To do a conversion of employer plan funds, you must be eligible to take a distribution from the plan.

2.

Who takes the year of death required distribution from an IRA?

Answer:
Any remaining amounts of the year of death required distribution MUST go to the beneficiary. The distribution never goes to the decedent or to the estate, unless the estate is the beneficiary. Any required distributions that are not taken will be subject to the 50% penalty and are reported on IRS Form 5498 by the beneficiary for the year the distribution was missed.

3.

I just found out I was not eligible to make a Roth contribution/conversion. What do I do now?

Answer:
 

First and foremost, you will have to remove the funds from the Roth IRA. You have three options.

1. Recharacterization - The funds can be recharacterized to a traditional IRA up to October 15th of the year after either the year of the conversion or the year for which the contribution is made. You must notify both the Roth IRA and the traditional IRA custodians that you are doing a recharacterization. A net amount is recharacterized. Gains or losses on the account for the time the funds are in the account that are attributable to the contribution/conversion must also be recharacterized. The funds must be moved in a trustee-to-trustee transfer back to an IRA. Once this is done, the funds are treated as though they had always been in the IRA.

2. Excess Contribution - This option can be used either before or after the October 15th date. If it is before October 15th of the year after either the year of the conversion or the year for which the contribution is made, then again a net amount must be withdrawn. The IRA custodian should be told this is a withdrawal of an excess contribution. The funds will go into your pocket and will no longer be in an IRA. Any earnings that are withdrawn will be taxable for the year of the contribution/conversion, not the year they are withdrawn.

If the October 15th date has passed, this will be your only option for removing the funds. However, you no longer have to calculate gains or losses. You only remove the amount of the contribution/conversion. This is good if you have gains in the account, bad if you have losses. You also will have to pay a 6% excess contribution penalty on the amount of the contribution/conversion that was in the account as of December 31st of the prior year. This penalty will also apply to a contribution made up to April 15th of the current year that was designated as a prior year contribution. The penalty is reported on IRS Form 5329 which is filed with your tax return. The penalty will apply for each year that the excess amount remains in the account (that is why you need to remove it as soon as possible).

3. Carry Forward - You can carry forward the excess amount and use it up in subsequent years as contributions for those years. This is generally only a good idea for contributions when you are fairly certain that you will be eligible to make a contribution in the next year. You will still owe the 6% excess contribution penalty for each year that you have excess funds in the account.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Joe Cicchinelli and Jared Trexler

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Don't Pledge Your IRA For Any Loans

Most of us have loans of some sort, whether it's a mortgage on our home, a car loan, student loan, etc. Or maybe you're thinking about applying for a new loan. In order to get the loan, the bank or other lending institution might require you to have some collateral or pledge some assets as security for the loan. However, if you have an IRA, you can’t use it as collateral for any personal loans.

IRS rules do not allow you to pledge any part of your IRA as security for a personal loan. This rule applies whether it’s a loan for you or for someone else, such as a loan for your son’s college tuition or your daughter’s home mortgage.

If you do pledge some or all of your IRA as collateral for a loan, the amount that you pledged will be treated as distributed to you. That means if it’s a traditional, SIMPLE, or SEP IRA, you will be taxed on that amount. The IRA custodian should send you a copy of IRS Form 1099-R showing a withdrawal. It’s treated as if you actually took that amount from your IRA and spent it. Accordingly, you will owe federal income taxes on the amount. If you’re under age 59 ½, you’ll also owe an IRA 10% penalty for an early distribution. So, in addition to paying interest on the loan, you will owe Uncle Sam for the taxes and penalties for wrongly pledging your IRA - not a good financial move.

Ideally, the bank, credit union, or other lending institution would not allow you to pledge your IRA as collateral for a loan. Hopefully, when they see the account is an IRA, they would stop you from pledging it. But don’t rely on the lender to know the rules; it’s your responsibility. The IRS would not give you a break on paying the taxes on the deemed IRA withdrawal if you claim it was the bank’s fault.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Joe Cicchinelli and Jared Trexler

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IRA Bankruptcy Exemption Amount Increases

As of April 1, 2013, the maximum bankruptcy exemption amount for IRAs increased from $1,171,650 to $1,245,475. This exemption amount is subject to cost-of-living adjustments (COLAs). Since most Americans don’t have IRA balances anywhere near $1 million, the IRAs of almost everyone will be fully protected from their creditors if they declare bankruptcy.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the first $1 million of IRA and Roth IRA funds are protected (or exempt) in bankruptcy. This amount is reviewed every three years and increased as needed. For example, the $1 million base amount increased to $1,171,650 in April 2010, and now is increased to $1,242,475.

The new $1.2 million exemption amount does not apply to SIMPLE and SEP IRAs because these IRA based employer plan assets are fully protected in bankruptcy in an unlimited dollar amount.

There is also no maximum exemption for assets in employer retirement plans such as a 401(k). Anyone who has IRAs that exceed the new $1.2 million exemption amount should consider rolling over their IRAs into their employer plan to get the unlimited creditor protection. Note that not all employer retirement plans accept rollovers from IRAs, so check with your employer’s plan administrator.

The $1 million limit does not apply to assets that were rolled over from an employer plan and into an IRA. Because these rollover funds and their earnings are fully protected from creditors, if you ever file for bankruptcy, it’s probably easier if those rollover assets are kept in a separate IRA.

The bankruptcy exemption amount only protects your IRA money if you declare bankruptcy. There are instances when your IRA can be taken. For example, if you get a divorce, some or all of your IRA can be awarded to your ex-spouse. Also, if you owe the IRS money, the IRS can take (levy) your IRA.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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Retirement Plan Income Tax Deadlines

We are down to the wire. Tax day is Monday, April 15th and it is coming up quickly. Following are some retirement plan deadlines you don't want to miss!

April 15th: This is the last day you have to make an IRA or Roth IRA contribution for 2012. There are exceptions for individuals in certain combat zones, and there may be extensions for individuals in certain federally declared disaster areas. The contribution limit for 2012 is $5,000 per person (those age 50 or older at any time in 2012 can add an additional $1,000 to their accounts for a total of $6,000). You must have earned income at least equal to the amount you contribute. You cannot make an IRA contribution if you were age 70 ½ or older in 2012. There are income limits for making a Roth contribution. Participation in an employer plan has NO impact on your ability to make IRA or Roth IRA contributions.

October 15th: This is the deadline for recharacterizing a contribution or a Roth conversion. You must have timely paid your taxes and filed your return or your return must be on extension to qualify for this date.

This is also the deadline for timely removing an excess contribution made for 2012. If the contribution is not removed in accordance with IRS guidelines, the 6% penalty will apply to the amount of the excess contribution.

This is also the deadline for making employer contributions to a SIMPLE IRA. The SIMPLE IRA must have been timely established in 2012.

December 31st: This is the deadline for taking a 2013 required distribution. If 2013 is your first distribution year, you can delay the first distribution until April 1, 2014. However, you would still have to take a second distribution for 2014 by the end of 2014.

This is the last date to do a Roth conversion for 2013. In order for a conversion to be a 2013 conversion, the funds must be out of the IRA or employer plan by December 31, 2013. You do not have until April 15, 2014 to do a 2013 Roth conversion.

SEP IRA Contribution Deadline: SEP IRAs can be established and funded up to the tax filing deadline plus extensions for the business. The business need not be on a calendar year.

You can find more information on these deadlines in IRS Publication 590 (for IRAs) or Publication 560 (for SEPs and SIMPLEs) on the IRS website at www.irs.gov.

Timing is everything. Don’t miss your deadline.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Beverly DeVeny and Jared Trexler

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5 Facts About the April 1 Required Beginning Date

It might sound hard to believe, but amazingly enough, we are just a few days away from the start of April. Its first day, Monday, April 1st, is known as April Fool’s Day to many, but to those in the retirement world, it’s better known as the required beginning date. Unfortunately, this date often causes a great deal of confusion for pre- and post-retirees, so with that in mind, below we explore 5 key facts you need to know about the April 1st deadline. Make sure you know these rules well, or come April Fool’s Day, the joke might be on you.

1) April 1st of the year following the year you turn age 70 ½ is known as your required beginning date (RBD). Therefore, April 1, 2013 is your required beginning date if you turned 70 ½ in 2012. The required beginning date is the absolute latest date you can wait to take required minimum distributions (RMDs) from your IRA without possible penalties, so if you turned 70 ½ in 2012 and have not yet taken an RMD from your IRA, you only have a few days left to do so without potentially incurring a 50% - yes, that’s right, a FIFTY percent penalty. The penalty applies even if you’re one day late.

2) Generally speaking, if you take an RMD in any one year, you calculate that RMD in part, by looking back to the previous year’s December 31st balance. For instance, most RMDs being taken in 2013 are calculated using the December 31, 2012 balance. However, if you turned age 70 ½ in 2012 and waited until 2013 to take your first RMD, you must calculate that RMD using the December 31, 2011 balance. Why? Quite simply, even though you’re taking the RMD now, in 2013, it’s still the RMD for 2012, making the 2011 year-end balance the correct figure to use. And remember, you will still have to take an RMD in 2013 for 2013. That 2013 RMD will, of course, be calculated using your December 31, 2012 IRA balance. Note: If you take two RMDs in 2013, you will be taxed on both of them for 2013.

3) April 1st of the year after you turn 70 ½ is always your required beginning date for IRAs, including SEP IRAs and SIMPLE IRAs. You may, however, have a different required beginning date for certain employer plan assets. For instance, if you are still working for a company where you have a 401(k) or similar plan and don’t own more than 5% of the company, you may not have to take an RMD until the year you retire, even if you’re over 70 ½ already. That would make your required beginning date April 1st of the following year.

4) April 1st of the year following the year you turn 70 ½ is the required beginning date for your own IRAs, but not inherited accounts. If you were someone’s designated beneficiary (i.e. named on their beneficiary form) and inherited an IRA, your required beginning date is generally December 31st of the year after their death. Different rules may apply if the deceased person was your spouse.

5) If you have name designated beneficiaries on your IRA beneficiary form (i.e. your spouse or children), whether or not you die before or after your required beginning date makes no difference on how those beneficiaries will calculate RMDs. If, however, you name a non-designated beneficiary (i.e. a charity or your estate) or your money ends up with one because you failed to name a beneficiary, the rules for calculating inherited IRA RMDs are different depending on whether you die before your required beginning date or not. If you die before your required beginning date, non-designated beneficiaries have to distribute all funds within five years of death. If you die on or after your required beginning date, those beneficiaries must distribute the funds over your remaining life expectancy (had you lived… I know, it’s weird) or sooner.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Jeffrey Levine and Jared Trexler

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Key Retirement Planning Dates During 2012 Tax Season

For all Americans, it’s now 2012 tax season. As we gather our information and records to prepare our federal income taxes for 2012, here are some important dates that affect retirement plans.

If you own a business that is incorporated, and you have a SIMPLE IRA plan or a SEP (Simplified Employee Pension), your business’ deadline for making a contribution for 2012 is March 15, 2013. But, if your business filed for an extension, you will have up to that deadline to make the contribution. If you own a business that is not incorporated, for example you are a sole proprietor, your business’ tax filing deadline is April 15, 2013. If you get an extension to file your taxes, that will also extend your SIMPLE IRA plan or SEP funding deadline as well.

If you turned age 70 ½ in 2012 and have a traditional IRA, you must start taking required minimum distributions (RMDs) for that year, and every year going forward. If you took that RMD last year; great! But if you didn’t, you must take it by April 1, 2013 to avoid a 50% penalty from the IRS. Don’t miss that deadline by even one day, because if you do, the 50% penalty applies. Your RMD for 2013 is also due this year by December 31, 2013. If you didn’t take your 70 ½ year RMD last year, but instead waited until on or before April 1, 2013, both RMDs you take this year will be included in your 2013 income.

If you are thinking about making a prior year (2012) traditional or Roth IRA contribution this year, you must do so by April 15, 2013. Even if you get an extension for filing your 2012 tax return, that extension does not extend your IRA contribution deadline. It must be made by April 15, 2013.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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Revised IRS Publication Addresses Key Education Savings Accounts, Penalty Exceptions

The IRS just released the updated version of Publication 970, Tax Benefits for Education (For use in preparing 2012 Returns). It discusses a relatively unknown savings account called a Coverdell Education Savings Account (known as a CESA or ESA). An ESA is set up to pay the qualified education expenses of a child or student, known as a designated beneficiary. The contribution is limited to $2,000 per year and generally must be made before the child’s 18th birthday. However, someone whose modified adjusted gross income for the year is more than $110,000 ($220,000 in the case of a joint return) cannot make an ESA contribution. The contributions aren’t tax deductible, but the distributions are tax-free if used for the qualified education expenses of the student. In an ESA, qualified education expenses include not only higher education, but certain expense for kindergarten through high school.

The American Taxpayer Relief Act of 2012 (ATRA) preserved a number of ESA provisions that were set to be expire including:
• allowing prior-year contributions through April 15
• increasing the maximum annual contribution to $2,000
• permitting tax-free distributions for elementary and high school expenses

The Publication also discusses the exception to the 10% early distribution penalty for withdrawals that are used for higher education. Generally, if you take an IRA distribution before age 59 ½, a 10% early distribution penalty applies. This rule applies to all IRAs including Roth, SEP and SIMPLE IRAs. The penalty on an early distribution from a SIMPLE IRA can be as high as 25%.

However, distributions from your IRAs for qualified higher education expenses (not from employer plans) are exempt from the penalty. You may owe income tax on the amount distributed, but you may not have to pay the 10% penalty. You cannot use your IRA penalty-free for elementary and high school expenses; it must be used for higher education expenses only. IRS Publication 970 is available on the IRS website: http://www.irs.gov/pub/irs-pdf/p970.pdf

Article Highlights:
• IRS Publication 970, Tax Benefits for Education, has been revised for 2012
• ATRA (American Taxpayer Relief Act of 2012) preserved many provisions of Coverdell Education Savings Accounts (ESAs) that were set to expire
• IRA distributions before age 59 ½ for higher education expenses are exempt from the 10% early distribution penalty

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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