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Showing posts with label Tax Planning. Show all posts
Showing posts with label Tax Planning. Show all posts

IRAtv: International Tax Questions Involving Retirement Accounts

We receive questions every day involving international tax issues as they relate to retirement accounts. Does someone need to name a United States citizen as the benefi
international tax questions retirement accounts
ciary of his/her IRA? Is the Stretch IRA option available for non-U.S. citizens? Can someone combine his/her foreign retirement plan with his/her IRA?

Ed Slott and Company IRA Technical Consultant Jeffrey Levine answers all of these questions and more in this IRAtv YouTube video on international tax questions relating to retirement accounts. Make sure to subscribe to Ed Slott and Company's YouTube page here to receive email notifications on posted informational videos.

-By Jeffrey Levine and Jared Trexler

Hardship Distributions from 401(k)s Carry a Hefty Cost

If you have a retirement plan where you work, that plan might allow you to take a distribution from it if you are experiencing financial hardship. Employer retirement plans are not required to provide for hardship distributions, so make sure to check with the plan administrator. Here is IRS FAQs regarding retirement plan hardship distributions.

Often times, retirement plans that allow you to save money from your paycheck and deposit it into the plan (known as employee salary deferral contributions) allow hardship distributions. These plans include 401(k) plans.

hardship distribution 401(k)Under IRS rules, a hardship withdrawal must be for an immediate and heavy financial need and because you have no other financial resources. If your 401(k) plan does allow hardship distributions, it must state the specific criteria to determine what is considered a hardship. For example, your plan might allow a hardship distribution but only for certain expenses, such as funeral or medical expenses or to prevent eviction.

You won’t be able to take out your entire 401(k) balance: there are limits. For example, many plans will only allow you to take out the amount you put in as a salary deferral contribution.

One of the biggest problems of taking a hardship distribution is that it is taxable to you. To make matters worse, it’s also subject to an additional 10% early distribution penalty if you’re younger than age 59 ½. And you won’t be able to avoid the tax by rolling the funds over to an IRA because hardship withdrawals are not eligible for rollover.

Another problem is that, unlike plan loans, hardship distributions are not allowed to be repaid to the plan. So, a hardship distribution permanently reduces your balance under the plan.

So between the income taxes that you’ll owe on the distribution (and maybe even a 10% penalty), plus the permanent reduction in your retirement account balance, hardship distributions are very costly.

-By Joe Cicchinelli and Jared Trexler

Roth IRA Contributions: 3 Keys You Need to Know

Ed Slott and Company IRA Technical Consultant Jeffrey Levine discusses 3 key factors you need to know when planning or thinking about a Roth IRA contribution. You can view the video below and make sure to subscribe to our IRAtv YouTube page for the latest IRA, retirement and tax planning videos.

3 Unexpected Ways Your Retirement Account Could Cost You

When managing your retirement account, you should be aware of the unexpected ways those employer-sponsored or IRA accounts could actually COST you. Jeffrey Levine details 3 of those situations in the article below.

Student Aid
If you have a child who is already a college student or is quickly approaching that age, chances are you’ve noticed the extravagant costs that have come to be associated with post-secondary education. In today’s world, a four-year degree at even the most affordable of state-run colleges can easily run into the tens of thousands. It should come as little surprise then that students and parents alike go to great lengths to seek out any financial aid they qualify for to help with the cost. But can your IRAs impact your (or your child’s) ability to claim financial aid?

Well, thankfully there’s some good news here. Retirement accounts can generally be excluded from your assets when you’re filling out the free application for federal student aid (FAFSA). This includes your IRAs and Roth IRAs, as well as your company sponsored retirement accounts. It’s not all roses though. Although you can generally exclude these accounts from a FAFSA application, certain colleges and universities do look at these accounts when determining who qualifies for their own student aid programs. Plus, the FAFSA application includes questions on your income, which can be increased when you take distributions from your retirement accounts or make Roth conversions.

Medicare Premiums
What in the world does your IRA have to do with your Medicare premiums? Nothing, provided your money stays in an IRA. Start taking taxable distributions from your IRA or other tax-deferred retirement accounts though, and suddenly, your IRA can have a lot to do with your Medicare premiums.

That’s because Medicare Part B premiums are income based. For 2013, the “standard premium” is $104.90 per month. However, depending on your income, you could pay more than three times that amount! Those with the highest incomes must pay an additional $230.80 per month in 2013. Ouch! That income could be from continued employment, interest, dividends or other sources, including IRA distributions and Roth conversions.

Here’s the weird thing about the Medicare Part B premiums you need to know. They are generally based off of your tax return from two years prior. So that means that if you make Roth IRA conversion now, in 2013, you might not finish really paying for it until 2015! Some of you may be finding this out first hand this year, as Medicare Part B premiums for 2013 might be increased thanks to the additional income reported on your 2011 tax return from your 2010 Roth IRA conversion (remember, a special rule in 2010 allowed Roth converters to split income evenly over 2011 and 2012).

Taxation of Social Security
If you are currently receiving Social Security benefits, the amount of those benefits included in your gross income and subject to income tax depends on your “combined” - a.k.a. “provisional” - income. This calculation is a little complicated, but needless to say, it includes taxable income from your IRAs and other retirement accounts, as well as Roth conversions. If your income is low enough, you won’t pay tax on any of your Social Security benefits, but if your income is higher, you could pay tax on up to 85% of your benefits. If you’re planning on taking an IRA distribution or making a Roth conversion and receive Social Security benefits, you should factor in any impact it might have on the taxation of your Social Security benefits first.

-By Jeffrey Levine and Jared Trexler

Retirement Plan Simplification Legislation Proposed in Congress

On May 22nd, Congressman Richard E. Neal (D-MA) introduced H.R. 2117, The Retirement Plan Simplification and Enhancement Act of 2013, in the House of Representatives. H.R. 2117 is proposed legislation that is intended to boost retirement savings.

Rollovers of Life Insurance to IRAs Would be Allowed
The bill proposes several IRA related changes. One proposed change would allow the rollover of insurance contracts from your employer's qualified retirement plan (e.g., 401(k)) into your IRA. Currently, you cannot invest any part of your IRA in life insurance contracts. You can, however, invest a limited amount of your employer retirement plan money in life insurance. Under the current rules, you can’t roll over your life insurance contract in your employer retirement plan to your IRA. The new legislation, if enacted would allow you to do so.

No Required Minimum Distribution for Balances Under $100,000
Currently, everyone who has an IRA or other retirement account must take required minimum distributions (RMDs) starting at age 70 1/2, regardless of the balances in those retirement plans. It doesn’t matter if your total balances are $50,000 or $5,000,000; you have to take RMDs. Under the proposed legislation, the RMD rules would be relaxed and you would not be forced to take RMDs if your total balance in all retirement accounts is $100,000 or less.

60-Day Rollovers for Non-Spouse Beneficiaries
Under current law, if you are a non-spouse beneficiary of someone who died and left you their IRA or employer retirement plan, you cannot move those retirement funds to a beneficiary (or inherited) IRA via a 60-day rollover. If you inherited an employer retirement plan or IRA and you’re not the decedent’s spouse, the only way to move those funds, under current law, is by way of a direct rollover or transfer. When money is moved in this manner, it goes directly from one retirement account to another and you don’t have control or use of the money while you’re moving it. Under H.R. 2117, you would be allowed to take a distribution made payable to yourself and do a rollover within 60 days, similar to the way you can move your own retirement funds.

Caution: The above proposed changes have only been introduced in Congress and are NOT law. Check back to The Slott Report for updates.

-By Joe Cicchinelli and Jared Trexler

Advisor Perspective: Ed Slott's Elite IRA Advisor Group

Ed Slott's Elite IRA Advisor Group is a membership group of financial advisors who are committed to their IRA education and serving their clients' best financial and retirement planning interests. At our last workshop this May in Dallas, Texas, Ed Slott and Company IRA Technical Consultant Jeffrey Levine spent some time with several members to get their perspective on the educational expertise they receive and how it has elevated their standing in the industry and enhanced their business.

Below are two roundtable discussions with seven members of Ed Slott's Elite IRA Advisor Group: Jeffrey Cutter, Christian Koch, Suzanne Christian, Bill Jones, Stuart Kirsner, Jude Wilson and Micah Shilanski.

Advisor Perspective #1

Advisor Perspective #2

-Compiled by Jared Trexler; Edited by Scott Currie

How to Name a Non-Spouse Beneficiary of Your Retirement Account

Life events happen. Marriage is one of those major life events that make you focus on not just the present, but the future. Ed Slott and Company IRA Technical Consultant Jeffrey Levine got married this past Sunday then sat down to talk about how you can name a non-spouse beneficiary of your retirement account.

It seems counter-intuitive, but Levine wants you to know that naming a spouse is the easy part, yet there are many current and future retirees that don't have a spouse or want to name a child or grandchildren as the beneficiary of their life savings instead. This video demonstrates the steps to take when naming a non-spouse beneficiary of your retirement account.

-By Jeffrey Levine 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

Wedded Miss: How Changing Your Last Name Affects Moving Your Retirement Money

Tradition has it that when a man and a woman get married, the woman typically takes the last name of her husband. Although today, many choose to modify this tradition, perhaps by hyphenating their maiden name with their husband’s surname, or do away with it altogether and keep their own name, there are still many who keep this tradition alive.

changing last name affects moving retirement moneyOne potential consequence of changing your name is that moving your retirement money around might become a little more challenging. This has nothing to do with any tax code rules or other laws, but is simply a result of the policies many custodians have in place. When money is transferred from one IRA directly to another IRA in a trustee-to-trustee transfer, many custodians want to have everything "match-up" before they will accept the funds. That means that if you have your maiden name on an old IRA or plan account and your married name on the new one, the transfer might be blocked, at least temporarily, by one or both of the custodians.

So what can you do if such a situation presents itself? There are really three main options to choose from. The first option, and one we would NOT recommend, is taking a distribution from your old account payable to you, depositing it in your bank account and then writing a new check to your new custodian using your new name. This solution, however, is rife with potential problems.

For instance, if the distribution is coming from a plan, the plan might withhold 20% for taxes, which would have to be made up with personal funds in order to avoid the withheld amount from being subject to income tax and perhaps the 10% penalty. Plus, whether it’s coming from a plan or an IRA, you only get 60 days to complete this process. That may seem like a long enough time but there are hundreds of IRS private letter rulings asking for an extension of the 60 days that indicate otherwise.

Your second option, and a good one at that, is contacting the new custodian and letting them know about your situation. Ask them what policies, if any, they have in place for such a situation. Perhaps completing your transfer will be as simple as submitting a copy of your marriage license or court documents showing a change of name.

If for whatever reason your new custodian is hard to deal with on this issue, your third option is going back to the old custodian and trying to change your name there first. This way, when you initiate your transfer, your names will match. This option requires you to deal with the old custodian, from whom you are taking the funds, and oftentimes people prefer to avoid this option, if possible, for reasons of personal comfort.

Transferring funds between retirement accounts is but one of the many issues to consider after changing your name for one reason or another. Beneficiary forms, wills, trusts and any other important documents should also be updated. You often don't need any of these documents after a significant event or until something has gone wrong, and that seems like a bad time to have to start dealing with this.

-By Jeffrey Levine and Jared Trexler

Prohibited Transactions Can Come Back to Haunt You

Two individuals wanted to purchase a business together. They set up self-directed IRAs and a corporation to hold the business. The self-directed IRAs purchased the shares of the new company, which then purchased an ongoing business. The purchase of the business was partly funded with loans that were personally guaranteed by the two individuals.

The IRAs were later converted to Roth IRAs. Eventually the Roth IRAs sold the stock held in the business at a profit. IRS got wind of all of this and sent the individuals tax notices for tax on the gains realized from the sale of the stock and for accuracy related penalties. The individuals took the case to tax court.

The ultimate decision of the tax court was not good for the IRA owners. The judge found that the tax code prohibits a direct or indirect extension of credit between IRA assets and a disqualified person. He found that the loan guarantees were an indirect extension of credit by the individuals to the IRAs through the business the IRA owned.

The court found that once the prohibited transaction occurred, the IRA was no longer qualified and that the prohibited transaction continues to exist until the loan is paid. When the IRAs were converted to Roth IRAs, the Roth IRAs were not qualified because the IRAs were not qualified. Therefore, the gain on the sale of the stock was taxable in the year it occurred.

When prohibited transactions occur in an IRA, the repercussions may not be felt until many years later. If the consequences from the prohibited transaction are not properly reported to IRS, there is no statute of limitations. IRS can come back at any time and assess penalties due to the prohibited transaction. In this case, the individuals were also hit with accuracy related penalties.

Any time you want to do something out of the box with an IRA, you have to be very sure that you know what you are doing in order to stay out of trouble. The prohibited transaction rules are nothing to laugh at.

-By Beverly DeVeny and Jared Trexler

State Income Tax Consequences of an IRA Contribution

Just about 24 hours ago, the wheels of my plane touched down in Dallas, Texas, site of this week's Ed Slott's Elite IRA Advisor Group and Master Elite IRA Advisor Group Conferences.

Texas is a great place to visit. If you haven't been yet, I'd highly recommend it. It's also not a bad place to call home, especially since it's one of just seven states that doesn't have a state income tax (Alaska, Florida, Wyoming, Nevada, South Dakota and Washington are the other six).

ed slott IRA contribution state income taxWith no state income tax to worry about, Texas residents don't have to worry about the state tax impacts of making IRA contributions. Since there is no state income tax, a deduction for making an IRA contribution is irrelevant. Plus, when IRA distributions are made in the future, Texas residents will only owe federal income tax on those distributions (assuming the Texas' tax laws remain the same).

If you happen to live in one of the other 43 states, figuring out the state income tax consequences of making an IRA contribution is likely to be a bit more taxing (pun definitely intended).

Thankfully, many of the 43 states that impose a state income tax follow the federal income tax rules for IRA contributions. Take New York, for instance. If you live in New York, the state income tax rules governing the taxation of your IRA contributions are essentially the same as those on the federal level. In other words, if you get a deduction for making an IRA contribution on your federal income tax return, you'll generally get one on your New York State income tax return as well.

Other states make things even more complicated by abandoning or modifying the federal income tax rules for IRA contributions. Massachusetts is a good example of this. Massachusetts, like most states, imposes a state income tax. However, unlike most states, Massachusetts does not follow the federal income tax rules for IRA deductions. Instead, no IRA deduction is allowed at the state level.

The result?I f you live in Massachusetts, or a state with similar rules, and make an IRA contribution, you could end up with IRA money that has a split personality. On the one hand, you could get a current tax deduction on your federal income tax return, leaving future distributions of those funds subject to federal income tax (when those distributions take place). On the other hand, since no deduction would be allowed for your IRA contribution at the state level, you'd have basis (after-tax money) for future state income tax purposes only. Provided you keep accurate records and fill out the appropriate forms, portions of your future IRA distributions should be state income tax free.

Most people pay close attention to the effect their IRA contributions have on their federal income tax return, but if you live in one of the 43 states that has its own state income tax, you should be aware of how those contributions will affect your state income tax bill as well, now and in the future. If you aren't sure of the specific rules in your state, it's usually a good idea to start by asking a knowledgeable financial advisor or tax professional.

-By Jeffrey Levine and Jared Trexler

Roth Conversions and the 2013 Taxes

A Roth conversion could cost you more in 2013. That's because of several new and/or increased taxes in play for this year. The top income tax bracket is 39.6% for individuals married filing jointly with taxable income in excess of $450,000. A large Roth conversion could easily push an individual into the highest income tax bracket. When adjusted gross income for our married couple exceeds $300,000, personal exemptions and itemized deductions begin to phase out. And, when modified adjusted gross income exceeds $250,000, net investment income for our married couple becomes subject to the 3.8% surtax. So you can see how a Roth conversion could cost an individual more in taxes this year.

So, why do a Roth conversion? The above mentioned taxes are all “permanent,” at least until Congress changes the tax law again. When considering a Roth conversion, you do not want to look short term. Short term means all we are looking at is the taxes due today on the conversion. You want to look long term. Long term you are going to have to deal with these taxes each year. When you get to age 70 ½ you will have mandatory distributions from your retirement plans. Consider whether or not those required minimum distributions (RMDs) will push you up over any one or more of the limits described above. The only way to get out of RMDs is to get rid of your traditional IRA and similar retirement funds. One way to do that is to do a Roth conversion.

Doing nothing means you could feel the pain year, after year, after year. The taxes owed on a Roth conversion are a one-time hit - you only feel the pain once. Later on, when you would have to be taking those taxable RMDs, you can take income tax-free distributions from your Roth IRA instead, if you need money.

There are other considerations when doing a Roth conversion. You must have the funds to pay the income tax on the conversion - preferably non-retirement funds. Using non-retirement funds has the added benefit of reducing future net investment income that could potentially be subject to the 3.8% surtax. If you are going to need to spend your retirement funds in your retirement, a Roth conversion may not be the best thing for you to do. You might be better off spreading the tax out over a number of years.

You can do partial conversions of your IRA to a Roth IRA. Many individuals do this to “fill up a bracket” or to lessen the amount they have to pay in income tax each year. When using this bracket method, you convert only the amount that takes you to the top of your current income tax bracket.

Deciding to do a Roth conversion is a complicated process. This article only discusses a small number of the variables to be considered. You should consult with an advisor before making your final decision. You can find a list of Ed Slott trained advisors on our web site, www.irahelp.com.

A final note - Roth conversions are not an irrevocable decision. You can recharacterize (undo) a Roth conversion up to October 15th of the year after the conversion.

- By Beverly DeVeny and Jared Trexler

3 Financial and Retirement Planning Keys As Your Wedding Nears

financial retirement planning keys during marriage
Ed Slott and Company IRA Technical Consultant Jeffrey Levine discusses 3 financial and retirement planning keys you should discuss with your impending spouse as your wedding nears. Jeffrey talked about these keys in the IRAtv YouTube video below.

-By Jeffrey Levine and Jared Trexler

More Information on IRS' Tax Filing Extension to Boston Bombing Victims

The IRS issued a News Release (IR-2013-43) that gives a three-month tax filing and payment extension to Boston area taxpayers and others affected by the bombs at the Boston Marathon on Monday, April 15th. The new deadline is July 15, 2013.

ed slott IRS tax filing extension Boston Marathon BombingThe relief applies to all individual taxpayers who live in Suffolk County, MA, including the city of Boston. It also includes victims, their families, first responders, others impacted by this tragedy who live outside Suffolk County and taxpayers whose tax preparers were adversely affected.

Eligible taxpayers now have until July 15, 2013 to file their 2012 returns and pay any taxes normally due April 15th. No filing and payment penalties will be due as long as returns are filed and payments are made by July 15, 2013. By law, interest, currently at the annual rate of 3% compounded daily, will still apply to any payments made after the April deadline.

The IRS will automatically provide this extension to anyone living in Suffolk County. Eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, and identifying themselves to the IRS before filing a return or making a payment.

Eligible taxpayers who receive penalty notices from the IRS can also call this number to have these penalties abated. Taxpayers who need more time to file their returns may receive an additional extension to Oct. 15, 2013, by filing IRS Form 4868 by July 15, 2013. Taxpayers with questions unrelated to the Boston tragedy should visit www.IRS.gov, or contact the regular IRS toll-free number at 1-800-829-1040.

IR-2013-43 did not extend any IRA or employer plan deadlines, however the IRS may do so in the future.

-By Joe Cicchinelli and Jared Trexler

IRS Provides Relief to Those Affected by Boston Marathon Bombing Tragedy

Let me start by saying we here at Ed Slott and Company were horrified and deeply saddened by the deadly bombings at the Boston Marathon on Monday. Our hearts go out to the victims and their families, and we salute the first responders and brave citizens who so courageously rushed to the aide of so many who were in need, no doubt saving countless lives.

Earlier this morning, IRS announced that it would be providing relief to some affected by this tragedy by extending the deadline for certain taxpayers to file their return. Although this relief will be of little solace for those who have lost a loved one or whose lives have been irrevocably changed, it may, at least, remove one item of worry from victims’ (or others affected) to-do lists, for now, at a time when thoughts and actions are likely best utilized elsewhere.

Here are some of the key points you need to know, followed by a full copy of IRS’ announcement of the relief.

  • The relief automatically applies to all residents of Suffolk County, MA. If you live outside this area, but have been affected, you can claim this relief by calling 866-562-5227 beginning April 23rd.
  • Relief is available to the victims of the blast, as well as their families, first responders and others impacted by the events.
  • No filing or payment penalties will apply as long as returns are filed and payments made by July 15, 2013.
  • Interest will accrue from the April 15, 2013 deadline for returns filed later, even under this relief. The interest is not something IRS has the authority to waive. Thankfully, interest rates are still a very low 3% annualized amount (but compounded daily), so even if those affected wait until the last day to file under this relief (July 15, 2013), any unpaid tax liability would only increase by about 1%.
  • Those who will still need more time to file can file an extension (Form 4868) by July 15, 2013, which will extend the filing date further to October 15, 2013.
Here is the complete release:

IRS Announces Three-Month Filing, Payment Extension Following Boston Marathon Explosions

WASHINGTON — The Internal Revenue Service today announced a three-month tax filing and payment extension to Boston area taxpayers and others affected by Monday’s explosions.

This relief applies to all individual taxpayers who live in Suffolk County, Mass., including the city of Boston. It also includes victims, their families, first responders, others impacted by this tragedy who live outside Suffolk County and taxpayers whose tax preparers were adversely affected.

“Our hearts go out to the people affected by this tragic event,” said IRS Acting Commissioner Steven T. Miller. “We want victims and others affected by this terrible tragedy to have the time they need to finish their individual tax returns.”

Under the relief announced today, the IRS will issue a notice giving eligible taxpayers until July 15, 2013, to file their 2012 returns and pay any taxes normally due April 15. No filing and payment penalties will be due as long as returns are filed and payments are made by July 15, 2013. By law, interest, currently at the annual rate of 3 percent compounded daily, will still apply to any payments made after the April deadline.

The IRS will automatically provide this extension to anyone living in Suffolk County. If you live in Suffolk County, no further action is necessary by taxpayers to obtain this relief. However, eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, and identifying themselves to the IRS before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have these penalties abated.

Eligible taxpayers who need more time to file their returns may receive an additional extension to Oct. 15, 2013, by filing Form 4868 by July 15, 2013.

Taxpayers with questions unrelated to the Boston tragedy should visit IRS.gov, or contact the regular IRS toll-free number at 1-800-829-1040.

Making a 2012 IRA Contribution AFTER April 15, 2013

Now that April 15, 2013 has passed, and the anxiety of filing our 2012 tax returns is over for most of us, some of you may be wondering if it’s possible to make an IRA contribution for 2012. The answer generally is no, but there are some exceptions.

The general rule is that deadline for making an IRA contribution for the prior year is your deadline for filing your federal income tax return. However, if you filed for an extension to file your taxes, that does not extend your IRA funding deadline. Basically, the IRA deadline is your un-extended tax filing deadline. So, for 2012, the deadline was Monday, April 15, 2013, even if you have an extension to file your taxes for 2012.

There are few exceptions to the April 15 rule. If you mailed your 2012 IRA contribution by April 15, 2013, but it was received by the IRA custodian after April 15, it’s considered timely as long as it was postmarked by April 15. The postmark can be from the U.S. Postal Service or one of three private delivery service companies, Federal Express, United Parcel Service, and DHL.

The deadline for making a 2012 IRA contribution for certain individuals serving in the military can be after April 15, 2013. If you are in the military and served in a combat zone, you may have more time to make an IRA contribution for 2012. If you served in a combat zone between January 1 and April 15, you have a minimum of 180 days after you left the combat zone to make an IRA contribution for the year. See IRS Publication 3, Armed Forces Tax Guide, for more information.

The funding deadline for making SEP or employer SIMPLE IRA contributions for 2012 can be after April 15, 2013. If the employer, not the employee, had an extension to file their taxes for 2012, the SEP and employer SIMPLE IRA contribution deadline is the employer’s tax filing deadline, plus extensions.

-By Joe Cicchinelli and Jared Trexler

Tax Time 1040 Madness

With just 5 days left in the 2013 tax season, you might be scrambling to prepare your tax returns at the last minute, but as you go to reach for that 1040, here’s the question… which one? Yes, believe it or not, there are actually many different 1040 options available to you. Which one you should use depends on a number of factors, such as your filing status, your residency/citizenship status, the credits and deductions you’re eligible to claim and even how much taxable income you have!

IRS Form 1040 taxesWhile there are many options, below we discuss in detail the 3 most commonly used 1040 forms, the 1040-EZ, the 1040-A and the good ‘ole reliable 1040, so you can see which is right for you.

Let’s start with the 1040-EZ. This is the simplest of the 1040 forms, but calling it easy (or “EZ”) is not really all that accurate. Chew on this fact for a moment… The 2012 version of Form 1040-EZ is two pages, but the instructions for those two pages? Well, they are 46 pages long! Despite the EZ’s lack of true simplicity, it’s still the lesser of all evils when it comes to 1040 forms, so if you can use the form without giving up any deductions or credits, it often pays to do so.

Unfortunately, many people cannot file1040-EZ because they fail to meet the narrow requirements for its use. For example, if you have even a single dollar of IRA distributions or income from dividends (other than from the Alaska Permanent Fund), you cannot use Form 1040-EZ. Other restrictions include, but are not limited to the following:
  • You must file as either a single person or married filing jointly
  • Your income must be from only certain limited sources, including wages, salaries, tips and limited amounts of interest.
  • You cannot claim any dependents
  • Your taxable interest was not over $1,500
  • Your total taxable income was less than $100,000
  • You don’t itemize deductions
  • You won’t claim any tax credits other than the earned income credit

Next up is the 1040-A. The 1040-A is somewhat of a hybrid between the 1040-EZ and the “regular” 1040. It has slightly relaxed restrictions (yes, you can actually have an IRA distribution here), but there are still a number of limitations on who can use the form. These include, but are not limited to the following:
  • Your income must be from only certain limited sources, including wages, salaries, tips, interest dividends, capital gains, pensions, annuities, taxable Social Security and, most importantly for our readers, IRA distributions.
  • Your total taxable income was less than $100,000
  • You don’t itemize deductions
  • You have only certain “above-the-line” deductions, including the deductions for an IRA contribution, student loan interest, tuition and fees and educator expenses.
  • You claim only certain credits, including the earned income credit, the credit for elderly and disabled, educations credits, the child tax credit, the credit for dependent care expenses and the retirement savings contribution credit.
For a more detailed list of the restrictions on filing either 1040-EZ or 1040-A click here.

If you can’t file Form 1040-EZ or Form 1040-A because you don’t meet their requirements (say, for instance, you itemize your deductions), you’re probably going to be filing the plain vanilla 1040. Remember the 46 pages of instructions for the 1040-EZ? Well you’ll be longing for those days. This year’s Form 1040 is two pages long (the same as Form 1040-EZ), but its instructions are 214 pages long!

Yes, that’s right. The instructions are more than 100 times as long as the actual form they are telling you how to fill out. Wowzers!

And if you think that’s pretty nuts, get a load of this. Most people know about Form 1040 and there are even a number of people familiar with the 1040-EZ and/or 1040A discussed above, but did you know there are even more 1040 Forms? Well if not… surprise!!! There’s the 1040-NR-EZ for certain non-resident aliens, the 1040-NR for other non-resident aliens and there are even special 1040 forms for bonafide residents of Puerto Rico.

So this year, as you finish up your last minute tax preparations, just remember that things aren’t always as “EZ” as they seem. Happy filing!

-By Jeffrey Levine and Jared Trexler


Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.