Medical Privacy Law - Catch 22

Most of us believe that our medical and other health information is private and should be protected, and we want to know who has this information. The Privacy Rule, the Health Insurance Portability and Accountability Act of 1996 (HIPAA - a federal law), gives you rights over your health information and sets rules and limits on who can look at and receive your health information. The privacy rule applies to all forms of an individual's protected health information, whether electronic, written or oral. It prevents health care providers from disclosing your personal medical information to anyone other than you and someone you've named as your personal representative.

Old health care proxy documents that were created years ago, particularly before 1996, should be revised now as a result of this privacy law. For instance, you may have a health care proxy that names someone you want to make medical decisions for you if you're not able to make them yourself. But if you haven't also named that person as your personal representative under HIPAA, then he or she might not be able to access your medical information in order to make informed decisions.

This law also covers power of attorney (POA) documents. For example, let's say your POA document states that your agent can act on your behalf if you become incapacitated. However, if your agent isn't also your personal representative under HIPAA, then even if you do become incapacitated, your agent might not be able to access your medical records and as a result the POA might be of little value. To insure your agent doesn’t get caught in this catch 22, your POA and health care proxy documents should contain HIPAA clauses stating that the agent is also your personal representative.

In general, state laws that are contrary to the HIPPA regulations are preempted by the federal requirement, which means that the federal requirements will apply.

-By Marvin Rotenberg

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Identify Theft After Death

Apparently it is ridiculously easy to steal someone's identity after they die – before they are even buried. Thieves scan the obituaries, go online and get social security numbers, and they are in business. They can open credit card accounts, get cell phones and buy cars - all in the name of the deceased person – leaving the grieving family an additional task on their plate, that of sorting out what is a legitimate debt and what is not.

There are a couple of things that can be done to help prevent this from occurring. Several experts recommend getting multiple copies of the death certificate – 12 to 24 – enough to send to financial institutions, credit bureaus, and anyone else that may require one. Keep information in the obituary to a minimum. Don’t include full dates of birth, mother’s maiden name, or full addresses in the obituary. This information only helps the identity thieves.

Notify the three major credit bureaus immediately of the death. Provide them with a copy of the death certificate. This puts a permanent credit freeze on the deceased individual’s account and should stop most identity theft in its tracks. Several months after the death, request a copy of the credit report to double check that no new accounts were opened.

It is more important than ever that the person who will be settling your estate have a clear picture of your financial situation. Perhaps you should plan an annual “fun” event where you can have a conversation with this person and keep them up to date on your financial affairs.

-By Beverly DeVeny and Jared Trexler

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Roth Conversions and Contributions, Creditor Protection Highlight Mailbag

This week's Slott Report Mailbag includes questions on Roth conversions and contributions, the always-confusing Roth IRA 5-year rules and creditor protection for IRAs. Happy a happy, healthy Memorial Day weekend and thank you to the servicemen and women who risk their lives daily to defend and protect us. 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.

Hello,

I have purchased Ed Slott's program guide package. It's very helpful. Thank you very much.

I have a question regarding a Roth IRA conversion. There is no limit to convert from tradition IRA to Roth IRA. Can I contribute the $5,000 limit to a Roth IRA in the same year I convert the traditional IRA to Roth? In other words, will the amount I convert be counted as part of the contribution?

Thanks for the advice,

Tony

Answer:

Send your questions to mailbag@irahelp.com

Roth conversions are in addition to the amount you can contribute annually to a Roth IRA. You can convert $100,000 (or any other amount) to a Roth IRA and still make a contribution to any Roth account. Anyone can do a Roth conversion at any age. In order to make a Roth contribution, you must first have earned income (compensation) and your income cannot exceed certain limits. If you are married, filing jointly, your ability to contribute to a Roth IRA will phase out when your modified adjusted gross income is between $173,000 and $183,000. For individuals who file as single or head of household, the phase-out range is $110,000 to $125,000. You can find more numbers from 2012 IRA and tax tables at www.IRAhelp.com/2012.


2.

I have one question about the 10% penalty on non-qualified distributions.

Assumptions: I made my first Roth contribution 10 years ago. I converted an IRA to a Roth two years ago. Today I attain age 59 ½. Tomorrow I will take a distribution attributable to the Roth conversion.

The distribution will be a qualified distribution because I will be over age 59 ½ and I will have made my first Roth contribution over five years ago. Will the 10% penalty apply to the distribution because the conversion occurred less than five years ago? I thought the penalty only applied to non-qualified distributions.

Chuck

Answer:
There are two five-year rules for Roth IRA distributions. The first thing to keep in mind is that all of your Roth IRAs are considered one Roth account for distribution purposes. You could have your Roth contributions in one account and your conversion in another account, but for distributions they are treated as one account.

The first funds out of a Roth IRA are considered to come from your contributions, even if you take it from an account that contains no contributions, only converted amounts. Contributions are always distributed tax and penalty free, regardless of any five-year rule or of your age.

Once your contributions are gone, then your distributions are deemed to come from converted amounts, first in, first out. Each conversion is subject to its own five-year holding period. These distributions will be subject to the 10% early distribution penalty if you have not held it for five years and you are not yet 59 ½ on the date of the distribution. In your case, you are now over 59 ½ so the 10% early distribution penalty will not apply (it never applies to any distribution made after the age of 59 ½).

After your contributions and your conversions are totally distributed, then distributions come from earnings. This is where the other five-year rule comes in. In order for distributions of earnings to be tax and penalty free you must have established any Roth IRA more than five years ago and the distribution must be made after age 59 ½ or be due to death, disability of the account owner, or for a first-time home purchase (lifetime cap of $10,000).

You are now in the home-free zone. You have a Roth account established over five years ago and you are over the age of 59 ½. All distributions to you or to your beneficiaries will be tax and penalty free.


3.

Hi Ed and Beverly,

I would like to know if a Roth IRA is exempt from any and all tax liens from state and federal municipalities. I read that any account that has a maximum value of one million or less is also exempt. Can you also let me know if they are excluded from any and all collection agencies?

TKG

Answer:
State law generally provides creditor protection for IRAs. You will have to determine what protection your state provides for your IRA accounts. IRAs have federal protection in bankruptcy. The federal exemption is currently almost $1,200,000 since it is indexed for inflation. Under the federal bankruptcy rules any employer plans rolled over to IRAs are 100% exempt as are SEP and SIMPLE IRAs. The IRS can take (levy) your IRA for unpaid federal taxes.

-By Beverly DeVeny and Jared Trexler

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IRA-Related Tax Breaks for Certain Military Members and Their Families

Memorial Day is almost here, and it should serve as a reminder that we owe a great deal of thanks to all the members of our armed forces, both past and present. With that in mind, today we chose to highlight a couple of IRA-related tax breaks that are available to certain members of our military and their families.

10% Penalty Exception for Active Reservists
In general, a 10% penalty applies to any IRA distributions you take before reaching age 59 ½. The tax code does, however, provide a number of exceptions to this rule that will allow penalty-free distributions from an IRA at a “young” age. One such exception is for active reservists who are called away to active duty for more 180 days.

In order to qualify for this exception, the distribution must be taken while the reservist is on active duty. Although this provision was initially a temporary benefit, it was made a permanent addition to the tax code as part of the Heroes Earning Assistance Relief Tax (HEART) Act of 2008.

Repayment of Distributions Taken Under Active Reservist Exception
If an active reservist takes a distribution from his IRA that qualifies for the active reservist exception, he or she may repay all or a portion of that distribution to an IRA provided they do so within two years of the end of their active service. The repayment is not taken into consideration for annual contribution purposes and is not deductible. As a result, any such repayment would create basis that should be kept track of on Form 8606 or the repayment should be made to a Roth IRA.

Contribution of SGLI Benefits to a Roth IRA
When you join the military, you know you’re making a big commitment and that some day you may be called upon to risk your life in defense of the United States. Unfortunately, that risk sometimes requires the ultimate sacrifice.

When a member of the armed forces dies, their loved ones may receive proceeds from a Service Group Life Insurance (SGLI) policy. These proceeds can be contributed to a Roth IRA within one year of receipt. The funds go in as contributions (and without regard to the annual contribution limits) so they can be withdrawn at any time by the Roth IRA owner without any income tax or penalty, regardless of the Roth IRA owner’s age.

You may not be a member of the armed forces yourself, but chances are you know someone who is, or the family members of such individuals. If so, please take a moment to pass this information along to them. The brave men and women who risk their lives in defense of our country deserve all the help they can get.

Thank you, servicemen and women, for your service!

-By Jeffrey Levine and Jared Trexler

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