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.

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

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Slott Report Mailbag: Can I Convert My Non-Deductible IRA Contributions to a Roth IRA?

This week's Slott Report Mailbag discusses Roth IRA contributions, conversions and the availability of certain employer-sponsored retirement plans.  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.

For the last 15 years, I have been putting money in my traditional IRA. I have also been maxing out on my pension at work. Since I never took a deduction for my IRAs, I would like to transfer my traditional IRA to a Roth IRA. What difficulties will I have with the IRS?

John Di Paolo

Answer:

Send questions to mailbag@irahelp.com

You should have no problem converting your non-deductible IRA contributions to a Roth IRA as long as you have been filing IRS Form 8606 with your tax return in each year that you made a non-deductible contribution. The conversion of IRA funds to a Roth IRA is taxable. Because you have non-deductible contributions, those amounts aren’t taxed when they are converted but the earnings will be. There is a pro-rata rule that will apply at the time of your conversion. It can be found on Form 8606. All of your IRA accounts are looked at as one account and will be part of the pro-rata calculation. Your conversion to a Roth IRA will be partly taxable and partly after-tax based on the ratio of all of your after-tax amounts divided by the total balances in all your IRA accounts.

2.

Hello,

Can I contribute to my company 401(k), Health Savings Account (HSA), and a Roth IRA in the same tax year? If so, what are the income and contribution limits?

My wife and I are both in out middle 50s and have an AGI (adjusted gross income) of about $100,000 annually. For 2013: 8% of my paycheck is withheld for our company 401(k) (maximum % the company will match funds). I have $6,500 that will be funding a HSA and would also like to contribute to a Roth IRA (if tax code permits).

Michael in Mount Vernon

Answer:
There are no income limits to contribute to a 401(k), however, the income limits for contributing to a Roth IRA for 2013 are $178,000 - $188,000 if you file jointly. The tax code allows you to contribute to all three if you meet the requirements for all of them.

3.

If a company already has a SEP IRA, can they contribute to an IRA for certain employees as well?

Best regards,

Stacey

Answer:
Yes. An employer-sponsored IRA arrangement allows an employer to contribute to IRAs of any employees he or she chooses. The IRA contribution is treated as wages to the employees.

-By Joe Cicchinelli and Jared Trexler

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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.

One 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

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Don't Pledge Your IRA For Any Loans

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

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

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

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

-By Joe Cicchinelli and Jared Trexler

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