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Showing posts with label IRAs. Show all posts
Showing posts with label IRAs. Show all posts

Who Can You Trust? Misinterpreting the SIMPLE IRA Rules

You have your IRA at a large, reputable firm. They are going to give you accurate information, right? Not always. Consider the following:

SIMPLE IRA rulesA small business owner establishes a SIMPLE IRA plan for his employees in 2009. A SIMPLE IRA plan allows participating employees to defer some of their wages to the plan, similar to a 401(k) plan. One of the rules for SIMPLE IRAs is that funds cannot be moved to any non-SIMPLE IRA for the first two years of participation in the SIMPLE. The employees who begin participating in the SIMPLE in 2009 cannot move their funds to another type of account until 2011. SIMPLE IRA funds can be moved to another SIMPLE IRA at any time.

In 2012, the business owner transfers his SIMPLE IRA from Company A to Company B, a large, reputable firm. Company B knows that the funds are coming from an existing SIMPLE IRA plan and accepts the transfer into a SIMPLE IRA with their company.

In 2013, the business owner becomes unhappy with Company B and wants to transfer his SIMPLE IRA to Company C. Company B refuses to let him transfer the funds. Their reason - you haven’t had the account for two years. In vain, the advisor tells them that the SIMPLE IRA was established in 2009. He reminds Company B that they accepted it as a transfer of an existing account. He points out that it is being transferred to another SIMPLE IRA. Nothing will budge them. They have nominated themselves as the SIMPLE police and what they say goes, no matter what. The advisor has escalated his request, but has yet to find anyone in the company with a better understanding of the SIMPLE IRA rules.

The client is faced with the option of taking a distribution of the account balance payable to himself and doing a 60-day rollover into either his new SIMPLE IRA or to an IRA. We never recommend 60-day rollovers, but here the client may have no choice. All because the large, reputable firm misinterpreted the two-year rule for SIMPLE IRAs.

If your IRA custodian tells you something that doesn’t sound quite right, check it out. Ask someone else. Ask to see where it says that in the IRA agreement or in the tax code. Or ask an Ed Slott trained advisor. You can find a list of our trained advisors on our website at www.irahelp.com. Mistakes can be costly to you.

- By Beverly DeVeny and Jared Trexler

Think You Are Done Paying For Your 2010 Roth IRA Conversion? Think Again.

2010 roth conversion taxesThere were two key tax law changes in 2010 that encouraged people to convert their existing retirement accounts to Roth IRAs.

First, the restrictions that previously prevented Roth IRA conversions for those with high incomes or those filing married-separate returns were eliminated. This opened the Roth conversion door for millions of Americans who previously did not qualify to do conversions. Second, 2010 Roth IRA conversions were given special tax treatment. Instead of having conversion income included entirely in 2010 as would typically be the case, 2010 Roth IRA converters were able to split the income from their conversions equally over 2011 and 2012.

That being the case, many of those converters believe they have seen the end of the cost of their 2010 conversions, but that may not be so. There are two key ways in which you may still be affected by your 2010 Roth conversion.

One possibility is that you may be paying 2013 estimated tax payments that are artificially inflated. Here’s why… There are two safe harbor methods for paying estimated taxes that will definitely keep you from owing estimated tax penalties. One way is to pay in 90% of your current year tax liability through quarterly payments. While this is a perfectly acceptable method, it’s not as foolproof as its counterpart, because your current year tax liability isn’t known for sure until after the year is already over. The other safe harbor method requires you to pay in 100% of your previous year’s tax liability (110% for certain high-income filers) through quarterly installments. This is generally the preferred method because by the time your first estimated tax payment for the year is due (April 15th), you typically know, or at least have a pretty good idea, what your total tax bill was for the previous year.

Suppose however, that you made a large Roth conversion in 2010 - say $600,000 - and you split that income equally, $300,000 per year, over 2011 and 2012. If that’s the case, and you’re paying 2013 estimated taxes based on 2012’s tax liability (the generally preferable way), your 2013 estimated taxes will be artificially high, since 2013 won’t have any of that Roth conversion income. Overpaying your estimated taxes doesn’t technically hurt you, since you will get any overpayment back when you file your 2013 tax return, but giving an interest-free loan to the government isn’t exactly on the top of most people’s priority list.

Another way in which you may still be paying for a 2010 Roth conversion is if you are a Medicare participant. Medicare Part B premiums are income-based, so an increase in your income can increase your premiums. Here’s the thing though… the premiums are generally based on your income from your tax return of two years prior. That means that your 2014 Medicare Part B premiums will likely be based on your 2012 tax return. If that return includes Roth conversion income from 2010, your premiums might be higher than they otherwise would be based on your “real” income. Thankfully, however, those Part B premiums should drop back down in 2015, when they will generally be based on your 2013 tax return, which won’t have any 2010 Roth conversion income reported on it.

Then… maybe… finally… you might truly be done paying for your 2010 Roth IRA conversion.

- By Jeffrey Levine and Jared Trexler

When You Should Leave Your Employer Retirement Plan Money In The Plan

employer retirement plan creditor protectionWhen you are entitled to receive withdrawals from your employer's retirement plan, such as a 401(k), a rollover to an IRA is a smart move in most cases. But there are some times when it’s best to leave the money in the employer plan and NOT do a rollover to an IRA.

One of the main reasons to leave your retirement funds in your employer’s plan is if you are worried about lawsuits. (Note: The employer’s plan must have employees, not be a single participant plan.) For example, maybe you are a physician who is concerned about malpractice liability. Or perhaps you’re a business owner such as a contractor who is worried that you may be sued at some point and you want to protect your employer retirement funds from creditors. The good news is that those assets in your employer’s retirement plan are protected from creditors by federal law.

Leaving your funds in your employer plan will give you the most protection from creditors including bankruptcy. But, if you roll over those funds to an IRA, a problem might arise. IRAs are not protected by federal law, except in bankruptcy (up to $1 million). Whether IRAs are protected from your creditors is based on state law.

Some states protect IRAs but that protection varies from state to state. Also, the protection, if any, could be different for Roth IRAs than that afforded to Traditional IRAs. It might pay you to find out from an attorney what, if any protection, your state has for IRAs before you do an IRA rollover from your employer’s plan.

Aside from protecting your employer plan funds from creditors, there are some distinct disadvantages to leaving your money inside the plan. The investment choices inside your employer plan are limited whereas you have virtually an unlimited choice of IRA investments. Also, it is easier to work with a financial adviser and get personalized advice when retirement funds are in your IRA versus your employer plan.

- By Joe Cicchinelli and Jared Trexler

Distributions From a Roth IRA Conversion

Roth IRA conversion distributionSuppose you are one of the many retirement account owners who converted funds to a Roth IRA in 2010 when there was a special 2-year “deal” on paying the taxes. Now you are wondering when you can take a distribution of those funds. The simple answer is that you can always take a distribution of your converted funds. However, depending on what you withdraw, you may not be happy with the tax consequences. Here are the rules.

First of all, all of your Roth IRAs are considered one, big, giant Roth IRA for distribution purposes. Your Roth funds are divided into three “pots” for distribution purposes.

The first pot of Roth funds that you empty are your annual contributions. You can take these funds out at any time and at any age, tax and penalty-free. Any distribution you take from any Roth IRA will be considered to be your contributions until they are gone.

The next pot you empty are your conversions. They are distributed on a first in, first out basis. Your conversions will be always be distributed income tax free. However, if you are either under age 59 ½ and the conversion you are withdrawing from was done less than 5 years ago, the distribution will be subject to the 10% early distribution penalty - unless an exception to the penalty applies.

The last pot of Roth money you empty will be your earnings. Distributions of earnings can be subject to both income tax and the 10% early distribution penalty. To have a tax-free distribution of earnings, you must have established your first Roth IRA account more than 5 years ago AND the distribution must be made after you are either age 59 ½, or due to your death, disability, or the distribution is for the first-time purchase of a home (lifetime cap of $10,000 per person). If you don’t meet those criteria, your distribution will be taxable. If you are under age 59 ½ at the time of the distribution, it will also be subject to the 10% early distribution penalty unless an exception applies.

Now that you know the rules, can you take a distribution from your 2010 Roth conversion? Assuming that is the only Roth IRA you have, yes you can take a distribution from your 2010 conversion. If you are under the age of 59 ½, you will owe the 10% early distribution penalty on any part of the distribution that was taxable at the time of the conversion.

Need help with this or any other IRA question? You can find an Ed Slott-trained advisor in your area on our website, www.irahelp.com.

 - By Beverly DeVeny and Jared Trexler

How IRA Distributions Impact the 3.8% Healthcare Surtax

IRA distributions impact 3.8% healthcare surtaxHow can you and your financial advisor work together to lower your tax liability? One of the questions we often ask financial professionals is, "what have you done to lower your clients' exposure to the new 3.8% healthcare surtax on net investment income?"

If you take an IRA distribution, the 3.8% surtax is NOT assessed on that distribution. Also, the surtax can only affect single filers above $200,000 MAGI (modified adjusted gross income) and married joint filers above $250,000 - but even then, it is only assessed on net investment income.

However, an IRA distribution can push tax filers ABOVE the MAGI thresholds, and in certain cases, trigger the surtax. How? View our IRAtv video below or click here to view the video.

Taking Non-Cash Required Distributions from Your IRA

required distribution IRAWhen individuals take withdrawals from their IRAs, it's usually a cash withdrawal. By cash, we don't mean dollar bills; instead it's usually done by issuing a check. But it's possible to take a non-cash withdrawal from certain IRAs. These non-cash distributions are known as property distributions or “in-kind” distributions.

Some IRA distributions can be taken as non-cash (property) distributions. Let’s say you are age 70 ½ or older and have been taking required minimum distributions (RMDs) from your IRA for several years now. You have probably taken your RMDs in cash. You likely sold or liquidated an investment in your IRA, let’s say shares of stock, and had the custodian send you a check for the RMD amount. But you have another option; consider taking your RMD in a property distribution.

Assume you are age 75 and your RMD this year is $8,700. You could ask the custodian to distribute $8,700 worth of property to you from your IRA. This could be advantageous in some situations. For example, maybe your IRA is holding shares of a certain stock whose price has gone down quite a bit recently, but you think the stock price will rebound in the future. If you sell (liquidate) that stock inside your IRA and have the custodian send you a check for $8,700, you’ll never see that stock price rebound because neither you nor your IRA owns that stock anymore. Instead, you should consider having the custodian distribute $8,700 worth of that stock to you. The stock will be distributed out of the IRA in-kind (intact) to you and must be valued at its fair market value on the date of the distribution. You still own those shares and you can keep them in a non-IRA brokerage account. You have satisfied your RMD by taking an $8,700 property distribution. The custodian will send you a copy of IRS Form 1099-R showing that you took an $8,700 distribution, and you report that amount on your federal income tax return.

Don’t wait too late in the year to request your RMD be paid with a distribution of property. The custodian will need time to do a valuation of the asset, calculate how much of the property to distribute, and then make the actual distribution to you, which will involve changing the title of the asset to your name. Any RMD not timely paid out in the year in which it is due is subject to a penalty of 50% of the amount not taken. You could run into two problems if you wait too late in the year. One, the custodian may not complete the process in time or two, the value of the property on the actual date of distribution could be more or less than your RMD. The second problem can be corrected with a rollover of the excess property (not cash) or you can take a cash distribution to make up any shortfall.

- Joe Cicchinelli and Jared Trexler

IRAtv: How Financial Advisors Are Educating Their Clients

ed slott IRA informationIn today's fragile economic landscape, financial education is crucial. It's paramount that consumers are working with educated financial advisors to steer them through a complex tax code wrought with potential pitfalls and penalties.

That is the essence of Ed Slott and Company's mission, and our YouTube page, IRAtv, is another extension serving that clear goal: matching consumers with competent, educated financial advisors.

Below are several videos detailing how some of our financial advisors are best serving their clients and centers of professional influence (CPAs, estate planning attorneys, etc.) Those familiar with our video presence will also notice a new polished look at IRAtv - one that we will carry out into our future service of educating the public and the advisors they work with each day on IRAs, tax and retirement planning.

If you subscribe to our email feed and can't view the videos below, click here to land on IRAtv's homepage and search under "recent uploads" to watch 100 informative videos.

Inheriting More Than One IRA: What You Can and Can't Do

What happens when you or your client inherits more than one IRA? Can they be combined into one account? Do you have to take required minimum distributions (RMDs) from each account separately or can the distributions be aggregated?

inherited IRAThe answer will depend on who the inherited account came from as well as what type of account it is.

You can only combine accounts that are inherited from the same person. If you inherited three IRAs from Dad, you can combine them into one inherited IRA. If you later inherit an IRA from Mom who had inherited it from Dad, this IRA comes from Mom, not Dad. It cannot be combined with those IRAs inherited directly from Dad. The main reason for this is that the RMDs on the inherited accounts will be calculated differently. RMDs on accounts that are inherited directly are generally based on the beneficiary’s age in the year after the account owner’s death.

If you keep those three IRAs inherited from Dad as three separate IRA accounts, you must calculate an RMD on each account. Those RMDs can then be added together and taken from any one or any combination of the three IRAs inherited from Dad. An RMD for an IRA inherited from Dad cannot be taken from an IRA inherited from any other person.

You can never combine inherited retirement accounts of different types. You cannot combine an inherited traditional IRA with an inherited Roth IRA. You cannot combine an inherited 403(b) with an inherited IRA - except when you are doing a direct transfer of the inherited plan funds out of the plan into a properly titled inherited IRA. In that case, you can move the inherited employer plan funds (401(k), 403(b), etc.) into an existing IRA inherited from the same person.

You also cannot take RMDs for one type of inherited account from another type of inherited account. The inherited 403(b) RMD cannot be satisfied with a distribution from an inherited IRA. Generally, RMDs from employer plans must be taken from each employer plan separately. There is an exception for 403(b) plans. They can be combined just as the inherited IRA distributions can be combined as described above.

It is all too easy to lose an inherited retirement account because of a simple mistake. Beneficiaries should consider consulting with an expert in this area in order to preserve their inheritance for as long as possible. You can find a listing of Ed Slott-trained advisors on our website, www.irahelp.com.

- By Beverly DeVeny and Jared Trexler

Video Alert: IRS, Taxes and Same-Sex Married Couples

The Slott Report has extensively looked at IRS' DOMA guidance as it relates to taxes, IRAs and same-sex married couples through IRS Rev. Ruling 2013-17. Now, we have put all key points into a video alert at Ed Slott and Company's YouTube Page, IRAtv.

IRS taxes same-sex marriageThe video below with Ed Slott and Company IRA Technical Consultant Jeffrey Levine talks about the tax and retirement planning issues related to Rev. Ruling 2013-17. You can also click here to view the video.

-By Jeffrey Levine and Jared Trexler

Spousal IRA Rollovers For Same-Sex Couples

Previously, same sex married couples did not have the spousal IRA benefits of opposite-sex married couples under the tax code. These benefits include the ability to make spousal IRA contributions, tax-free splitting of IRAs in a divorce, and spousal rollovers at death. However, the IRS recently issued guidance that gives same-sex married couples the spousal IRA benefits.

spousal IRA rollover same-sex couplesUnder IRS Revenue Ruling 2013-17, same-sex marriages performed in a state that recognizes that marriage will be recognized for federal tax purposes. In essence, the IRS has adopted a “state of celebration” rule. The state where the couple currently lives doesn’t matter. For example, a same-sex couple who were married in Maryland (which allows same-sex marriages) but live in Pennsylvania (which doesn’t allow same-sex marriages), is treated as legally married for federal tax purposes. The effective date of IRS Revenue Ruling 2013-17 is September 16, 2013.

Note: the IRS ruling said that same-sex couples in civil unions and domestic partnerships won’t be treated as “married” for federal tax purposes.

In addition to general tax implications such as filing a joint federal income tax return, the IRS ruling has ramifications for IRAs. Specifically, the spousal IRA benefits are now available for same-sex married couples.

With respect to IRAs, perhaps the biggest benefit for same-sex married couples is the option to do a spousal rollover at death. Under the tax code, when an IRA owner dies, the only beneficiary who can make the IRA his or her own IRA via a rollover or transfer (often called a “spousal IRA rollover”) is a surviving spouse beneficiary.

When a surviving spouse makes the IRA his or her own IRA, the surviving spouse is treated as the IRA owner and not the beneficiary. Accordingly, the death distribution rules don’t apply. If the surviving spouse is not yet age 70 1/2, then no distributions have to be taken until then. So, as long as the same-sex couple is married, he or she can do a spousal rollover at death.

- By Joe Cicchinelli and Jared Trexler

Ed Slott's NEW Webcast: How to Profit From IRA Mistakes

You can listen to Ed Slott, America's IRA Expert, detail many of the real-world IRA misfortunes he has seen and demonstrate how you can use these mistakes as teaching tools to build your business and increase your value.

This streaming webcast is available right now. Take just 20 minutes, follow along with the slide presentation, search through our online resources and don't forget to share the webcast with colleagues, clients, friends and family on Facebook, Twitter and LinkedIn.

Ed Slott provides 3 key areas where IRA mistakes are common and penalties are punitive. Go to the following page to listen to Ed Slott's How to Profit From IRA Mistakes: https://www.irahelp.com/webcast/registration/2013-08-13.

 - By Jared Trexler

IRA Contributions After Death

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

IRA contributions after deathFor 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

You CAN'T Change Your Mind on a Roth 401(k) Conversion

While many of us know that you can convert an IRA to a Roth IRA, a process that’s not as well understood is a Roth 401(k) conversion. If you participate in a 401(k) at work, you can convert your existing plan assets to a Roth account inside the 401(k) plan. This option is known as an “in-plan conversion.” But check with your employer first because although the law allows an in-plan conversion, your plan may not have this option.

roth 401(k) conversionThe in-plan conversion rules also apply to 403(b) plans, governmental section 457(b) plans, and the thrift savings plan of the federal government. The Roth account inside your 401(k) plan is called a designated Roth account in the tax code. The in-plan Roth conversion will be taxable to you, but the funds inside the Roth account will grow tax-free if certain rules are followed.

Previously, you had to be eligible to get a distribution from your 401(k) plan to do an in-plan conversion. However, that rule changed this year. Beginning in 2013, you’re now allowed to do an in-plan conversion even if you’re not yet eligible to take a distribution from your 401(k).

The major problem with an in-plan Roth conversion is that once you do it, there’s no turning back. By contrast, if you convert IRA money to a Roth IRA, the law allows you to change your mind, or reverse it. The IRS calls this a “recharacterization.”

Unfortunately, the rules don’t allow you to undo (“recharacterize”) an in-plan Roth conversion, so make sure it’s the right move before you do it. As we said earlier, because an in-plan conversion will be taxable to you, you’d better be sure you’ll have the money to pay the taxes you’ll owe. Also, if, after an in-plan conversion, the value of that Roth account drops due to poor investment performance, you’ll still owe taxes on the value of the assets converted as of the date of the in-plan conversion.

- By Joe Cicchinelli and Jared Trexler

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.

IRA contributions employer retirement planFirst, 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

"How is My Annuity Going to Be Taxed?"

“How is my annuity going to be taxed?” It’s a question that's asked frequently, but one that can have several different answers. That's because an annuity can be taxed differently depending on the type of annuity you are receiving distributions from, as well as the type of the account it's in.

annuity taxFirst, let's make sure that we understand annuities generally fall into one of two categories. Either they are in “deferred status” or they have been “annuitized.” With a deferred annuity, you generally still exercise some control over your investment. On the other hand, annuitization is generally an irrevocable election where you essentially turn your money over to an annuity carrier in exchange for a series of payments.

Distributions of deferred annuities (that have not been annuitized) held in non-qualified accounts are taxed on what is known as a LIFO, or last-in, first-out basis. This means that if you have any earnings in your annuity, they are the first dollars considered to be distributed and are taxable as ordinary income. Only after you have exhausted your earnings will you receive distributions of principal - your initial investment in the contract - back tax free.

Example: You purchase a deferred annuity for $100,000 and the value has now grown to $115,000. While still in deferred status, you take a $12,000 distribution. The entire distribution would be taxable as ordinary income because you have not yet exhausted your $15,000 of earnings. If, instead of taking $12,000 you took $18,000, you would have taxable income of $15,000 and a return of basis of $3,000.

Distributions of annuitized annuities purchased with after-tax funds are taxed a little bit differently. Instead of being taxed on a LIFO basis, a portion of principal is returned with distributions. If you’ve annuitized your IRA over a specific number of years (i.e., 20 years), your principal will be distributed to you evenly over those years. If, on the other hand, you’ve annuitized your annuity contract over one or more life expectancies, your principal will be returned to you over the predicted life expectancy. An annuity company will calculate this “exclusion ratio” for you and can tell you how much of your distributions will be taxable and how much will be tax free.

Example: You purchase an annuity for $100,000 that is annuitized over 20 years and guarantees annual payments of $6,500. Each year, $1,500 of your distribution will be tax free and $5,000 ($100,000/20 = $5,000) will be taxable.

What if, on the other hand, you purchase your annuity with traditional IRA or Roth IRA money? Well here’s where people get confused. For the most part, you can throw away everything above, because when an annuity is purchased with retirement account money, distributions from that investment follow the applicable rules for the specific retirement account.

For example, if you purchase an annuity with traditional IRA money and start taking distributions, for tax purposes, it really doesn’t matter whether it’s been annuitized or not. If those distribution checks are going straight to you (i.e., the money is no longer in an IRA), then the entire amount is generally taxable because IRAs are generally funded with pre-tax dollars.

Similarly, if you purchase an annuity in a Roth IRA and begin to take distributions, the tax impact will be determined based on the Roth IRA rules. So, for instance, if you are already age 59 ½ and have owned a Roth IRA for at least 5 years, any distributions from Roth IRA-owned annuities will be considered qualified distributions and will be completely tax free.

- By Jeff Levine and Jared Trexler

The Kay Bailey Hutchison Spousal IRA Receives Congressional Agreement

kay bailey hutchison spousal IRAThe Kay Bailey Hutchison Spousal IRA: what a mouthful! We now have this thanks to a bill that was signed into law on July 25, 2013 that renamed the section of the tax code that specifies the spousal IRA contribution limit.

Kay Bailey Hutchison was one of the sponsors of the bill that increased the spousal IRA contribution limit to equal what a working spouse can contribute to an IRA. For 2013, that amount is $5,500, but if you are 50 or older by the end of this year, you can add an additional $1,000 for a total contribution of $6,500. The working spouse’s earnings must equal or exceed the amount of all IRA contributions. If you are turning age 70 ½ this year or are older, you can’t make a contribution to your IRA, even if your spouse is still working (and even if your spouse is under age 70 ½).

Kay Bailey Hutchison did not seek reelection in 2012. Her colleagues in the Senate chose to honor her service and her dedication to women’s issues by renaming this section of the tax code. And, for whatever reason, enough members of Congress could agree on this issue to pass the bill.

Meanwhile, we have a host of  issues that need to be resolved that will impact the well-being of all American citizens and, on these issues, Congress chooses to continue to posture and hold its uncompromising positions. Tax reform has been pushed off to the fall. We have major budget issues, which look like they will never be resolved. There are many, many presidential appointment positions that continually go unfilled because of Congressional actions - not inaction.

But we have the Kay Bailey Hutchison spousal IRA. On that, Congress could agree. Maybe we can build on this.

- By Beverly DeVeny and Jared Trexler

Ruling to Remember: Waiver of the 60-Day IRA Rollover Requirement

A taxpayer we will call "Greg" asserted that his failure to accomplish a prompt rollover of his distributed IRA funds within the prescribed 60-day IRA rollover window was due to the medical condition and death of his mother.

The story goes...

Greg received a statement from his company in early December, indicating a retirement plan distribution less federal income tax withholding. Upon receipt of the statement, Greg called his former employer and was informed that a check representing his investment in an employer retirement plan had been mailed to him a few days prior.

Greg maintained that he told his former employer that he had never requested or received the check. Nearly three months later, the former employer re-issued the check and about one month after that, Greg deposited the full amount into his IRA. Greg also asserted that he was the primary caregiver of his mother starting in mid-August (prior to the issued statement) until her death in early April of the following year (after the check issuance was resolved), allowing for a hardship exception to the 60-day IRA rollover window.

He requested a private letter ruling (201330047) with IRS to waive the 60-day IRA rollover requirement with respect to the distribution discussed above.

As it turns out, Greg didn't need the waiver. IRS ruled that documentation shows that the distributed amount was successfully deposited into his IRA within 60 days after the check was actually received. The waiver was denied since there was no need for the waiver.

Notes: The 60-day IRA rollover window begins after the check is RECEIVED, NOT when it is ISSUED. Also, if the check is made out to the new custodian instead of the individual, there is no 60-day rollover period.

- By Beverly DeVeny and Jared Trexler

Will Your Will be Challenged by a Beneficiary? Creating an "In Terrorem" Clause in Your Estate Plan

Creating an estate plan can be a very challenging process. For starters, it involves serious contemplation of on'’s death and the resulting aftermath, which can, in and of itself, be an uneasy topic of discussion. In some cases, however, the process can be particularly emotional and technically challenging. Oftentimes this occurs when someone chooses, for one reason or another, to treat children or other similar beneficiaries unequally, perhaps even disinheriting one or more of them.
estate plan will beneficiary
An unfortunate side effect of such action, however, is that it may increase the likelihood of your will being challenged. That could lead to any number of problems, including unnecessary legal costs, probate assets not being available to your intended beneficiaries in a timely manner and, perhaps most importantly, your final wishes going unfulfilled. So if you think your final wishes might ruffle some feathers, so to speak, what can you do?

Well, one thing you can do is to try and structure your will in such a way that it encourages people not to challenge it. There are a number of ways to do this, but one possible solution is to include what’s called a “in terrorem,” or “no contest” clause. The term “in terrorem” comes from the fact that the inclusion of such a provision in your will is supposed to terrify individuals from contesting it. While the exact wording of this clause will vary from state to state, and even from attorney to attorney, it tends to look something like this:

Anyone who is named as a beneficiary of this will and who contests this will shall receive $1, regardless of the outcome.

So how well can including a clause like this in your will actually prevent someone from challenging it? It depends on a number of factors.

For one thing, you have to make it worth a beneficiary’s while not to challenge. That often means not disinheriting them completely, even if that’s what you’d really like to do. Think about it… if you were completely disinherited under someone’s will, how much would that stop you from challenging it? If you did, what’s the worst that could happen? You could end up with nothing, which is right where you started - not counting any legal fees you might incur during the process, of course.

Similarly, if you have an estate of, say, $5,000,000 and you have two children and leave one child $4,995,000 and leave the other $5,000, that $5,000 might not be enough to prevent that child from contesting the will. In their mind, it might be worth risking the $5,000 for a shot at $2,500,000, or whatever they think they might be entitled to in the will. So step one in implementing an effective "in terrorem" clause is to leave a beneficiary enough money so that they think twice - check that, three times - about challenging your will. How much that should be, exactly, depends, among other things, on the total value of your estate, as well as how likely it is that a particular beneficiary would challenge your will.

The effectiveness of this provision varies from state to state. For instance, in some states, the "in terrorem" clause may work pretty much as it sounds and punish a would-be contester regardless of the outcome of their efforts. Other states, however, will refuse to strictly enforce such clauses as a matter of law, if there is “probable cause” for a person to bring the contest. Even in such cases, however, it’s possible that after reading such a clause, a beneficiary will think twice before taking any action.

So if you are really, really worried about someone contesting your will, you may want to choose where you live (and where you die, for that matter) carefully. Many retirees move to new locations for one reason or another. Common reasons include tax benefits, cost of living, Medicaid eligibility rules and family reasons. If the contestability of your will is hot button issue for you, maybe this is an item to add to your list.

- By Jeff Levine and Jared Trexler

FINRA Says Watch Out for "Free" or "No-Fee" Claims for IRAs

IRA custodians are allowed to charge fees on IRAs, but the fees must be properly disclosed to you. These fees are required to be spelled out in the disclosure statement portion of the custodian's IRA document that you get when you open the IRA.

The Financial Industry Regulatory Authority, Inc. (FINRA) has provided information on the disclosure of fees in communications concerning retail brokerage accounts and IRAs. Regulatory Notice 13-23, dated July 2013, gives guidance on the disclosure of IRA fees in sales and marketing communications of retail brokerage firms. http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p304670.pdf

FINRA is the largest independent regulator of securities firms doing business with the public in the United States. Its core mission, according to its website is “…to pursue investor protection and market integrity, and we carry it out by overseeing virtually every aspect of the brokerage industry.”

In Regulatory Notice 13-23, FINRA stated that some firms’ sales and marketing material emphasizes “free” or “no-fee” claims with respect to IRAs when in fact, fees are charged. They observed overly broad language in sales material of broker-dealer firms that implies there are no fees charged to investors who have accounts with the firm. In other instances, fees that are not charged are highlighted and separated from the disclosure of fees that are charged. In other cases, fees are not discussed or are difficult to determine. FINRA said that these kinds of sales materials can mislead investors and violate FINRA Rule 2210’s requirement to claim or imply that accounts are “free” when in fact there are fees. FINRA Rule 2210 requires that broker-dealer communications be fair and balanced and that they don’t omit material information that would cause them to be misleading.

- By Joe Cicchinelli and Jared Trexler

The Price of Procrastination: What Happens When You Miss the 60-Day IRA Rollover Window

When it comes to moving retirement account money from one IRA (or other eligible retirement account) to another, Congress has given you a couple of options. On one hand, you can have the money sent right from one institution to another. This is known as a trustee-to-trustee transfer, or a direct rollover, and is the preferred way to move money, as it avoids a lot of problems.

60-day IRA rollover periodOn the other hand, Congress also allows you to move money indirectly. In other words, instead of having money sent right from one account to another, you can receive the money from your retirement account (i.e. a check made payable to you). If you choose to use this method of moving money, you have 60 days, starting with the date you receive the money, to get the money back into another retirement account… or face the consequences. And those consequences can be quite expensive.

IRA distributions that are not timely rolled over are added to your income and are taxable in the year you take the distribution. So, for instance, if you take $100,000 from your IRA and fail to timely roll it over, you will pay tax on an additional $100,000. If you have an effective tax rate, between state and federal taxes, of 30%, you will owe $30,000 to Uncle Sam. If you’re under age 59 ½, you will also get hit with the 10% early distribution penalty, unless an exception applies. That would bring your total tax bill to $40,000. Obviously, the bigger your distribution, the more that failing to timely roll it over will cost you. Larger distributions could easily trigger income tax of several hundred thousand dollars or more.

So is there any way rectify such a mistake? In fact, there may be. It’s called a private letter ruling (PLR), and depending on why you missed the 60-day deadline, you may be able to get a favorable one, but even then, your mistake will cost you.

PLRs are a bit like mini court cases between you and the IRS, where you can ask IRS for an extension of the 60-day window, but they aren’t free. The typical fee for a PLR is $10,000, but there are actually “bargain” rates for 60-day PLRs that range from $500 to $3,000, depending on how large the distribution you are trying to rollover is. That’s not all though. You’re probably going to have to pay some professional, like a CPA or attorney, to prepare your ruling, and those professional fees could easily come to $10,000 or more.

Just because you pay the IRS fee doesn’t mean all is forgiven though. IRS is not required to, and does not, approve all PLR requests. Successful requests generally involve situations where the 60-day deadline was missed due to some event outside of your control, such as an illness, where the money was not used for any other purpose while outside of your retirement account and where you had a true intent to do a rollover.

If you are successful in your PLR request, IRS will give you more time to complete your rollover and avoid the taxation (and perhaps, the 10% penalty) on your distribution. However, if you’re unsuccessful, your stuck paying the PLR fees and all the taxes and penalties you owed on your distribution.

So here’s the deal… try to move money directly, via trustee-to-trustee transfer or direct rollover. If you absolutely have to use a 60-day rollover, keep one eye on the clock, because if you miss the deadline, you may not be happy with the price of procrastination.

- By Jeffrey Levine and Jared Trexler


Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.