You Will Receive Your 2013 IRS Form 1099-R by the end of January

You’ll be receiving a copy of your 2013 IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., if you took a distribution from your employer retirement plan or IRA last year. The employer plan or IRA custodian has to send you a copy by January 31, 2014. You’ll need to give your tax preparer a copy of it so that your retirement plan distributions are correctly reported on your federal income tax return. For 2013, there are two types of IRA distributions that are often confusing: qualified charitable distributions (QCDs) and rollovers between IRAs.

QCDs were available in 2013 but have expired. QCDs were tax-free transfers from your IRA at age 70 ½ or older that were sent directly to a charity. If you did a QCD last year, you may be surprised to find that the custodian will send you a Form 1099-R showing the distribution as taxable. While this may appear to be a mistake, it’s actually correct. There is no special Form 1099-R reporting for QCDs, but don’t worry; simply tell your tax preparer about it and he or she will show the QCD as a tax-free withdrawal when they do your tax return. See the instructions for IRS Form 1040 on how to do that.

Form 1099-R is also issued when you do a tax-free rollover of an IRA distribution to another IRA. The form will show the gross amount of your IRA distribution and also the taxable amount in boxes 1 and 2 respectively. Even though box 2 says that your distribution is taxable, this does not necessarily mean you owe taxes on that amount. Because rollovers are tax-free, tell your tax preparer that your IRA distribution was properly rolled over so he or she can show it as tax-free on your tax return. Note that IRS Form 5498 will show that the funds were rolled over to an IRA.

- By Joe Cicchinelli and Jared Trexler

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Differences between 401(k), Roth 401(k) and Roth IRA

We are starting to get asked whether or not there are required distributions from Roth 401(k), Roth 457(b), and Roth 403(b) accounts. The answer is - Yes. Following is our chart that compares some of the features of Roth IRAs, Roth 401(k)s, and 401(k)s. For ease, we refer to all Roth employer plans as Roth 401(k)s, but that includes Roth 403(b) and Roth 457(b) accounts as well.

Roth 401(k) Comparison Chart

	Roth IRA	Roth 401(k)	401(k)
Contribution/Deferral Limits*	$5,500 for 2014 plus $1,000 catch-up if you are 50 or older	$17,500** for 2014 plus $5,500 catch-up if you are 50 or older	$17,500** for 2014 plus $5,500 catch-up if you 50 or older
Matching Contributions	None	If the plan allows***	If the plan allows
Income Limits	Yes	None	None
Taxability of Contributions	Contributions are after-tax	Deferrals are after-tax	Deferrals are pre-tax
Rollovers	Only to other Roth IRAs	Only to Roth IRAs or Roth employer plans	To most other retirement plans - To Roth IRAs; To Roth 401(ks) as of late 2010
Required Distributions	None to Roth IRA owner	At age 70 1/2 (If you are still working and are not a 5% owner, distributions are deferred until you are no longer working)	At age 70 1/2 (if you are still working and are not a 5% owner, distributions are deferred until you are no longer working)
Non-Qualified Distributions	Use Roth ordering rules	Use pro-rata rule	Not applicable
Qualified Distributions	Made 5 years after date first Roth IRA was established AND after age 59 1/2, OR Death, OR Disability, OR first-time homebuyer	Made 5 years after date each Roth 401(k) was established AND after age 59 1/2, OR Death, OR Disability	Not applicable

*An individual who has traditional IRAs and Roth IRAs can contribute a maximum total of $5,500 to all their IRAs (in 2014), not to each IRA. An employee with a 401(k) and a Roth 401(k) can defer a maximum total of $17,500 (in 2014) to both types of accounts, not to each account. If age 50 or older, the catch-up amount is added to the contribution or deferral amount.

** Contribution limits for governmental Roth 457(b) and 457(b) plans are different from other employer plans

***Matching contributions cannot be allocated to the Roth 401(k) account. They must go into the 401(k) account.

The reason you have differences between Roth IRAs and Roth 401(k)s, including required distributions from the Roth 401(k), is that the employer plan rules apply to Roth 401(k) accounts. However, you can get out of the required distributions from the Roth 401(k) by rolling those assets to a Roth IRA before the year you turn 70 ½.

- By Beverly DeVeny and Jared Trexler

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

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

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

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

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

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

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Ruling to Remember: Waiving the 60-Day Rollover Requirement

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

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

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

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

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

- By Beverly DeVeny and Jared Trexler

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Slott Report Mailbag: Does The Once-Per-Year-Rollover-Rule Apply to Distributions From 401(k)s?

This week's Slott Report Mailbag gets into the Roth IRA 5-year rules - a tricky topic we talk about often in this space - as well as the once-per-year-rollover-rule and disclaimer planning. These topics showcase the depth of IRA distribution and retirement planning and the intricacies, detail and potential danger involved in this area. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

Send questions to [email protected]

1.

I opened a Roth IRA in 2001. I took all the money out in 2013 when I turned age 59 1/2. Although the account was still open a few months longer, there is no money in it.

Now, 6 months later, I want to do a Roth conversion with an investment of $30,000 that is currently in my self-directed IRA at another institution. The upside potential for this $30,000 investment in the next 5 years is huge so it seems to make sense that it would be better off in a Roth.

Can I open a new Roth IRA at this different institution and make my Roth conversion without having to wait 5 years?

Are there any guidelines for valuing this investment (a private offering memorandum) at the time of the conversion or is it valued as just the monies that you have invested?

Thank you so much!
Robin Heninger

Answer:
You can open a Roth IRA at any institution at any time. The conversion is taxed on the fair market value of the assets when they’re distributed from the IRA. Because you are over age 59 ½, there is no 10% penalty if you withdraw the conversion funds within 5 years. Also, because you opened your first Roth IRA in 2001 (i.e., more than 5 years ago) and you’re over age 59 ½, all distributions are now considered qualified and thus tax-free. IRS has been very clear that IRA assets must be valued at fair market value both for Roth conversions and for RMD (required minimum distribution) purposes. You should be sure that the value placed on your investment is one that would pass IRS scrutiny.

2.

Dear Slott Mailbag -

Taxpayer was a partner in a law firm. A few years back he left the firm, selling back his partnership interest, and was employed by a new law firm as a W-2 employee.

In 2013, he rolled over a portion of the 401(k) plan from his original firm to a new IRA account. The 401(k) plan had two "components" - a Profit Sharing component and a Partners’ component. The rollover came from the Profit Sharing component.

He now, still in 2013, wants to roll over more money from both components of the 401(k) plan to the same new IRA account to which the first 401(k) withdrawal was transferred. He will then purchase a real estate investment in this new IRA account.

I am aware of the one-year restrictions on IRA-to-IRA accounts - but the above is from a 401(k) plan to an IRA plan. Is there any reason that the Taxpayer cannot do what he now wants to do - rollover more money now from the two components of the 401(k) plan to the IRA account created from the first rollover?

Thank you!

Answer:
The one-rollover-per-year rule does not apply to distributions from 401(k)s. He can rollover more money now to the same IRA or to a new IRA.


3.

Hi IRA,

My mom recently passed away and she had an IRA on which myself, my brother and my sister are named as equal beneficiaries. For reasons I won't get in to, my sister is considering disclaiming her portion. If she does so, would her portion then be split equally between my brother and me? Thanks for taking my question.

Michael Willemsen

Answer:
If she files a qualified disclaimer of her portion of that IRA, the result is as if she died before you and your brother. Typically, her disclaimed portion would be shared equally between the two remaining beneficiaries. You should seek advice from an attorney as a disclaimer is a legal document. You should also check with the IRA custodian to determine who would inherit the disclaimed share before any disclaimer is actually done.

-By Joe Cicchinelli and Jared Trexler

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

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


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

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

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

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

- By Joe Cicchinelli and Jared Trexler

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Ruling to Remember: 60-Day IRA Rollover Requirement

In this month's Ruling to Remember, we take a look at Private Letter Ruling 201339002, submitted in late September 2012 as a waiver request to the 60-day IRA rollover requirement.

Taxpayer A, who we will call Joan, received a distribution from three separate IRAs then decided to shop around at different financial institutions for more favorable interest rates. She finally settled on a new bank, but was informed that her rollover contribution could NOT be accepted because it was past the 60-day IRA rollover window.

IRS rules that the information presented and the documentation presented by Joan indicated that she withdrew an IRA distribution with intent to redeposit the funds at a later time into another IRA that would yield a better rate of return. However, she did NOT demonstrate that her former bank had a duty to inform her of her 60-day IRA rollover requirement.

Her waiver was denied.

What You Should Learn:
A financial institution does NOT have an obligation to give advice (i.e. you better roll over the funds you are taking away from us to another financial institution within 60 days). If they are silent, they have no liability. They only have liability when they say things in error. YOYO, as Ed Slott says - you are own your own.

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Government Shutdown: Are You on Furlough and Thinking About Taking an IRA Distribution?

If you are on furlough thanks to the government shutdown and thinking about taking a distribution from your IRA, here are some things you need to know.

There is no such thing as a hardship distribution from an IRA. Generally, funds you take from your IRA will be subject to income tax and the 10% early distribution penalty, if applicable. If there are after-tax funds in any of your IRAs, your distribution will include some of your after-tax amounts. You must file IRS Form 8606 with your tax return to calculate the amount of any distributions that are income tax free.

Distributions can be rolled over within 60 days. You have 60 days from the date you receive IRA funds to replace them in the same IRA or a different IRA. However, you can only make such a rollover IF you have not done another 60-day rollover in the past 12 months either into or out of the IRA making the distribution. IRS can grant an extension of the 60-day rollover period under certain circumstances. There is a fee of $500 - $3,000 to apply for an extension. That is just the IRS fee. If you use a professional to prepare the waiver request, there will be additional fees. If you miss the rollover deadline, the distribution will be taxable and, if applicable, the 10% early distribution penalty will apply.

Exceptions to the 10% Early Distribution Penalty for IRAs:
Death
Disability
72(t) (substantially equal periodic payments)
Medical Expenses
IRS Levy
Active Reservists
Higher Education Expenses
First-Time Home Buyer
Health Insurance if you are Unemployed

If your distribution from the IRA qualifies for any of these exceptions and you are under age 59 ½, you will not have to pay the 10% early distribution penalty. Income tax will still be owed on the distribution. You can find more information on all of these exceptions to the penalty in IRS Publication 590. It is available on the IRS website, www.irs.gov. The website continues to be available during the government shutdown. To claim most of these exceptions, the IRA owner must file IRS Form 5329 with their tax return.

- By Beverly DeVeny and Jared Trexler

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When NOT to Roll Over Your Company Retirement Plan Money to an IRA

When you switch jobs or retire, you are generally entitled to a full distribution from your company retirement plan funds such as a 401(k). You must be given the option to roll over those funds to an IRA. Certainly, a rollover to an IRA is a great decision most of the time. A direct rollover to an IRA is tax-free and keeps your retirement funds intact and growing on a tax-deferred basis.

Another advantage to the IRA rollover is that you can create a stretch IRA for your beneficiaries. So when you do the IRA rollover and then name your children or whomever as the beneficiary of your IRA, your beneficiaries won’t be forced to take a total distribution of the funds. They will be allowed to stretch the IRA distributions over their own single life expectancy.

But in some cases you may not want to roll over your company retirement plan funds to an IRA. One potential reason to leave the assets in your employer retirement plan is for federal creditor protection. Federal law protects your funds from your creditors while it’s inside the company plan. If, for example, you have creditor problems or are a business owner or physician who is worried about lawsuits, you may want to leave the funds in the company plan to shield them from creditors (note: to qualify for federal creditor protection the plan must have employees other than the business owner).

If you roll over company retirements funds to an IRA, federal law does NOT protect your IRA from creditors. Your IRA might be protected by state law, but this protection, if any, varies from state to state. So, before you do the rollover, you may want to find out if your state protects IRAs from creditors.

Federal law does protect your IRA in bankruptcy up to $1,245,475. Employer plan funds in an IRA receive unlimited protection. This is for bankruptcy only; not for other types of judgments such as lawsuits and creditors.

- By Joe Cicchinelli and Jared Trexler

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IRAtv: How Financial Advisors Are Educating Their Clients

In today's fragile economic landscape, financial education is crucial. It's paramount that consumers are working with educated financial advisors to steer them through a complex tax code wrought with potential pitfalls and penalties.

That is the essence of Ed Slott and Company's mission, and our YouTube page, IRAtv, is another extension serving that clear goal: matching consumers with competent, educated financial advisors.

Below are several videos detailing how some of our financial advisors are best serving their clients and centers of professional influence (CPAs, estate planning attorneys, etc.) Those familiar with our video presence will also notice a new polished look at IRAtv - one that we will carry out into our future service of educating the public and the advisors they work with each day on IRAs, tax and retirement planning.

If you subscribe to our email feed and can't view the videos below, click here to land on IRAtv's homepage and search under "recent uploads" to watch 100 informative videos.

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Spousal IRA Rollovers For Same-Sex Couples

Previously, same sex married couples did not have the spousal IRA benefits of opposite-sex married couples under the tax code. These benefits include the ability to make spousal IRA contributions, tax-free splitting of IRAs in a divorce, and spousal rollovers at death. However, the IRS recently issued guidance that gives same-sex married couples the spousal IRA benefits.

Under IRS Revenue Ruling 2013-17, same-sex marriages performed in a state that recognizes that marriage will be recognized for federal tax purposes. In essence, the IRS has adopted a “state of celebration” rule. The state where the couple currently lives doesn’t matter. For example, a same-sex couple who were married in Maryland (which allows same-sex marriages) but live in Pennsylvania (which doesn’t allow same-sex marriages), is treated as legally married for federal tax purposes. The effective date of IRS Revenue Ruling 2013-17 is September 16, 2013.

Note: the IRS ruling said that same-sex couples in civil unions and domestic partnerships won’t be treated as “married” for federal tax purposes.

In addition to general tax implications such as filing a joint federal income tax return, the IRS ruling has ramifications for IRAs. Specifically, the spousal IRA benefits are now available for same-sex married couples.

With respect to IRAs, perhaps the biggest benefit for same-sex married couples is the option to do a spousal rollover at death. Under the tax code, when an IRA owner dies, the only beneficiary who can make the IRA his or her own IRA via a rollover or transfer (often called a “spousal IRA rollover”) is a surviving spouse beneficiary.

When a surviving spouse makes the IRA his or her own IRA, the surviving spouse is treated as the IRA owner and not the beneficiary. Accordingly, the death distribution rules don’t apply. If the surviving spouse is not yet age 70 1/2, then no distributions have to be taken until then. So, as long as the same-sex couple is married, he or she can do a spousal rollover at death.

- By Joe Cicchinelli and Jared Trexler

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Slott Report Mailbag: How Do I Name a Properly Titled Inherited? IRA?

This week's Slott Report Mailbag looks at the once-per-year rollover rules, touches on how to name a properly titled inherited IRA and once again dissects the always-confusing Roth IRA 5-year rules. 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.

Send questions to [email protected]

Is there a rule that says the holder of an IRA-CD can get the higher interest rate at a bank once in a calendar year, even if the CD is for a longer term? Can banks have differing rules on charging for RMD withdrawals from IRA-CD's?

S. Vogel

Answer:
There is no IRS rule that governs when you can get a higher CD rate. Check your CD documents to see if you’re entitled to transfer your IRA funds to a higher paying CD. Banks can charge fees and/or CD penalties for RMD withdrawals, but those fees and penalties must be disclosed to you. Fees can be different among banks. What you, as the IRA account owner, have to be careful of are the 60-day rollover rules. A rollover is when a distribution from an IRA is made payable to you and you then take the funds and put them back into an IRA. You can only do this type of transaction once every 12 months on the same funds. If you have any questions on this, you need to consult with an advisor who specializes in the IRA rules. This is not necessarily the person you talk to at the bank. For a list of Ed Slott trained advisors, go to our website: www.irahelp.com.

2.

I am confused about the naming of a stretch IRA. Per your book, you indicate an IRA inherited by child must be named "John Smith, IRA (deceased 10/27/11) FBO John Smith, Jr., beneficiary". My IRA is currently named "Company A custodian FBO John Smith IRA". How would this be renamed?

Answer:
There is some leeway on how a properly tiled inherited IRA is titled. The title must have the name of the beneficiary and the deceased IRA owner, and use the social security number of the beneficiary. For example, another correct inherited IRA title could be “John Smith, Jr. as beneficiary of John Smith, IRA.”

3.

Hello,

I was hoping you could clarify a question I have regarding the 5-year window for converted Roth IRA funds.

Is it accurate that if the first year IRA contribution was made more than 5 years ago and the investor is over 59.5 that the 5-year window for each conversion really no longer applies?

I thought that each conversion had its own 5-year window, but I just read that if the Roth had been initially funded over 5 years ago and the account owner is over 59.5 that it really doesn't matter.

Thank you,

Ryan

Answer:
The answer to both of these questions is the same. The 5-year rule for conversions has to do with the 10% early distribution penalty. If the account owner is age 59 ½ or older now, there is no 10% penalty on a distribution of a converted amount. When the account owner is under age 59 ½ and takes a distribution of a converted amount within the first 5 years, the 10% early distribution penalty will apply.

The other 5-year rule applies to a qualified distribution. Once you have qualified distributions, there are no taxes or penalties on any amounts withdrawn. To be qualified, a distribution must be:

taken 5 years after your first Roth IRA is established
AND
after attaining age 59 ½; OR
after your death, disability, or for a first time home purchase.

- By Joe Cicchinelli and Jared Trexler

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Slott Report Mailbag: What Part of My Lump Sum Distribution is an Eligible Rollover Distribution?

This week's Slott Report Mailbag looks at retirement plan distributions and moving money to tax-free territory. We dissect these two issues below, and remember, if you have a question make sure to email us at [email protected].  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.

Enjoy your articles greatly.

Send questions to [email protected]

My question is, say I am 63, receiving Social Security and a pension. My wife is 5 years younger. We both had company 401(k)s.

When she retires, I figure her Social Security, 401(k) distributions and pension may throw us to the 25% tax bracket.

What I want to do is take $30,000 distributions from my 401(k), figuring to use about $10,000 of it. I want to throw the excess $20,000 into my existing Roth IRA so that I have some more tax-free income in the future when we may be at the 25% tax bracket.

Is this allowed and are there any limits?

Thanks

Rich McBride

Answer:
You can convert any amount of your 401(k) distribution to a Roth IRA. There are no dollar limits on the amount of money that can be converted to a Roth IRA nor are there any income limits that would prevent you from doing a conversion. The amount converted will be taxable. It is considered ordinary income and can push you into a higher tax bracket. It can also affect your deductions, credits, exemptions and phase-outs. If, after doing your tax return for 2013, you decide that the conversion is no longer what you want to do, you can undo (recharacterize) all or some of the converted amount up to October 15, 2014.

2.

A pension plan participant has been receiving monthly payments during 2013.

The pension plan is terminating and the participant has been offered a lump-sum cash out option. She wishes to elect this option (with spousal consent) and roll the lump sum to an IRA (non-Roth).

Question: What portion of the lump sum is an eligible rollover distribution?
a. All but the full normally computed required minimum distribution?
b. (a) but reduced (not below $0) by the sum of the monthly pension payments received?
c. Other?

Question: Will the amount rolled over be subject to a second minimum required distribution in 2013?

Thank you.

Answer:
The amount that’s eligible for rollover is the full amount minus any required minimum distribution (RMD) of the pension plan for 2013 that she hasn’t taken yet. Assuming she’s age 70 ½ or older this year, she doesn’t have to take a second RMD from the IRA on the pension rollover amount.

- By Joe Cicchinelli and Jared Trexler

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

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

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

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

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

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

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

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

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

- By Jeffrey Levine and Jared Trexler

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Supreme Court Rules Defense of Marriage Act is Unconstitutional: IRAs are Affected

On June 26, 2013, the Supreme Court ruled that the Defense of Marriage Act (DOMA) was unconstitutional. The ruling opens the door for same-sex couples who are married under state law to enjoy the same tax benefits that opposite-sex married couples have.

Under DOMA, only opposite-sex couples were considered married under federal law; however its legality was challenged by Edie Windsor. Ms. Windsor and her partner, Thea Spyer, were considered married in New York. Spyer left her entire estate to Windsor, but because of DOMA, the estate did not qualify for estate tax breaks for married couples, resulting in the payment of federal estate taxes of over $363,000. Windsor sued for a refund of those taxes claiming DOMA violated the equal protection clause of the Fifth Amendment of the Constitution.

The Federal District Court and an Appeals Court agreed with her and ruled she was entitled to a refund of the estate taxes, plus interest. The US Supreme court agreed to hear the case.

The Supreme Court ruled that DOMA is unconstitutional by treating legally married same-sex couples differently from married opposite-sex couples. This ruling has an impact on how same-sex couples will be taxed. It also affects IRAs.

The same federal tax benefits that have been available to opposite-sex couples will now be available to same sex couples. These benefits include, among other things, the ability to file a joint federal income tax return, and the ability to claim each other’s tax deductions, for example medical expenses.

With respect to IRAs, many spousal benefits will now also be available. For example, when an IRA owner dies, a spouse beneficiary can do a spousal rollover (or transfer) of the deceased spouse’s IRA to his or her own IRA, and not have to take death distributions until they reach age 70 ½. Now, that option will be available to same-sex married couples. As long as the couple is considered married under state law, the spousal IRA benefits are available.

Other spousal IRA benefits include the ability to make spousal IRA contributions for the nonworking spouse and the ability to split retirement plan assets tax free in a divorce.

The states that currently recognize same-sex marriage are: Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective 8/1/13), New Hampshire, New York, Rhode Island (effective 8/1/13), Vermont, Washington, and the District of Columbia.

-By Joe Cicchinelli and Jared Trexler

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

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

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

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

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

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

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

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

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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

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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.

1.

Mr. Slott:

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

Thank You,

Send questions to [email protected]

Walter Orlosky

Answer:
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.

2.

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

Answer:
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.

3.

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


Answer:
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.

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Slott Report Mailbag: Can I Keep Doing Backdoor Roth IRA Conversions?

This week's Slott Report Mailbag includes questions about the rules involved intended yearly contribution dates (is it when the check was postmarked or when the custodian received it?) and the backdoor Roth IRA conversion. 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.

Hi Guys,

Send questions to [email protected]

I have a question for you. I wrote a check out on 12/27/2011 for my IRA contribution for 2011. The receiving company did not open the mail until January 3, 2012 so they applied the deposit as a 2012 contribution. Because I did not write on the check memo ‘2011 contribution’ they ‘assumed it was for 2012.’ They accepted the deposit into my account. Then at the end of 2012, I deposited $6,000 for my 2012 IRA deposit, it wasn’t until I saw they funded the wrong account that they said, “oh you over funded your IRA for 2012.” I said, “no, that 2011 check was for my 2011 contribution.” They are stating because they did not receive it until 2012 they assume it’s for 2012. Taxes have been filed. Doesn’t the date of check mean something?

Please advise. I’m very upset.

Thank you so much.

Answer:
The IRS rules state that when filing a tax return or making IRA contributions, it’s the date of the postmark that matters. However, a custodian could have a policy that it’s the date they receive a check that matters to them.

2.

Can a new traditional IRA deposit for the 2012 tax year be deposited into an existing "rollover" IRA from previous years that was rolled out of a corporately sponsored plan? I am having a disagreement with a CPA friend of mine. Thanks

Answer:
Yes. In most cases, there is no longer a reason to keep rollover IRA funds separate from other IRA funds.

3.

Hello,

Every year, I need to wait until my taxes are calculated before I know if my income will allow me to contribute to a Roth IRA. If I am over the limit, I do the traditional IRA and immediately convert it to a Roth. I do not have any deductible IRAs. My question is - Is there any reason why I shouldn't just automatically do the traditional IRA and immediate conversion to Roth every year, instead of waiting to see I qualify for a straight Roth contribution? Are there any downsides to this for someone with no deductible IRAs?

Thanks in advance!

Jack Lam

Answer:
The difference is in how the distributed funds are treated. The advantage of making Roth IRA contributions directly versus a back-door conversion is that the Roth IRA contributions can be withdrawn at any time with no federal income tax or 10% early distribution penalty. Making a non-deductible IRA contribution that is then converted to a Roth IRA is a conversion. Roth conversion funds are subject to a five-year waiting period, for each conversion, for exemption from the 10% early distribution penalty if you are under age 59 ½. The ordering rules for Roth distributions state that the contributions will be deemed to be distributed first, then conversions - first in, first out.

-By Joe Cicchinelli and Jared Trexler

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Slott Report Mailbag: Can I Deposit This Check In My IRA After 60 Days?

This week's Slott Report Mailbag talks about the act of "moving money" from one retirement account (yours or an inherited account) to another. There are many tax and penalty pitfalls at play, and we dissect the right way to go through these procedures in the question-and-answer below. 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.

I retired and asked to do a direct rollover from my former employer's 401(k) plan to my IRA. The check was mailed to my house but made payable to my IRA custodian. I just realized I didn't deposit that check right away. It's now past 60 days since I received it. Can I deposit that check now or is it too late?

Send questions to [email protected]

Answer:
You're in luck. You can deposit that check even though it's after 60 days from when you received it. The 60-day rule does not apply to a direct rollover. A direct rollover is when you don't have control of the money. In this case the check was made payable to your IRA custodian, not you. Therefore, you can deposit that direct rollover check after 60 days.

2.

My Aunt died and I directly rolled over the pension money she left me to an inherited Roth IRA. Is this a tax-free rollover?

Answer:
No. This is a taxable rollover because the money was rolled into an inherited Roth IRA. If you had directly rolled over the money to an inherited regular (Traditional) IRA, it would have been a tax-free rollover. The good news is that when you later take the money out of the Roth IRA, it will generally be tax-free.

3.

I took out $20,000 from my IRA last month in one withdrawal. I'd like to complete the rollover of $20,000 with multiple deposits to my IRA during the 60-day rollover time frame. Will the IRS allow me to do that or must I roll over the entire $20,000 in one deposit?

Answer:
It's your choice. You can roll over the $20,000 in one deposit or you can do multiple deposits totaling $20,000 on separate days, as long as the deposits are made within 60 days.

-By Joe Cicchinelli and Jared Trexler

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