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Ed Slott welcomes you to The Slott Report, your source for IRA, retirement and tax planning information.

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

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

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

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

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

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

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

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

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

- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: The Tricky Balance of Retirement Planning Funds on the Move

This week's Slott Report Mailbag includes questions about retirement planning funds on the move, namely withdrawing funds and dealing with its tax consequences. 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,

I have been contributing to a non-deductible IRA for several years. Originally, my intention was to convert them to Roth. But since I have other Rollover IRAs (from previous 401(k)s, as I understand, if I do the conversion, I will have to pool all these IRAs together for that purpose, which will trigger a large tax bill, because the balance on the Rollover IRA is 3 times the amount of the non-deductible IRA. What should I do?
ed slott IRA questions
Send questions to mailbag@irahelp.com

Also, a related question: when I retire in the future, and start withdraw money from my IRA, do I also need to pool these IRAs together and proportionally pay tax on the part that's taxable? Is there a way to pull out only the principle in the non-deductible IRA without paying any taxes?

Thanks,
Mike

Answer:
Under the pro-rata tax rule, you must add together, or “pool”, all of your non-Roth IRAs. So, when you take any IRA distribution, it will be mostly taxable. But there is one exception to the pro-rata rule. You can roll over all of your pre-tax IRA funds to a company retirement plan, if the company plan allows this, and leave the nondeductible portion in the IRA. Then the remaining IRA funds will all be tax-free, which could be converted to a Roth IRA at no cost.

2.

I am 55 years old. My company was sold to another company. Can I withdraw my 401(k) without penalty? I do not want to roll over my 401(k). Thank you for your assistance.

Mitchell

Answer:
Whether you can withdraw your 401(k) plan will depend on whether or not that plan is terminated. Most times, the plan gets incorporated into the plan of the new company. If you do not meet the plan requirements for taking a distribution, you will not be able to move your funds out of the plan. Generally, if you are age 55 and no longer working for that employer, then the 10% penalty won’t apply to any distribution you are allowed to take.

- By Joe Cicchinelli and Jared Trexler

3 Ways to Make Filing Next Year's Tax Return Less Taxing

April 16th is here. The blossoms are budding on the trees, the birds are beginning to chirp and, of course, CPAs and tax preparers everywhere are coming out of a 2 ½ month hibernation. Tax season is officially over. With that in mind, taxes may be the last thing you want to talk about right now, but with the sting of this year’s tax season still fresh, now’s the time to start thinking about a few easy steps to help make next year’s tax season a little less... well… taxing! Here are three such steps you might want to consider. 

1. Plan Ahead for Next Year and Beyond                                                                                     
tax planning and preparationIf you weren’t happy with your 2013 tax bill, the best way to make sure you don’t feel the same way again next year is by planning ahead. Here’s the rub in a nut shell, tax planning and tax preparation are not the same thing. Tax preparation tallies up your income, deductions, exemptions, credits, etc. and calculates the amount of tax you owe. That’s not to say it’s not valuable, but theoretically it should not change your tax liability, it should just report your taxes accurately and properly. Tax planning, on the other hand, can help you change your tax liability, but generally only prospectively, that is to say, in the future. Common tax planning strategies include tax loss harvesting, investing in assets that have tax-favorable characteristics, retirement plan contributions and Roth conversions (caution – Roth conversions will generally increase your tax bill for next year, but could reduce it for the long-term).

2. Make Estimated Tax Payments
The shock of a large tax bill is often hard to swallow. One way to soften this blow is by making estimated tax payments throughout the year or by increasing withholdings from your salary, pension or other eligible sources. In addition to being more palatable than one giant lump-sum tax payment in April, doing so may actually help you lower your overall tax bill by avoiding estimated tax penalties. While this may lead to you overpaying your taxes, it can be worth it. Now there are many articles that discuss why overpaying your taxes throughout the year and getting a refund is bad, and they generally have a very valid dollars and cents argument. There’s no financial benefit to overpaying your taxes throughout the year because Uncle Sam does not give you any interest on those amounts. However, not everything is always a dollars and cents issue. For many people, paying in smaller amounts each month is simply easier to stomach than a giant check in April made out to their least favorite Uncle. If the end result is an overpayment, a refund check isn’t the worst thing in the world, even if it was an interest-free loan to the government.

3. Keep Better Records
Time and time again, those with better records pay less tax. It’s best to start your new and improved system of tax organization at the beginning of the year for obvious reasons, but without any real motivation, sometimes that just isn’t a reality. Now that you’ve just filed your taxes though, that motivation is probably at an all-time high for the year. Think about it, wouldn’t filing those taxes have been easier if you had better records and were more organized. If someone else prepares your taxes, organization can save you not just time, but money. If you have your ducks in a row, that means less time your CPA or tax preparer needs to spend digging for info, which should mean a lower rate to prepare your return. So at the very least here’s what to do for the rest of this year… every time you get anything tax-related, throw it in a folder. Even if that folder, itself, is not organized, at least all your info will be in one place. That’s a good starting point and one that is sure to save you at least a few headaches.

- By Jeffrey Levine and Jared Trexler

Using Your Income Tax Refund as an IRA Contribution

If you're lucky enough to be getting an income tax refund from IRS for 2013, you might be wondering what you can do with that money. Certainly you can use it to pay some bills, or treat yourself to something you've wanted to buy for a while.

tax refund IRA contributionBut if you're thinking about using that refund to help save for retirement, you're in luck. The IRS allows you to have that refund check directly deposited into an IRA if you follow certain procedures when you file your federal income taxes for 2013.

If you have an extension to file your 2013 taxes until October 15, 2014, when you do file your return, you should consider having the IRS directly deposit your tax refund as an IRA contribution for 2014. Note: You won’t be able to have the refund count for 2013 because the deadline for making a 2013 IRA contribution was April 15, 2014. But why not consider using it as a 2014 IRA contribution?

To have the IRS directly deposit your tax refund as a 2014 IRA contribution, there are several rules you’ll need to follow. First, make sure the IRA custodian will accept it and notify them in advance.

You’ll need to file IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases), if your refund will be directly deposited to two or three different accounts. However, if you’re depositing your refund to only one account (i.e., your IRA), simply note the direct deposit information on the appropriate line of your federal tax return.

Lastly, know that you must meet all the IRA rules for making a 2014 contribution. For example, for a traditional IRA contribution, you must have compensation and be under age 70 ½ for all of 2014. For a Roth IRA contribution, you must have compensation and your income must be below certain levels to be eligible for a Roth IRA contribution (e.g. under $181,000 if you are married and filing jointly for 2014).

 - By Joe Cicchinelli and Jared Trexler

After-Tax IRA Contributions, Distributions, Conversions at Tax Time

How do I tell IRS that my IRA distribution or Roth conversion is not taxable? We get this question fairly frequently at tax time - especially if the client has done a "backdoor" Roth conversion.

The answer is IRS Form 8606.
After-Tax IRA Distribution Tax Planning
You make an after-tax contribution to your IRA or a series of after-tax contributions to the IRA. Now it is time to take the money out or you want to do a Roth conversion of the IRA. How will IRS know that some of the funds are after-tax so you won’t have to pay tax again when they are distributed?

The first thing to realize is that the IRA custodian does NOT keep track of your after-tax contributions – even if you tell them that the funds are after-tax or keep the after-tax funds in a separate IRA. They have no way of knowing what you do on your tax return so they have no way of knowing if you really take a deduction for that IRA contribution. The 1099-R that you receive from the IRA custodian for the distribution is going to say that the taxable amount is not known.

Any time you make an after-tax contribution to an IRA, you need to file IRS Form 8606 with your tax return to tell IRS that you have after-tax funds in your IRA. Without this form, IRS will assume that any funds that are distributed from your IRA account are taxable.

Secondly, you have to tell IRS that you did a Roth conversion, even if the entire amount converted is IRA-after-tax funds. There is a special section on Form 8606 for reporting Roth IRA conversions.

Finally, Form 8606 will tell you how much of your IRA distribution is taxable. This is going to depend on the total amount you have in all your IRA accounts, including SEP and SIMPLE IRAs and the total amount of after-tax dollars in your IRA. You cannot isolate only the after-tax amount and say that is what you took out of your IRA. You have to divide your total account balance into the total of your after-tax amount and come up with a percentage. The percentage is applied to your total distributions for the year to determine what amount is taxable and what amount came out of your after-tax amounts.

Example: Your total IRA balance is $100,000 and your after-tax contributions are $10,000. $10,000/$100,000 = 10%. Ten percent of all your distributions for the year will not be taxable.


- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can I Convert SEP IRA Funds to a Roth IRA?

This week's Slott Report Mailbag focuses on a SEP IRA conversion to a Roth IRA. It's an interesting question (one we don't get often), so we decided to put a spotlight on the issue in this week's mailbag. 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.

ed slott IRA questions
Send questions to mailbag@irahelp.com
I want to contribute to SEP IRA through an LLC that I own. Once in the SEP IRA account, I want to convert it to Roth IRA. Is that workable? Should I be careful of any issue?

Answer:
IRA funds, including SEP IRA funds, can be converted to a Roth IRA. As long as you are not age 70 ½ or older this year, all of your SEP IRA funds can be converted to a Roth IRA. If you are going to make future contributions to the SEP IRA you should leave enough money in the account to keep it open. There are many issues involved in whether or not you should convert to a Roth IRA. The good news is, if you later decide the conversion was not the right move for you, you can unconvert (recharacterize) some or all of your conversion by October 15th of the year after you did the conversion. Please see our website to locate an Ed Slott trained Elite IRA advisor to discuss your situation.


- By Joe Cicchinelli and Jared Trexler

3 Things You Didn't Know About IRA Prohibited Transactions

Prohibited transactions are a list of things that you cannot do with your retirement account. In fact, they are one of the worst things you can do with a retirement account. When a prohibited transaction occurs, your entire IRA is deemed distributed as of January 1 of the year you made the prohibited transaction.

IRA prohibited transactionThis can lead to any number of negative consequences, the least of which include massive taxation and penalties. Since the prohibited transaction rules are so important, the basic information can be readily found in IRS publications and other places on the web, but here are 3 things most people don’t know about them

1) Buying collectibles with your IRA money is not a prohibited transaction
If you know the IRA rules pretty well, right about now you might be thinking to yourself, “But I thought that buying collectible with IRA money isn’t allowed?” And if you were thinking that, you’d be right. You cannot buy collectibles, such as artwork, with IRA money, but doing so is not a prohibited transaction, it’s a prohibited investment. That might sound like splitting hairs, but it’s not. Unlike a prohibited transaction, where you’re entire account is deemed distributed, if you make a prohibited investment, only the portion of your IRA that is invested in such assets is deemed distributed.

Example: You have a $300,000 IRA and invested $20,000 in collectible stamps. At the time of purchase, $20,000 is treated as having been distributed from your IRA and is subject to tax. If you’re under 59 ½, you’ll also be subject to the 10% penalty. The remaining $280,000 in your IRA, however, remains intact and tax-deferred.

2) Transactions with parents or children aren’t okay, but transactions with brothers or sisters are… sort of… but not really…
Okay, I can understand where that would confuse just about anyone, but here’s the deal in a nutshell… There are certain people and entities that are specifically designated by the tax code as disqualified persons with respect to your IRA. That means that, under no circumstances (with the extraordinarily remote exception being if the Department of Labor has granted a Prohibited Transaction Exemption), can your IRA engage in any transaction with such an individual or entity. Such statutorily disqualified persons include parents, children, businesses and trusts for which you directly or indirectly own 50% or more and, of course, yourself. It doesn’t matter what the circumstances of the transaction are, such as for how much the transaction is for or whether it was made using fair market value. A transaction of just $1 with the wrong person can destroy your IRA.

You have a $500,000 in an IRA and own a few shares of privately held stock that your son would like to purchase. The shares have a fair market value of $2,000. Being a good parent, you decide to appease junior and sell him the shares for $2,000, their fair market value. Well, junior may be happy, but you sure won’t be. You just committed a prohibited transaction and your entire IRA – the full $500,000 – is deemed distributed. You no longer have an IRA but instead, have a hefty, hefty tax bill.

Now, however, suppose that you had the same situation, but your brother wanted to buy the private held stock from your IRA instead of your son. Well, interestingly enough, brothers and sisters are not disqualified persons. However – and this is a big however – there is another part of the prohibited transaction rules that says, in layman’s terms, “If you benefit from an IRA transaction in any way other than through your IRA, it’s a prohibited transaction.” Would that be the case in the example above? Maybe not, but I wouldn’t tempt fate. Remember, just one small prohibited transaction can wipe out your IRA and a lifetime of savings.

3) A prohibited transaction can cost you bankruptcy or creditor protection
As mentioned above, prohibited transactions treat your IRA as if it were distributed from your IRA account when the prohibited transaction is made. That’s true even if your funds are still physically in an account designated as an IRA (i.e., you’re still getting monthly statements from your custodian – who may not know about your prohibited transaction – that say “IRA”). Thankfully, IRAs and other retirement accounts have extremely strong bankruptcy protection under federal law. In addition, many states have chosen to enact laws that provide strong protection from creditors in non-bankruptcy situations as well. Here’s the rub… If you commit a prohibited transaction, you money is no longer deemed to be in an IRA and, therefore, any bankruptcy or creditor protection that may have been available to you could be lost. Now, on top of a tax bill, your creditors will have access to the rest of your (former) IRA funds.


-By Jeffrey Levine and Jared Trexler

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