Friday, January 20, 2012

How to Retitle an Inherited IRA

You have just inherited an IRA or employer plan from someone other than your spouse. What now?

The first thing we tell beneficiaries is, “Touch nothing.” At least not until you talk to someone who knows the rules for inherited accounts.

The number one rule for an inherited IRA is never, never, NEVER put the inherited funds into an IRA in your own name. Don’t request a check payable to you either. Both of those actions create a taxable distribution to you, the beneficiary, and you no longer have a tax deferred account. Many people have started investing in cryptocurrencies expecting huge profits. The number of crypto traders has drastically risen. Traders may automate their trades for more efficiency. Visit https://coincierge.de/bitcoin-bank/ to automate crypto trading.

Of course, maybe you have big plans and you are going to spend all of the money right away so the taxes aren’t a big issue for you. Consider, though, what you are giving up. Let’s say you inherit a $100,000 IRA at age 30. If it earns 6% a year and you take only required distributions each year, the IRA will eventually pay you over $650,000 over the next 54 years. In the first 10 years you will only get a check for $2,000 - $3,000 a year, but you can then write a check in that amount to fund your own IRA or Roth IRA, if you qualify.

The trick is in the titling of the inherited IRA account. You must leave the name of the original account owner in the account title.

For example, John Smith, deceased, IRA for the benefit of (fbo) James Smith. 

This does not create a taxable distribution and you can then “stretch” the distributions over your life expectancy.

So, do yourself a favor and touch nothing. Then talk to someone who understands these rules and can show you the potential of the inherited retirement account. Then make an informed decision. If you choose to stretch your inherited account, you can sit back and collect easy money each year. Oh, and be sure to name your own beneficiary on the inherited account. They can continue to collect your payments if anything happens to you before the inherited account is emptied.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2012 Ed Slott and Company, LLC

Required Minimum Distributions From All Angles in Mailbag

This week's Slott Report Mailbag delves into the oftentimes complicated world of required minimum distributions (RMDs). We look at RMDs after conversions, recharacterizations and the "still-working" exception. We also answer a question about when you can recharacterize a 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.

Happy New Year. I get your regular updates from www.irahelp.com and www.theslottreport.com, and they are great!

Send your questions to [email protected]
I may need to access around $11,000 from my Roth IRA, and I want to understand what the cost, fees and tax (if any) implications are. I spoke to a rep over the weekend and he said possibly re-characterizing the conversion could be helpful. Further, he suggested going to irs.gov and researching pub 590 (page 60 chapter 2) as it kind of spells out what the implications would be pertaining to my proposed scenario. So, besides a sales charge, 10% withdrawal penalty and taxes on earnings, what total costs would I be saddled with if I access this money?

If memory serves me correctly, I converted the IRA to Roth in 2010 and my accountant is spreading the taxes over 2 years. This may or may not effect what I am trying to do.

Any feedback on this would be greatly appreciated.

Thanks,

Jason De Ruggiero

Answer:
You should look at IRS Pub. 590 as it outlines the rules about recharacterizations and when you can and cannot recharacterize.

If you converted to a Roth in 2010 you had up to October 15, 2011 to recharacterize.

If you have had any Roth IRA established for 5 years and you are over age 59 1/2, there is no problem accessing any funds in your Roth IRA. You can always withdraw a converted amount without incurring a penalty or income taxes if the requirements mentioned above are met. It is generally the earnings in the Roth account that cannot be accessed without income taxes unless certain requirements are met. The ordering rules state that when taking withdrawals all Roth IRAs are considered one account. All contributions are considered to come out first, then converted amounts (first in, first out) and lastly earnings. We can’t be more specific on your situation without knowing what amounts have gone into your Roth accounts, if those amounts were contributions or conversions, your age, and when your first Roth IRA was established.

2.

If a 71-year-old is fully employed this year, contributing to their 401(k), when must they take their first RMD (required minimum distribution)? I have read it’s the year after they retire. If that’s true, do they have to take two distributions (April and December) that year? How long can they delay taking an RMD if they are fully employed? I have read one has to take a distribution the year they turn 75.

Thank you for your help!

Answer:
If you are less than a 5% owner of the company, are still working after age 70 ½, and if the employer plan allows, then you would not have to commence RMDs until the year you separate from service. You should check the plan document or summary plan description to see if the plan has that provision in it. The first RMD is due for the year of separation from service and can be deferred until April 1 of the following year. If it is deferred, then two distributions will have to come out in that year. I believe the age 75 you mentioned applies only to 403(b) plans. In a 403(b) plan, balances prior to 1/1/86 don't have to be used for calculating RMDs at age 70 1/2. Those balances will then be added back in for RMDs when the participant attains age 75.

3.

Good afternoon Ed!

Here are the facts: A 61-year-old taxpayer converted his traditional IRA to a Roth IRA in 2010. In January 2012, he withdraws the entire amount of the converted IRA including contributions, conversion amounts, and earnings.

My question is this. Can the taxpayer contribute only the earnings of the converted IRA back to the converted IRA account to avoid taxation on the earnings in 2012?

Thanks,

Gary

Answer:
A taxpayer has 60 days from the receipt of Roth IRA funds to do a rollover to another Roth IRA account. It is up to the taxpayer to track which Roth funds are derived from contributions to a Roth IRA, conversions to a Roth IRA, and earnings. In addition, all Roth accounts are considered one account for the purposes of the distribution rules. Distributions are deemed to come first from contributions, then conversions (first in, first out), and lastly from earnings. Assuming the taxpayer has emptied all Roth accounts and does only a partial rollover, you would have to assume that the first dollars rolled over would be earnings. You should go through the calculation on Part IV of IRS Form 8606 to see how it will work out.

There will be no tax on the earnings if the taxpayer had established any Roth IRA in 2007 or earlier since he is over the age of 59 ½.

By Marvin Rotenberg and Jared Trexler
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*Copyright 2012 Ed Slott and Company, LLC

Thursday, January 19, 2012

Money Habits That Destroy Retirement, IRS Guidance on 2010 Roth Conversions, 401(k) Investment Strategies

Each day, One Day Closer provides the articles from across the worldwide web that help you move one day closer to a sound financial situation, a retirement you always envisioned, a safe and secure financial future for you and your family. This will be added to throughout the day with important articles.

Quote of the Day:
I'm now as free as the breeze - with roughly the same income.
- Gene Perret

Articles of the Day:
The tax code just isn't always fair, and is full of inequalities. This article discusses several of them and how to avoid or get around them. http://bit.ly/xdTvPj

Reuters warns that to maximize your retirement savings, you MUST know the rules. http://reut.rs/wX9RgJ

Are you buried by a deceased relative's debt? This article looks at the complicated issue of the decedent's estate and where to go from there. http://on-msn.com/wW8Ozh

BusinessInsider looks at 5 money habits that will ruin your retirement. http://read.bi/AnJ6oC

Plan sponsors can now help 401(k) plan participants allocate their retirement funds. This article explains. http://bit.ly/zNc6vg

Are municipal bonds still a smart investment? SmartMoney answers that question in this article.  http://sm.wsj.com/xckZ2u

SmartMoney is in the business of answering questions today. Another article talks about whether FINRA should have a shorter leash? http://sm.wsj.com/xckZ2u

IRS provides guidance on how to report 2010 Roth conversions on your 2011 tax return. http://1.usa.gov/yYV7Jy

This U.S. News and World Report article chronicles 401(k) investment strategies through the years. http://bit.ly/yORvkv

Wednesday, January 18, 2012

Form 1040 Changes, Social Security Elections, 401(k) Tax Advantages

Each day, One Day Closer provides the articles from across the worldwide web that help you move one day closer to a sound financial situation, a retirement you always envisioned, a safe and secure financial future for you and your family. This will be added to throughout the day with important articles.

Quote of the Day:
When you retire, think and act as if you were still working; when you're still working, think and act a bit as if you were already retired.

Articles of the Day:
Before you file your tax return, make sure you know about these changes to Form 1040. http://sm.wsj.com/z7ifFR

A good personal finance article that illustrates how companies are stacking the deck against you with fine print. http://on.wsj.com/wyXa29

The IRS has gone social! Learn how you can spread the word to nearly 3-in-4 workers eligible for the earned income tax credit. http://bit.ly/xTLADf

Fraud of older individuals has grown by leaps and bounds. The Wall Street Journal points out some red flags that may tip you off. http://on.wsj.com/ytlR38

This article from NAPFA discusses how women can successfully plan for their retirement. http://bit.ly/xKR0yP

Do you need to file a tax return this year? This article answers that question as tax filing season is underway. http://bit.ly/yK77nW

SmartMoney looks at the tax advantages of different retirement accounts and answers the question, "What are the tax advantages of the 401(k)?" http://sm.wsj.com/yOtgOS

Choosing the correct Social Security election may be your most important decision of the retirement planning process. This chart puts your math to the test and helps you pick the right election for you. http://bit.ly/yz1M52

A great piece in conceptualization for financial advisors: your clients and prospects don't care that you DO financial planning, they care WHY you do financial planning. http://bit.ly/wmCn69

Taxes, Taxes, Taxes: Tax Season is Here

The dreaded W-2 forms. The equally confounding 1099-Rs. Turbo Tax, Free Tax USA and the like trending on Twitter.

Yes, it is tax season, and with it comes sleepless nights both for CPAs and tax filers nationwide. You could have finished fast with e-filing beginning yesterday, although most still haven't received the necessary forms (W-2) to complete the task. Those forms MUST be in all taxpayers' hands by January 31.

We will be peppering The Slott Report with tax-planning tips, tricks, pitfalls and comprehensive articles over the next several months, but as a refresher and a precursor to our coverage, CLICK HERE to view all articles related to tax planning, and bookmark this site for TAX SEASON WEEK, which will run from February 6 - 10 with articles, photos, a Q&A with a special tax expert, tweets and more to get you prepared for filing your tax return.

Until then, here are some tax-savings tips from an article in the USA Today, which was posted on this site and our Twitter account (@theslottreport) yesterday. 

By Jared Trexler
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Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.

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*Copyright 2012 Ed Slott and Company, LLC