Contribute to BOTH Your 401(k) and IRA in 2013

There’s a common belief that if you have a 401(k) plan where you work and you contribute to it, you’re not allowed to also contribute to your IRA for the same year. But that’s not true; you’re allowed to contribute to both.

As far as IRA or Roth IRA contributions go, for 2013, the maximum that you can contribute is $5,500 if you’re under age 50 or $6,500 if you’re age 50 or older this year. In fact, you can contribute to both an IRA and a Roth IRA for the year, but the total limit is $5,550 (or $6,500). For example, let’s assume you’re age 60, working this year, and eligible to contribute the full $6,500 to a Roth IRA. If you decide to only contribute $4,000 to your Roth IRA, you could choose to contribute the remaining $2,500 to your IRA, bringing the total to $6,500.

Let’s also assume you have a 401(k) plan where you work. The maximum 401(k) contributions (also known as salary deferrals) you can make for 2013 are $17,500. If you are age 50 or older and your plan allows, you can also make catch-up contributions of an additional $5,500, making your total 401(k) contributions $23,000. Oftentimes, 401(k) plans have some plan-based restrictions on salary deferrals that might reduce the maximum dollar amount you can actually save. For example, your plan might need to limit your salary deferrals to pass certain IRS nondiscrimination tests.

Contributing to a 401(k) in no way limits your ability to make contributions to an IRA or Roth IRA. Roth IRA eligibility is only limited by your modified adjusted gross income and there are no income limits for contributing to a traditional IRA. The biggest limit really is how much money you can afford to contribute. If you can afford to contribute the maximum to both your 401(k) and IRA for 2013, then you can contribute a total of $23,000 ($5,500 + 17,500) if you’re under age 50 or $29,500 ($6,500 + $23,000) if your age 50 or older.

- By Joe Cicchinelli and Jared Trexler

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Contributing to an IRA When You Are Married Filing Separately

If you are married, you can choose between filing your federal income tax return as a joint return or as a separate return. In general, the married-filing separately (MFS) status typically gives you fewer tax benefits than filing jointly. That's because MFS taxpayers aren’t allowed to claim certain tax benefits such as the student loan interest and tuition deduction. You also have more of your Social Security benefits taxed. Additionally, there are certain IRA contribution and deduction rules that are generally less favorable when you file separately.

If you want to make an annual Roth IRA contribution for the year, your modified adjusted gross income (MAGI) has to be within a certain dollar range. If you’re MFS, those limits are $0 - $10,000 for 2013 and 2014. For example, if your MAGI is exactly $5,000, i.e., right in the middle of the $0 - $10,000 range, you can only contribute half of the maximum Roth IRA amount for the year. If your income is $10,000 or more, you’re not permitted to make an annual Roth IRA contribution for the year.

If you want to convert your IRA to a Roth IRA, there are no longer any income limits. Before 2010, conversions were limited to taxpayers that had less than $100,000 in adjusted gross income. Further, if you were MFS, you weren’t allowed to do a conversion regardless of your income. Fortunately, you can now do a Roth IRA conversion even if you’re MFS and even if you’re not allowed to make an annual Roth IRA contribution.

If you want to make a Traditional IRA contribution, all you need is to be younger than age 70 ½ and to have compensation from your job for the year. Even if you’re married filing separately, you can still make an IRA contribution regardless of how high your MAGI is. But, as far as taking a tax deduction for your IRA contribution, you have lower income phase-out ranges. For example, if either you or your spouse actively participates in an employer retirement plan for the year, then your ability to take a tax deduction on your IRA contribution is phased out between MAGI of $0 - $10,000. So, it is possible that you can make an IRA contribution, but you probably won’t get a tax deduction for doing so.

Filing your tax return as MFS can be tricky so it’s best that you work with a competent tax adviser.

- By Joe Cicchinelli and Jared Trexler

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Retirement-Related Tax Breaks for Military Members

With Veteran's Day quickly approaching, Ed Slott and Company IRA Technical Consultant Jeffrey Levine detailed 3 retirement-related tax breaks members of the United States armed forces can take advantage of before year-end.

Click here to watch the video if you can't view it below, and subscribe to Ed Slott and Company's IRAtv YouTube page to have the latest video updates sent straight to your inbox.

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IRS Releases 2014 Retirement Plan Limits

Many of the retirement plan annual limits are indexed for inflation. IRS has just released the plan limits for 2014. We look at those limits in some detail below.

Contribution Limits
IRA contributions are unchanged at $5,500. Catch-up contributions remain at $1,000.
Plan deferral limits are unchanged at $17,500. Catch-up contributions remain at $5,500.
The SEP contribution limit is now 25% of $260,000.
SIMPLE deferrals are unchanged at $12,000. Catch-up contributions remain at $2,500.

IRA Deductibility
Any individual with earned income who has not reached the year they turn 70 ½ can make an IRA contribution. However, if they are covered by an employer plan or if their spouse is covered by a plan, they may not be able to deduct that IRA contribution.

Single - The ability to deduct a contribution now phases out between $60,000 - $70,000.
Married filing jointly - Deductibility now phases out between $96,000 - $116,000 when the contributor is the one covered by the plan. Deductibility now phases out between $181,000 - $191,000 when the spouse of the contributor is the one covered by the plan.
Married filing separate - The limit remains between $0 - $10,000.

Roth IRA Contribution Income Limits
Not everyone can make a Roth IRA contribution. Unlike an IRA, a Roth contribution can be made at any age. However, the individual must have earned income, but that income cannot exceed certain limits.

Single - The ability to make a Roth contribution now phases out between $114,000 - $129,000.
Married filing jointly - The ability to make a Roth contribution now phases out between $181,000 - $191,000.
Married filing separate - The limit remains between $0 - $10,000.

- By Beverly DeVeny and Jared Trexler

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Simple Questions to Make Sure You Are Eligible to Make a 2013 IRA or Roth IRA Contribution

If you put money into an IRA or Roth IRA earlier this year for 2013 or plan to do so before the April 15, 2014 contribution deadline, it’s important to double check and make sure you are actually able to do so. Any amount you contribute to an IRA/Roth IRA that isn’t allowed to be there will cost you a 6% penalty if it is not timely removed by October 15, 2014. Worse yet, that 6% penalty is not a one-time penalty. Every year the errant contribution remains in the account, the 6% penalty is assessed.


Traditional IRA Contributions
If you have already made/plan to make a traditional IRA contribution for 2013, there are two important questions you need to ask yourself.

First, ask yourself, “Will I have any compensation for 2013?” The answer to this question must be “yes” in order for you to make a traditional IRA contribution. Compensation is a term used to describe only certain types of income. If you have compensation, chances are it’s from earned income, such as W-2 wages or self-employment income, but it can also be from other sources, such as taxable alimony.

The second question to ask yourself to make sure you can make a 2013 traditional IRA contribution is, “Will I be younger than age 70 ½ on December 31, 2013?” Again, the answer must be “yes.” If you are 70 ½ or older at the end of this year, you are prohibited from making a traditional IRA contribution for 2013. However, if you answered yes to question one, but no to question two, all may not be lost. You may be able to make a Roth IRA contribution.

Roth IRA Contributions
There are also two important questions to ask yourself if you have already made/plan to make a Roth IRA contribution for 2013. The first question, which should sound familiar is, “Will I have any compensation for 2013?” Note that this question is exactly the same as the first question to verify you can make a traditional IRA contribution. And just as is the case for traditional IRAs, the answer to this question must be “yes” if you want to make a Roth IRA contribution.

The second question to ask yourself if you want to make sure you can make a valid 2013 Roth IRA contribution is, “Will my income be below the applicable income threshold?” Here again, the answer must be “yes.” The precise threshold you must be under in order to make a 2013 Roth IRA contribution varies depending on your filing status. To see what your applicable threshold is, use the chart below. Also note that income, for this purpose, is modified adjusted gross income (MAGI). To see how MAGI is calculated you can click here and go to page 62 of IRS Publication 590.

Tax Filing Status	2013 MAGI
Single	$112,000-$127,000
Married Filing Jointly	$178,000 - $188,000
Married Filing Separately*	$0 - $10,000

*Married couples filing separately can determine their Roth IRA contribution eligibility using the “single” status, but ONLY if they did not live together for the ENTIRE year.

- By Jeffrey Levine and Jared Trexler

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IRS Releases Updated Form for Claiming the Saver's Tax Credit

The IRS released the 2013 version of IRS Form 8880, Credit for Qualified Retirement Savings Contributions. The form is used to claim a federal income tax credit, known as the “saver’s credit,” if you make IRA contributions or certain salary deferral contributions to your company’s retirement plan, such as a 401(k) plan. The credit is a financial incentive to save for your retirement. However, not everyone who makes an IRA or other retirement plan contribution will qualify.

To get the credit, you must meet certain rules/guidelines. Your income must be below certain limits to qualify. For example, if you are married filing jointly, your adjusted gross income (AGI) must be below $35,500 (or $17,750 for singles) to qualify for the full credit amount. If your AGI is above these AGI levels, then the credit phases out (reduces).

The maximum amount of the credit is $1,000 (or $2,000 if you file jointly and both qualify). If you qualify, the amount of the credit will reduce the federal income taxes you owe, dollar for dollar. It can even be used to reduce taxes if you are subject to the alternative minimum tax (AMT). For example, let’s say that after your federal income taxes for 2013 are calculated, you or your tax preparer initially figure that you owe $3,500 in income taxes, but you qualify for a $1,000 saver’s credit because you made an IRA contribution. You simply subtract the credit from the taxes, which results in you owing $2,500 to IRS (i.e., $3,500 - $1,000 saver’s credit = $2,500).

The credit is available if you make IRA contributions, Roth IRA contributions, SIMPLE IRA salary deferrals, and even 401(k) deferrals. Also, you can still get the credit even if you get an income tax deduction for making your IRA contribution.

- By Joe Cicchinelli and Jared Trexler

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Slott Report Mailbag: Going Back to the IRA Basics

It's fitting and all. School is in session or about to begin for many, so this week's Slott Report Mailbag provides the syllabus for IRAs 101, answering consumer questions on some of the IRA nuts-and-bolts you and your financial team must know to properly open, manage and distribute from an IRA. 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. Can I contribute to an IRA or Roth IRA on behalf of my spouse who does not work or who makes less than the contribution limits?

Answer:
Yes, you can contribute on behalf of a non-working spouse. The contribution rules are the same for the non-working spouse as they are for the working spouse. You must have earned income in order to make a contribution. The safe harbor definition of earned income is W-2 income. You can contribute the amount of your earned income or the contribution limit, whichever is less. Any taxpayer with earned income can make an IRA contribution with the following two exceptions. If you are age 70 ½ or older during the year, you cannot make a traditional IRA contribution. If your income exceeds certain limits you will not be able to make a Roth IRA contribution. The income limits will increase each year for inflation. See IRS Publication 590 for the current contribution and income limits (you could also visit www.IRAhelp.com/2013). If you are age 50 or over you are eligible to make an additional catch-up contribution in the amount of $1,000.

2. Do I have to take distributions from my traditional IRA?

Answer:
YES. An IRA, SEP or SIMPLE owner must begin taking distributions in the year they turn age 70 ½. It does not matter if you are still working or if you do not want to touch the money, you still must take a required distribution. Your IRA custodian is required to notify IRS that you have to take a distribution, but they are not required to tell IRS how much you should withdraw. The custodian is required to tell you how much you should withdraw or they must offer to do the calculation for you. You will get that letter from your IRA custodian in January each year.

A non-spouse IRA beneficiary who is named on the beneficiary form (not one who inherits through the estate) must generally begin taking distributions in the year after the IRA owner’s death although some beneficiaries may have only 5 years to distribute the entire IRA. A spouse beneficiary (one who does not move the IRA funds into an IRA in their own name) does not have to start taking distributions until the IRA owner would have been age 70 ½. However, an IRA custodian can limit the distribution options for a beneficiary. You should check the IRA agreement for each account you inherit to see what your distribution options are for that account. A non-person beneficiary (estate, charity, etc.) and a trust beneficiary have special distribution rules. See IRS Publication 590 or the IRA account agreement form for more information on the distribution rules for beneficiaries.

Any required distribution that is not taken is subject to a 50% penalty of the amount not taken and is reported on IRS Form 5498 for the year the distribution was missed.

3. Can I name a trust as the beneficiary of my IRA or Roth IRA?

Answer:
Yes, you can name a trust as the beneficiary of your IRA or Roth IRA. BUT, do not do this unless you understand all of the ramifications of having a trust instead of an individual inheriting the IRA. Always consult with an IRA expert advisor before taking this step. NEVER, NEVER, NEVER move your IRA assets into the trust or re-title your IRA into the name of the trust. Both of those actions are taxable events and you will owe income tax on the entire balance in your IRA, and you will no longer have an IRA!! The trust should simply be named as the beneficiary on the beneficiary form.

4. I just inherited an IRA or Roth IRA from my spouse. What do I do now?

Answer:
Under the tax code you have three options, but your IRA custodian may limit these options. You will need to check with the custodian to see what your options are.

1. You can leave the IRA where it is and remain a beneficiary. This is generally not recommended. When you start taking distributions, they will be accelerated and your beneficiaries may not be able to stretch distributions over their lives when they inherit from you. However, it could be beneficial for a younger spouse who will need funds from the IRA to live on before attaining age 59 ½. Distributions from the inherited IRA will not be subject to the 10% early distribution penalty. Required distributions will begin in the year the account owner (not you) would have attained age 70 ½ or in the year after death if the owner was already 70 ½.

2. You can leave the IRA where it is and have it retitled in your own name and social security number. Some IRA custodians may not allow you to do this, but it is a simple way for you to get the IRA in your own name. The account is treated as if it had always been yours and distributions to you will begin when you turn age 70 ½ or in the year after death of the account owner if you are already age 70 ½.

3. You can move the funds to an IRA in your own name. This can be either a new account or an IRA that you already had in your name. If you are under the age of 59 ½, any funds you take out of an account you own will be subject to the 10% early distribution penalty. The account is treated as if it had always been yours and distributions to you will begin when you turn age 70 ½ or in the year after death of the account owner if you are already 70 ½.

Whatever option you use, always be sure to name your own beneficiaries on the account you have inherited. Any required distributions that are missed will be subject to the 50% penalty and are reported on IRS Form 5498 for the year the distribution was missed.

- By Joe Cicchinelli and Jared Trexler

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IRA Contributions After Death

The general rule for making IRA contributions after an individual dies is that you can’t.

For instance, let’s say that Michael, age 55, earned $50,000 before he died in 2013. If he has not already made an IRA contribution for the year, his spouse, or the representative of his estate, cannot make a contribution for him after his death. IRS has a very logical explanation for this rule - there is no need for a deceased person to save for their retirement. It is hard to argue with that logic.

However, as is the case with many of the IRA rules, there is an exception. Let’s say that Michael is married to Kelly. Kelly lost her job during the recession and has not been able to find another job. Michael has been making spousal IRA contributions to Kelly’s IRA for the last couple of years. We know that there can be no contribution to Michael’s IRA now, but can a spousal contribution still be made to Kelly’s IRA?

Generally speaking, the answer is yes. As long as Kelly files her tax return as married filing jointly, she will be able to make an IRA contribution to her IRA based on Michael’s earned income. There is still a need for Kelly to save for her retirement.

For expert advice on these and other IRA questions after the death of an IRA owner, you can find an Ed Slott trained advisor on our website, www.irahelp.com.

- By Beverly DeVeny and Jared Trexler

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IRA Contributions When You Contribute to an Employer Retirement Plan

I am maxing out my 401(k) or I am contributing to a 401(k), can I also make an IRA contribution? We get asked that question a lot.

The answer is, YES. But, you may not be able to deduct your IRA contribution.

First, let's talk about the contribution. Participation in any employer retirement plan, including IRA based SEP and SIMPLE plans, does NOT impact your ability to make an IRA or a Roth IRA contribution. The only qualification is that your earned income must equal or exceed the amount you contribute. You can make a contribution for yourself and for a non-working or lower wage earning spouse as long as you file your income tax return as married filing jointly.

For 2013, the contribution limits are $5,500 per person, and if you are age 50 or older during the year, you can contribute an extra $1,000 for a total of $6,500 per person. You cannot contribute $5,500 to an IRA and $5,500 to a Roth IRA. The maximum you can contribute is $5,500, which can be split between an IRA and a Roth IRA if you wish.

Now let’s talk about deducting your IRA contribution. If you are covered by an employer plan and file your tax return as married filing jointly, for 2013, your ability to deduct your IRA contribution phases out when your adjusted gross income is between $95,000 and $115,000. If you are filing your return as single, the phase-out range is $59,000 to $69,000. If you are not covered by a company plan but your spouse is covered, the phase-out range for you is $178,000 to $188,000. If you file married-separate, your phase-out range is $0 to $10,000.

If you cannot deduct your contribution and you decide to make the contribution to a Roth IRA instead, you have a different set of rules. If your income is too high, you cannot make a Roth IRA contribution. For 2013, when you are married filing jointly, the phase-out range for making a Roth contribution is $178,000 to $188,000. If you are single, the phase-out range is $112,000 to $127,000, and if you are married filing separate, the phase-out range is $0 to $10,000.

As with most IRA rules, what seems simple has its complications. For an Ed Slott-trained advisor, please go to our website: www.irahelp.com. Don’t be a do-it-yourselfer. Mistakes made in IRAs can be very costly.

- By Beverly DeVeny and Jared Trexler

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Contributing to More Than One Retirement Plan for the Year

While many Americans aren't saving enough for retirement, there are others who are saving a lot (true story). In fact, some of you have asked whether it's possible to contribute to more than one retirement plan for the same year. The answer is generally yes, but there are certain traps you need to be aware of before jumping in to the savings game feet first.

If you are making an IRA contribution for 2013, the maximum contribution you can make is $5,500 (or $6,500 if you’re age 50 or older this year). This limit applies to both IRAs and Roth IRAs. Although you can contribute to both an IRA and Roth IRA, the combined limit is $5,500 or $6,500 depending on your age. You can’t contribute the maximum to both an IRA and a Roth IRA. For example, if you are age 50 or older this year, the maximum combined IRA and Roth IRA contribution you can make is $6,500. You could choose to make a $3,000 contribution to your IRA and the remaining $3,500 to a Roth IRA. As long as you don’t exceed your $6,500 limit, you can split the IRA contribution any way you want.

If you also participate in a retirement plan with your employer that allows you to make salary deferral contributions, you can do that in addition to your IRA contributions. For example, if you participate in your employer’s 401(k) plan for the year, the maximum amount you can defer is $17,500 if you are under age 50. If you’re age 50 or older, the maximum deferral is $5,500 more, for a total of $23,000 for the year. The IRS calls this the “annual deferral limit.” Note that your plan may set a lower dollar limit.

If you happen to participate in more than one employer retirement plan during the year, the annual limit must be combined for plans such as 401(k)s, SIMPLE IRAs, and 403(b)s. The annual limit applies no matter how many plans you participate in during the year. So, if you switched jobs during the year, and participated in more than one plan, you have to keep track of the annual deferral limit to make sure you don’t exceed the limit. If you do exceed the annual deferral limit, you will have to remove the excess and the interest it earned from the plan by April 15th to avoid tax problems.

-By Joe Cicchinelli and Jared Trexler

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Summer IRA Season: Contributing to an IRA for Your Child

Now that we are in the middle of the summer of 2013, have you ever thought about contributing to an IRA for your child or grandchild this year? It’s possible as long as certain rules are followed.

The first rule is that the child must have compensation or earnings from a bona fide job to make an IRA contribution for the year. Some children have summer jobs, either full-time or part-time. Even if the child spent all of his or her summer job money, an IRA contribution can still be made for them. The source of the funds used to make the IRA contribution doesn’t matter, so you, the parent, can make the contribution for your child using your money. Also, there’s no rule that prohibits a minor from having an IRA.

The second rule is that there is a limit on how much can be contributed. The maximum IRA contribution for 2013 is $5,500. However, if the child earned less than that, the maximum IRA contribution would be limited to the child’s earnings. For example, if your granddaughter earned $2,900 working at a summer job, the maximum IRA contribution that could be made for her is $2,900.

Starting an IRA for a child can be a great way to save, especially when you factor in the power of compounding interest. When interest is added to principal, from that moment on, the interest that has been added also earns interest. This is called compounding, and makes the account grow larger over time. But even better, IRAs have an advantage that regular bank accounts don’t; no taxes are due each year on the interest earned inside an IRA.

You should consider making a Roth IRA contribution for your child instead of a Traditional IRA contribution. Roth IRA distributions are generally tax-free whereas distributions from Traditional IRAs will be taxable.

Starting an IRA for a child that has compensation is a great way to save. The earlier you start the better.

-By Joe Cicchinelli and Jared Trexler

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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.

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Employer-Sponsored IRAs: A Retirement Plan with Unique Advantages

If a business owner is considering starting a retirement plan for himself and his employees, he may want to consider an employer-sponsored IRA. While employer-sponsored IRAs are not very well known, even to many tax pros and CPAs, they offer some unique advantages from other employer retirement plans.

Basically an employer-sponsored IRA is an arrangement where the employer makes an IRA contribution for his employees. The employer can choose to make that contribution into an IRA or Roth IRA. The employer can also choose the employees for which he or she wants to make that contribution. Unlike other employer retirement plans such as a 401(k), SEP, or SIMPLE, the employer has complete flexibility over which employees will receive an IRA contribution that year. The employer has complete discretion.

The employer would make the deposit into an IRA for each employee who is getting a contribution. All the IRA rules apply, such as the $5,500 limit for 2013 (or $6,500 if the employee is age 50 or older), the age 70 ½ rule for IRAs, and the income rules for Roth IRAs. For example, if your employer wants to make a Roth IRA contribution for you, your income (modified adjusted gross income) must be below $178,000 if you’re married filing jointly, or $112,000 if you’re single, to receive a full Roth IRA contribution.

Employer-sponsored IRA contributions are considered wages, so the contribution is taxable to you. If your employer makes an IRA contribution for you, they should tell you so that you don’t exceed the IRA limit for the year if you also plan on making an IRA contribution for yourself. If the employer contribution was made into an IRA, you might be eligible for a tax deduction. If the employer contribution is made into a Roth IRA, it can’t be deducted.

-By Joe Cicchinelli and Jared Trexler

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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).

With 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

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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

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Key Retirement Planning Dates During 2012 Tax Season

For all Americans, it’s now 2012 tax season. As we gather our information and records to prepare our federal income taxes for 2012, here are some important dates that affect retirement plans.

If you own a business that is incorporated, and you have a SIMPLE IRA plan or a SEP (Simplified Employee Pension), your business’ deadline for making a contribution for 2012 is March 15, 2013. But, if your business filed for an extension, you will have up to that deadline to make the contribution. If you own a business that is not incorporated, for example you are a sole proprietor, your business’ tax filing deadline is April 15, 2013. If you get an extension to file your taxes, that will also extend your SIMPLE IRA plan or SEP funding deadline as well.

If you turned age 70 ½ in 2012 and have a traditional IRA, you must start taking required minimum distributions (RMDs) for that year, and every year going forward. If you took that RMD last year; great! But if you didn’t, you must take it by April 1, 2013 to avoid a 50% penalty from the IRS. Don’t miss that deadline by even one day, because if you do, the 50% penalty applies. Your RMD for 2013 is also due this year by December 31, 2013. If you didn’t take your 70 ½ year RMD last year, but instead waited until on or before April 1, 2013, both RMDs you take this year will be included in your 2013 income.

If you are thinking about making a prior year (2012) traditional or Roth IRA contribution this year, you must do so by April 15, 2013. Even if you get an extension for filing your 2012 tax return, that extension does not extend your IRA contribution deadline. It must be made by April 15, 2013.

- By Joe Cicchinelli and Jared Trexler

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How to Reduce Your 2012 Tax Liability...in 2013!

There isn't much you can do now, in 2013, to lower your tax liability for 2012. One possible way, however, can not only help you save money on your 2012 taxes, but can also help you plan for retirement. I'm talking, of course, about a deductible IRA contribution. 2012 IRA contributions can be made up until April 15, 2013 and, if you meet certain criteria, you can take a deduction for that contribution, thus reducing your 2012 tax liability.

If you haven't made an IRA contribution for 2012 and are wondering if you can make a deductible IRA contribution now to help reduce your 2012 tax bill, follow the questions below to find your answer.

1) Did you have “compensation?” (Compensation only includes certain types of income, such as wages, self-employment income and taxable alimony. It does not include interest, dividends, capital gains or other passive income.)

If no, you CANNOT make a deductible IRA contribution for 2012. In fact, you can't make any traditional IRA or Roth IRA contribution at all.

If yes, move on to the next question.

2) Were you born after June 30, 1942?

If no, you CANNOT make a deductible IRA contribution for 2012. You also cannot make a nondeductible contribution to a traditional IRA.

If yes, move on to the next question.

3) Were either you or your spouse an “active participant” in a company-sponsored retirement plan for 2012? (The definition of active participation varies depending on the type of plan. For 401(k) and similar plans, there is active participation if any salary deferrals or employer contributions were made during 2012.)

If no, here’s some good news for you. You CAN make a deductible IRA contribution for 2012. Note that if neither you nor your spouse were an active participant in a company plan, there is no income limit preventing you from taking a deduction for your IRA contribution.

If yes, see below.

If you had compensation in 2012 and were not age 70 ½ by the end of the year, you can definitely make an IRA contribution for 2012, but if either you or your spouse actively participated in a company plan, you MAY not be able to deduct all or a portion of your IRA contribution.

Unfortunately, here’s where it gets a little more complex. The final answer depends on three factors:

1. Your 2012 modified adjusted gross income (MAGI)
2. Your filing status for 2012
3. Whether it was you and/or your spouse that was the active participant in 2012. 

If you know your 2012 income and filing status, you can use the following two charts to see if you can deduct all or a portion of your 2012 IRA contribution.

If you were an active participant in a company plan in 2012, click here to see if you can deduct all, part or none of your 2012 IRA contribution.

If you were not an active participant in a company plan in 2012 but your spouse was, click here to see if you can deduct all, part or none of your 2012 IRA contribution.

So make those IRA contributions now and hopefully you can save a little in taxes at the same time. If you have any questions on your ability to make or deduct your contribution, check with your tax preparer or financial advisor.

- By Jeffrey Levine and Jared Trexler

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Slott Report Mailbag: When Does an Employee Age 70.5 Have to Take an RMD?

This week's Slott Report Mailbag includes questions about where to put your IRA money, RMD requirements, and excess IRA contributions. 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.

My financial advisor told me I was going to have to put money in my IRA in their fee-based account. He said the department of labor was requiring all IRAs to be in fee-based or wrap accounts? That doesn't seem right to me. Can you help me?

Thank you!

Send questions to [email protected]

Answer:
The Department of Labor does not require IRAs to be in a fee-based account, including wrap fees. Wrap fees are fees for investment services where the fee is a percentage of money under management. There are many financial institutions that do not charge fees for IRAs or that charge minimal fees. You need to balance the fee against the level of services that are provided for that fee. It is very easy to make a costly mistake with IRA funds. Sometimes you cannot afford free.

2.

When is an employee age 70.5 required to make a RMD (required minimum distribution) from a 401(k)? The employee also has traditional IRAs.

Answer:
In a 401(k), you must begin taking RMDs for the year you turn age 70 1/2. However, if you are still working and are not a 5% owner, distributions may be delayed until you are no longer working, if the plan allows this. This rule applies to all 401(k)s, including Roth 401(k)s.

For IRAs, you must begin taking RMDs for the year you turn age 70 ½, regardless of whether you’re still working. This rule applies to traditional, SEP and SIMPLE IRAs. Under no circumstances can you take a plan RMD from an IRA or an IRA RMD from a plan.

3.

I am 73 years old and retired in March 2012. My pension consists of two components, money I had contributed through the years and money the company contributed through their defined benefit plan. Upon retirement I was given several choices as to how I wanted to take my pension distribution. I chose a lump sum to me with the money I had contributed (some of which was contributed after taxes). The money was sent to my rollover provider to be placed into my pre-existing rollover IRA.

The company component of my pension is being distributed to me in monthly pension checks. I was notified in January 2013 that due to a miscalculation by the company the amount given to me as a lump sum for rollover exceeded the amount of a provision of the Internal Revenue Code of 1986, which only allows a certain percentage of my accrued benefit to be allotted for IRA rollover. What had been given to me exceeded that percentage. I was told that anything over that percentage was considered a “prohibited payment” and needed to be removed from the rollover IRA. It was suggested that I contact my IRA provider to have the excess removed. When I do this, the money ($7500) will be returned to me (as it is money I contributed), and it and its earnings for the past 10 months will become a taxable event. I believe the company should accept responsibility for its error and cover the tax expenses I will incur as a result of this error. Is this asking too much? Do I have any other options for this money other that a taxable event? Thanks for any suggestions or enlightenment you can provide on this situation.

Answer:
The information you have provided is not specific enough for us to be able to definitively give you an answer. Whenever an overpayment occurs in a distribution from a plan, that amount is not eligible to be rolled over. In this case, the $7,500 becomes a regular contribution in your IRA and thus is now an excess contribution because you are past age 70 ½ and not allowed to make an IRA contribution. In some cases, your ex-employer can request that you repay that amount, plus interest, to the plan.

The deadline for removing an excess contribution is October 15 of the year following the year of the contribution. You must inform the IRA custodian that you are removing an excess contribution and follow their procedures to correct the excess. When an excess contribution is not timely removed, it becomes subject to a penalty of 6% per year for every year that it remains in the IRA.

Ideally, you should also tell your CPA so he or she can properly address the excess IRA contribution and correction on your tax return.

- By Joe Cicchinelli and Jared Trexler

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Super Bowl Gambling's Tax and IRA Consequences

Whether you won or lost on Super Bowl Sunday, your gambling wager has tax and IRA planning consequences.

Super Bowl XLVII was held in New Orleans this past Sunday. After San Francisco played a “lights out” second half after the lights went out, the Baltimore Ravens held on to win the game 34-31. Although Baltimore won the game and got to raise the coveted Vince Lombardi trophy, it wasn't the only winner this past weekend. In fact, millions of Americans became winners themselves as a result of legal and illegal gambling.

The Super Bowl is the most bet on sporting event in the world. You can bet on the obvious, such as which team will win, but that’s far from the only way you can place. This year, so-called “prop” bets included yearly favorites, such as “Will the pregame coin flip turn up heads or tails,” as well as Super Bowl XLVII specific wagers, such as “Will Beyoncé’s hair be straight or curly?” Regardless of the type of bet you placed however, there are certain tax rules you should know.

Let’s start with those who had bad news first. If you lose money gambling, you may be able to claim the loss as a miscellaneous itemized deduction on your tax return. Since the deduction is an itemized deduction, it can only be taken if you itemize your deductions, as opposed to taking the standard deduction. Furthermore, the only income this deduction can offset is other gambling winnings. About the only good news you might have if you are trying to claim a gambling loss deduction is that unlike many miscellaneous itemized deductions this one is not subject to the so-called 2% floor.

Okay, enough of that. Nobody likes to talk about the bets they lose, so let’s move on and talk about the rules if you won money. The first rule to know is that regardless of where you placed your bet and how it was placed, if you won money on a Super Bowl bet, it’s taxable. Gambling income is considered ordinary income and is taxable at ordinary rates. If you placed your bet through legal avenues, such as through a licensed casino, depending on the size of your bet and a host of other factors, the casino might issue you a W-2G and/or withhold some of your winnings for federal income taxes. If, on the other hand, you place your bet via a more “friendly” (a.k.a. illegal) method, your winnings are still technically taxable. The tax code provides that all income from any source is taxable unless there is a specific exclusion. Not surprisingly, there’s no such exclusion for illegal gambling.

Some people might make the mistake of thinking that just because they’re paying tax on their gambling winnings they can use these winnings to make an IRA or Roth IRA contribution. That is generally not the case. IRA contributions must be made using income that qualifies as “compensation” under the tax code. Compensation includes wages, self-employment income, taxable alimony, but it does not include gambling winnings. In fact pretty much the only way you could use gambling winnings to make an IRA contribution is if your occupation was a professional gambler. Now is not the time to get into specifics on that, but suffice to say that doesn’t include too many people. Plus, although you could use gambling winnings to make an IRA contribution if you are a professional gambler, your net profit at the end of the year, before your IRA contribution, would be subject to self-employment tax. That end result would likely favor IRS and not you.

So there you have it, your game plan for dealing with the tax consequences of your bet on the big game. If you lost, don’t feel too bad. Super Bowl XLVIII will be here before you know it. It will be held in New York, so it’s a good bet it will be freezing. If you won, enjoy your winnings, but don’t get too excited. Much like the IRS and your taxes, when it comes to gambling, the house usually wins.

Article Highlights:
1. If you lose money gambling, you may be able to claim the loss as a miscellaneous itemized deduction on your tax return
2. regardless of where you placed your bet and how it was placed, if you won money on a Super Bowl bet, it’s taxable
3. Unless you are a professional gambler, you can not use gambling winnings to make an IRA or Roth IRA contribution

- By Jeffrey Levine and Jared Trexler

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The Most Pressing Year-End Retirement Planning Questions

Tick, tock, tick, tock. 2013 is almost here, and we at The Slott Report want to provide a few more important points to remember if you are still sorting through year-end retirement planning.

These are the questions I am getting most frequently as we near the end of the year.

• Can I have more than one employer plan?
• What is the maximum I can contribute when I have more than one plan?
• I am covered by a plan at work, but can I still make an IRA or Roth IRA contribution?
• I am over age 70 ½ and am self-employed. Can I contribute to a retirement plan?

Can I have more than one employer plan?
If you are an individual who is working for more than one employer or if you have a side business, yes, you can be covered by more than one employer plan. The rules can become complicated, though. There are rules for business that are related where one plan may be considered to cover employees at a second business. You also have to be careful of the same business having multiple plans, i.e. a SEP, a SIMPLE, and a solo 401(k). You should consider consulting with a plan specialist to ensure that all plans comply with the rules.

What is the maximum I can contribute when I have more than one plan?
Plans have maximum contribution limits. These will be spelled out in the plan documents. You do have a statutory deferral limit though. For 2012 the limit is generally $17,000 (there is an additional $5,500 for those age 50 and over). This is generally the maximum that can be deferred to all plans by one individual. It is a cumulative limit, not a per plan limit. There are some differences if you have a a governmental 457(b) and/or 403(b). Please make sure you work with a knowledgeable financial advisor to make sure you have the correct totals.

I am covered by a plan at work, but can I still make an IRA or Roth IRA contribution? 
You can always make an IRA contribution, as long as you have at least that much in earned income or some other form of "compensation" and you are NOT 70 ½ or older. The question is, can you deduct the contribution? There are income limits for taking a deduction. There are income limits for making Roth IRA contributions. As long as you have earned income and are under the income limits, you can make a Roth IRA contribution. The IRA and Roth limits are indexed for inflation each year and can be found in IRS Publication 590, which is available on its website at www.irs.gov.

I am over 70 ½ and am self-employed. Can I contribute to a retirement plan?
You can set up an employer plan such as a SEP IRA, SIMPLE IRA or a solo 401(k) for your self-employment income. You can make contributions as long as you have self-employment income. However, you will also have to take required distributions each year.

In all of the above situations, you should consult with a retirement professional to help you navigate the complexities of the tax code. Mistakes in this area can be very costly. You can find a list of Ed Slott-trained advisors at this link.

- By Beverly DeVeny and Jared Trexler

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