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Showing posts with label Retirement. Show all posts
Showing posts with label Retirement. Show all posts

What Does Your Will Mean to Your Estate?

Do you have a will? Most people who need one, realize that they need one. Most of those people actually do something about it and put a will in place for their estate. But what is your will really doing for you?

will IRA estate beneficiary formA will determines who gets your probate property, but just how much of your estate is probate property (and to that end, what is probate property)? If you are married, most of your estate is probably NOT probate property. For instance, real estate is often owned jointly with rights of survivorship. If so, it will pass to the surviving spouse and never go through your will. The same is true of your bank accounts and investment accounts if they are titled jointly with rights of survivorship. They will go to the survivor and not through your will.

Your retirement accounts also do not go through your will…or at least they shouldn’t. They pass to whoever you have named on your beneficiary form, so unless you’ve named your estate as the beneficiary on the beneficiary form or you failed to name a beneficiary and the IRA documents default to your estate - both of which are big no-nos - your retirement accounts will not be affected by your will. Other assets with beneficiary forms, such as life insurance policies and annuities also do not pass through your will. The estate is generally not a good choice of beneficiary for any of these assets.

That could leave very little to pass through your will. In many situations, only your personal property, such as a car, jewelry or collectibles will pass through your will. Assets that are titled in your name only also pass through your will.

This means that you need to make sure that you not only have a will in place, but that you also correctly title your other assets so that they go where you want them to go. If someone dies or gets a divorce, you may need to update the names on real estate, bank accounts, investment accounts, and assets with beneficiary forms, such as retirement accounts, life insurance and annuities. Your will may not take care of how these assets transfer after your death or may transfer them to the wrong beneficiaries. There seems to be an app for everything these days, do you suppose there is an app for this?

- By Beverly DeVeny and Jared Trexler

Divorce vs. Legal Separation in Employer Plans

In the current issue of its newsletter, Employee Plans News (Issue 2013-3, September 13, 2013), IRS has an article on one of the differences between divorce and legal separation as it impacts employer retirement plan rules.

In most employer retirement plans, a spouse is entitled to inherit plan benefits, even if another individual is named on the beneficiary form. A spouse must sign a waiver, usually provided by the plan, before an individual other than the spouse can inherit those benefits.

divorce, legal separation retirement benefit employer planMost plan participants complete a beneficiary form naming their spouse as the beneficiary of plan benefits. This can create problems later if the plan participant divorces that spouse and does not complete a new beneficiary form naming someone other than the ex-spouse as the new beneficiary of those plan benefits - if the participant has not remarried. At the plan participant’s death, the ex-spouse will inherit the plan benefits, even if they were waived as part of the divorce settlement.

To mitigate this problem, some plans incorporate a provision that automatically removes an ex-spouse as a plan beneficiary when the plan participant divorces. Some plans take this a step further and will also remove an ex-spouse when there is a legal separation.

In the article, IRS points out that the automatic removal of a spouse without spousal consent could cause a plan violation of the spousal death benefit rules. These rules state that a current spouse has certain entitlements to a death benefit in a qualified employer plan.

When a plan participant obtains a legal separation, they can change a beneficiary designation to a non-spouse beneficiary without obtaining a spousal waiver. However, the article states : “Although a legally separated participant can waive the spousal death benefit without spousal consent, a plan’s automatic revocation language, by itself, doesn’t satisfy the waiver rules.” This means that the separated spouse will remain the beneficiary of plan death benefits.

Plan participants should not rely on the plan language to determine the beneficiary of plan benefits. Beneficiary forms need to be updated whenever there is a significant life event such as a birth, death, adoption, divorce, or legal separation. The plan administrator is not going to monitor what is going on in a plan participant’s life and remind them to update their beneficiary forms. Make sure the money you worked so hard for is going to the beneficiaries that you choose.

- By Beverly DeVeny and Jared Trexler

The Government Shutdown Could Cause You Tax Problems

For over a week now, the federal government has been partially shut down - what some news outlets have called a slim down - thanks to Congress' inability to come together on any sort of agreement that would have prevented, or at least delayed the issue at hand.

For some, the government shutdown has been little more than an afterthought and fodder for the talking heads on TV. For many, however, the government shutdown couldn't have come at a more inconvenient time and could lead to problems. That's because the October 15, 2013 extended due date for tax returns is now less than a week away and one government agency that has been significantly impacted by the shutdown is the Internal Revenue Service. In case, you didn't know it, IRS is actually an arm of the U.S. Treasury Department and, thanks to the shutdown, has less than 10% of its staff reporting for work.

Although you wouldn't be alone if the first thought to go through your mind was, "Awesome, no one's there to collect my tax!" you might want to temper your enthusiasm. In fact, the IRS' forced scale back means you still have all the responsibilities of filing your return (if you have not done so already), without much of the help. Here's why...

The government shutdown has no impact on when you must file your tax return. If you filed a timely extension earlier this year and have until the October 15th extended deadline to file your 2012 tax return, you must still file it by that deadline in order to avoid possible penalties. And even though the IRS will be operating with a skeleton crew of sorts, they will still cash your check promptly, if you owe any taxes. On the flip side though, if you've overpaid your taxes and, after filing your return, you're entitled to a refund, that refund could very well be delayed. How long? That's a good question without a definite answer, but needless to say, the longer this shutdown drags on, the longer it may take to get your refund.

Need help filing that return? That might be a lot more problematic too. If you call an IRS hotline with a question on a "normal" day, it can be challenging to get a timely answer, if you can even get an answer at all. But now? Simply put, impossible. In response to having its workforce slashed by over 90%, IRS has closed its hotlines. Walk-in assistance centers are also closed.

In addition to your refund being delayed, if you happen to be waiting for IRS to respond to a private letter ruling (PLR) request, be prepared to continue to do so. Worse yet, if you're waiting on IRS to respond to a PLR related to a retirement account issue, you can probably all but forget about getting a response until IRS is able to expand its workforce again. Out of the nearly 9,000 IRS workers still reporting for duty, only about 20 work in the Tax Exempt and Government Entities Division, which, despite its unrelated name, is actually the division of IRS primarily responsible for issuing rulings related to retirement accounts. Here is the Internal Revenue Service's full 2014 government shutdown contingency plan.

As if that's not enough of a kick in the pants, here's the "best" part of the whole situation. Although Congress can't agree on much, they already decided that when they finally come to an agreement - whenever that might be - they will incorporate retroactive pay for furloughed government workers into that agreement. Think about that for a second. That means that, at the end of the day, the IRS professionals who could be answering your questions by phone, timely processing your refund or performing other tasks to assist you will,
instead of doing those jobs, be paid to sit at home on the couch and watch TV. Nice. But don't blame the IRS or its workforce for this one. This is a mess that was created by, is being perpetuated by, and will eventually be resolved by Congress.

If you're wondering if there's any good news - anything at all - to come from the IRS' bare bones workforce... yes, there is. IRS has announced that during the shutdown, audits will be suspended. This may be of some benefit for a few individuals, but if you file your tax returns on time, accurately and completely, the chance of being audited is minimal anyway.

The government shutdown is, of course, a fluid situation and it’s possible that at some point, even without an agreement in Congress, IRS could find ways to expand its workforce, or be forced to reduce it further. Stay tuned to the Slott Report for any major changes.

- 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

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.

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

Slott Report Mailbag: How Do I Name a Properly Titled Inherited? IRA?

This week's Slott Report Mailbag looks at the once-per-year rollover rules, touches on how to name a properly titled inherited IRA and once again dissects the always-confusing Roth IRA 5-year rules. 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.


ed slott IRA questions
Send questions to [email protected]
Is there a rule that says the holder of an IRA-CD can get the higher interest rate at a bank once in a calendar year, even if the CD is for a longer term? Can banks have differing rules on charging for RMD withdrawals from IRA-CD's?

S. Vogel

There is no IRS rule that governs when you can get a higher CD rate. Check your CD documents to see if you’re entitled to transfer your IRA funds to a higher paying CD. Banks can charge fees and/or CD penalties for RMD withdrawals, but those fees and penalties must be disclosed to you. Fees can be different among banks. What you, as the IRA account owner, have to be careful of are the 60-day rollover rules. A rollover is when a distribution from an IRA is made payable to you and you then take the funds and put them back into an IRA. You can only do this type of transaction once every 12 months on the same funds. If you have any questions on this, you need to consult with an advisor who specializes in the IRA rules. This is not necessarily the person you talk to at the bank. For a list of Ed Slott trained advisors, go to our website: www.irahelp.com.


I am confused about the naming of a stretch IRA. Per your book, you indicate an IRA inherited by child must be named "John Smith, IRA (deceased 10/27/11) FBO John Smith, Jr., beneficiary". My IRA is currently named "Company A custodian FBO John Smith IRA". How would this be renamed?

There is some leeway on how a properly tiled inherited IRA is titled. The title must have the name of the beneficiary and the deceased IRA owner, and use the social security number of the beneficiary. For example, another correct inherited IRA title could be “John Smith, Jr. as beneficiary of John Smith, IRA.”



I was hoping you could clarify a question I have regarding the 5-year window for converted Roth IRA funds.

Is it accurate that if the first year IRA contribution was made more than 5 years ago and the investor is over 59.5 that the 5-year window for each conversion really no longer applies?

I thought that each conversion had its own 5-year window, but I just read that if the Roth had been initially funded over 5 years ago and the account owner is over 59.5 that it really doesn't matter.

Thank you,


The answer to both of these questions is the same. The 5-year rule for conversions has to do with the 10% early distribution penalty. If the account owner is age 59 ½ or older now, there is no 10% penalty on a distribution of a converted amount. When the account owner is under age 59 ½ and takes a distribution of a converted amount within the first 5 years, the 10% early distribution penalty will apply.

The other 5-year rule applies to a qualified distribution. Once you have qualified distributions, there are no taxes or penalties on any amounts withdrawn. To be qualified, a distribution must be:

taken 5 years after your first Roth IRA is established
after attaining age 59 ½; OR
after your death, disability, or for a first time home purchase.

- By Joe Cicchinelli 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

IRAs and Wills Don't Mix

IRAs and willsA Will is a legal document under state law where you name a person to manage your estate and divide your property after you die. Property in your estate must pass through “probate”, which is the process under your state’s law of how your estate is administered and who gets your property. Ideally, you should have a Will. If you don’t, then state law will decide who gets your property after you die. That might not be what you want, so it’s better for you to decide who gets what by having your own Will.

If you also have an IRA, you probably named a beneficiary of that account on the custodian’s beneficiary form. The IRA beneficiary form decides who gets your IRA after your death; not your Will. The only time your Will would control who gets your IRA is if your estate is the beneficiary. Generally, it’s not a good idea to name your estate as the beneficiary of your IRA.

Regardless of whether you have a will or not, if your estate is the beneficiary of your IRA, then your IRA must go through the probate process. That could be costly and time consuming. But far worse than that, when the estate is the beneficiary of an IRA, the death distribution options are limited and your IRA funds will have to be paid out more quickly.

Let’s say your estate is the beneficiary of your IRA and your children are the beneficiaries of everything in your estate. If you die at age 65, your children who get your IRA through your estate will only have 5 years to distribute those funds out of the IRA. They can’t use a stretch IRA and stretch distributions over their own life expectancies because the estate was the beneficiary of your IRA. An estate does not have a life expectancy. If we instead assume you die at age 75, then your children will have to take death distribution out over your remaining life expectancy. That’s not ideal because your children’s life expectancies are much longer than yours because they’re younger. What this means is that they’ll have much less time to deplete the IRA versus if they could use their own life expectancies (the stretch IRA). Again, the estate as IRA beneficiary put them in a bind by prohibiting them from using the stretch IRA.

-By Joe Cicchinelli and Jared Trexler

Is There a Tax Advantage to Giving an IRA Distribution to My Granddaughter For College Tuition?

This week's Slott Report Mailbag includes questions about helping your grandchildren pay for the ever-rising cost of college tuition plus the intricate 60-day IRA rollover rule. 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]
In 2013, I will give my granddaughter $6000 (estimate) for college tuition. Is there a tax advantage in taking it from my IRA? Designating it RMD (required minimum distribution)? I am 71 years old. Could you include any advice regarding tax efficient ways to fund college costs? Thank you.


You will be taxed on the full amount of the IRA withdrawal (unless you have after-tax funds in your IRA) even though you gave it to your granddaughter for college tuition. The IRA withdrawal will automatically count towards your RMD if you have not yet taken all of it at the time of the withdrawal.


I took out $20,000 from my IRA last month in two withdrawals. I'd like to complete the rollover of $20,000 with one deposit to my IRA during the 60-day rollover time frame from the time of the first withdrawal. Is this a permissible qualified rollover? Is the one time within in one year refer to the distribution or the redeposit rollover?

If the two withdrawals were taken on two different days from the same IRA plan, then only one of them is rollover eligible within 60 days. The one-rollover-per year rule (12 months) begins on the day the distribution is received by you, not when it is redeposited (rolled over).

-By Joe Cicchinelli and Jared Trexler

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.

IRA contribution for childrenThe 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

IRAtv: International Tax Questions Involving Retirement Accounts

We receive questions every day involving international tax issues as they relate to retirement accounts. Does someone need to name a United States citizen as the benefi
international tax questions retirement accounts
ciary of his/her IRA? Is the Stretch IRA option available for non-U.S. citizens? Can someone combine his/her foreign retirement plan with his/her IRA?

Ed Slott and Company IRA Technical Consultant Jeffrey Levine answers all of these questions and more in this IRAtv YouTube video on international tax questions relating to retirement accounts. Make sure to subscribe to Ed Slott and Company's YouTube page here to receive email notifications on posted informational videos.

-By Jeffrey Levine and Jared Trexler

Hardship Distributions from 401(k)s Carry a Hefty Cost

If you have a retirement plan where you work, that plan might allow you to take a distribution from it if you are experiencing financial hardship. Employer retirement plans are not required to provide for hardship distributions, so make sure to check with the plan administrator. Here is IRS FAQs regarding retirement plan hardship distributions.

Often times, retirement plans that allow you to save money from your paycheck and deposit it into the plan (known as employee salary deferral contributions) allow hardship distributions. These plans include 401(k) plans.

hardship distribution 401(k)Under IRS rules, a hardship withdrawal must be for an immediate and heavy financial need and because you have no other financial resources. If your 401(k) plan does allow hardship distributions, it must state the specific criteria to determine what is considered a hardship. For example, your plan might allow a hardship distribution but only for certain expenses, such as funeral or medical expenses or to prevent eviction.

You won’t be able to take out your entire 401(k) balance: there are limits. For example, many plans will only allow you to take out the amount you put in as a salary deferral contribution.

One of the biggest problems of taking a hardship distribution is that it is taxable to you. To make matters worse, it’s also subject to an additional 10% early distribution penalty if you’re younger than age 59 ½. And you won’t be able to avoid the tax by rolling the funds over to an IRA because hardship withdrawals are not eligible for rollover.

Another problem is that, unlike plan loans, hardship distributions are not allowed to be repaid to the plan. So, a hardship distribution permanently reduces your balance under the plan.

So between the income taxes that you’ll owe on the distribution (and maybe even a 10% penalty), plus the permanent reduction in your retirement account balance, hardship distributions are very costly.

-By Joe Cicchinelli and Jared Trexler

Spousal Waivers and IRAs

You are married and have an IRA. You know you need to name a beneficiary for those funds. But what if you do not want to name your spouse as the beneficiary? Are you required to name him or her? Under federal law, and IRAs are governed mostly by federal law, you are not required to name your spouse as your IRA beneficiary. You can name anyone you want as the beneficiary. They don’t even have to be a relative.

State law will have some impact here, though. If you live in a community property state, you will most likely need to have your spouse sign a waiver before you can name a non-spouse beneficiary for your IRA funds. In some states, you can “disinherit” your spouse by naming someone else on the beneficiary form, but the spouse could have the last laugh. Some states allow a disinherited spouse to make a right of election against the estate and the spouse would then end up with some of your assets. He or she could then laugh all the way to the bank.

In most employer plans, if you are married and want to name someone other than your spouse as the beneficiary of your plan benefits, you must have your spouse sign a waiver.

Be careful who signs the waiver. It must be a spouse. Documents signed by a fiancé, such as a pre-nuptial agreement, do not count. Once a spouse signs a waiver, update the beneficiary form. You should do both steps to ensure that your assets go to the beneficiaries that you select.

Divorce decrees also don’t count. A spouse can waive rights to retirement benefits in a divorce decree, but as long as a beneficiary form naming the spouse remains in place, that spouse - now the ex-spouse - will, in most cases, end up with the retirement benefits. Always update beneficiary forms after a divorce.

Beneficiary form reviews should be a key component of your financial plan, whether you are your own planner or you have a professional doing this for you. You can see how something that seems so simple can quickly become complicated.

-By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can IRA Distributions Make Me Susceptible to 3.8% Healthcare Surtax?

This week's Slott Report Mailbag looks into two tricky areas of IRA planning. The first is how IRA distributions affect an individual's income, and in turn, their susceptibility to the 3.8% health care surtax. We then answered a question about the equally problematic Roth IRA 5-year rules. We receive many questions on a process wrought with possible mistakes and penalties - so much so that we created an entire Roth IRA 5-Year Rules pamphlet! Do you know who knows all about the 5-year rules? An Ed Slott-trained advisor in your area.

On to the mailbag...

1. 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, tax and retirement planning questions
Send your questions to [email protected]


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.

2. I have a Roth IRA that is over 5 years old, and last December I converted my Traditional IRA into a Roth IRA (paying the income tax on the non-basis amount on my 2012 tax return), then combined it with my existing Roth IRA. First, was it okay to combine them, and secondly do I have to wait for 5 years until I can withdraw the amount I had converted?

It was okay to combine them. There are ordering rules for Roth distributions and all your Roth IRAs are considered one Roth IRA. Your contributed funds will be deemed to be the first amounts distributed. Then your conversion funds, first in, first out. If you are younger than age 59 ½ when you withdraw conversion funds within five years of the date of conversion, you’ll be assessed the 10% early distribution penalty on the amount that was taxable when you converted. The last funds out are earnings. To have a tax and penalty free distribution of earnings, the distribution must occur at least five years after the date you established your first Roth IRA and after you are age 59 ½ or dead, disabled, or for a first time home purchase.

3. We are looking to convert an IRA to a Roth IRA. We took a loss on a variable life policy that was converted to an annuity. Can we use that loss to offset the tax due on a Roth conversion?

The conversion of the IRA to a Roth IRA is treated as ordinary income on the tax return. You can only offset that income with deductions that will offset ordinary income. You should consult with your tax preparer to see if this particular loss qualifies to offset his ordinary income.

-By Joe Cicchinelli and Jared Trexler

Moving an IRA That is Making 72(t) Distributions

You are under age 59 ½ and need funds from your IRA to live on. You set up an early distribution payment plan that will be exempt from the 10% early distribution penalty (called 72(t), SOSEPP, or SEPP payments). You now want to move that account from your current IRA custodian to a new one. Can you do that?

moving an IRA 72(t) distributionsIf at all possible, you are better off not moving the funds. The only guidance we have from IRS on 72(t) payments is in Revenue Ruling 2002-62 and Notice 89-25. You are not allowed to change the balance in the IRA that is making the 72(t) distributions. You cannot make contributions or rollovers into that account and you cannot take funds out of the account other than the 72(t) distributions. In addition, Rev. Rul. 2002-62 says that you cannot make a “nontaxable transfer of a portion of the account balance to another retirement plan.”

In a recent private letter ruling, IRS ruled against a taxpayer who was taking 72(t) distributions. His advisor changed companies and the taxpayer wanted to stay with his advisor. He attempted to transfer the entire balance of his IRA to the new company. He later discovered that the new company would not accept one of the investments in his IRA so only a portion of the account was transferred. The rejected investment remained in an IRA at the old company.

Then the new company reestablished his 72(t) payments in the wrong amount. Corrections were subsequently made and the taxpayer asked IRS to forgive the errors that were made and to allow the payment schedule to continue. IRS has forgiven errors made by IRA custodians in the past. But in this case, IRS did not rule in the taxpayer’s favor. The reason they gave was that only a portion of the account was transferred.

The end result is that the taxpayer now owes the 10% penalty on all distributions taken to date, plus interest and perhaps penalties. Setting up a 72(t) schedule requires a commitment on the part of the IRA owner. You commit to taking only the amount of the 72(t) payment from that IRA, potentially kept at the same IRA company, for a minimum of five years. This is a commitment that lasts longer than many marriages.

-By Beverly DeVeny and Jared Trexler

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.

3 Unexpected Ways Your Retirement Account Could Cost You

When managing your retirement account, you should be aware of the unexpected ways those employer-sponsored or IRA accounts could actually COST you. Jeffrey Levine details 3 of those situations in the article below.

Student Aid
If you have a child who is already a college student or is quickly approaching that age, chances are you’ve noticed the extravagant costs that have come to be associated with post-secondary education. In today’s world, a four-year degree at even the most affordable of state-run colleges can easily run into the tens of thousands. It should come as little surprise then that students and parents alike go to great lengths to seek out any financial aid they qualify for to help with the cost. But can your IRAs impact your (or your child’s) ability to claim financial aid?

Well, thankfully there’s some good news here. Retirement accounts can generally be excluded from your assets when you’re filling out the free application for federal student aid (FAFSA). This includes your IRAs and Roth IRAs, as well as your company sponsored retirement accounts. It’s not all roses though. Although you can generally exclude these accounts from a FAFSA application, certain colleges and universities do look at these accounts when determining who qualifies for their own student aid programs. Plus, the FAFSA application includes questions on your income, which can be increased when you take distributions from your retirement accounts or make Roth conversions.

Medicare Premiums
What in the world does your IRA have to do with your Medicare premiums? Nothing, provided your money stays in an IRA. Start taking taxable distributions from your IRA or other tax-deferred retirement accounts though, and suddenly, your IRA can have a lot to do with your Medicare premiums.

That’s because Medicare Part B premiums are income based. For 2013, the “standard premium” is $104.90 per month. However, depending on your income, you could pay more than three times that amount! Those with the highest incomes must pay an additional $230.80 per month in 2013. Ouch! That income could be from continued employment, interest, dividends or other sources, including IRA distributions and Roth conversions.

Here’s the weird thing about the Medicare Part B premiums you need to know. They are generally based off of your tax return from two years prior. So that means that if you make Roth IRA conversion now, in 2013, you might not finish really paying for it until 2015! Some of you may be finding this out first hand this year, as Medicare Part B premiums for 2013 might be increased thanks to the additional income reported on your 2011 tax return from your 2010 Roth IRA conversion (remember, a special rule in 2010 allowed Roth converters to split income evenly over 2011 and 2012).

Taxation of Social Security
If you are currently receiving Social Security benefits, the amount of those benefits included in your gross income and subject to income tax depends on your “combined” - a.k.a. “provisional” - income. This calculation is a little complicated, but needless to say, it includes taxable income from your IRAs and other retirement accounts, as well as Roth conversions. If your income is low enough, you won’t pay tax on any of your Social Security benefits, but if your income is higher, you could pay tax on up to 85% of your benefits. If you’re planning on taking an IRA distribution or making a Roth conversion and receive Social Security benefits, you should factor in any impact it might have on the taxation of your Social Security benefits first.

-By Jeffrey Levine and Jared Trexler

Retirement Plan Simplification Legislation Proposed in Congress

On May 22nd, Congressman Richard E. Neal (D-MA) introduced H.R. 2117, The Retirement Plan Simplification and Enhancement Act of 2013, in the House of Representatives. H.R. 2117 is proposed legislation that is intended to boost retirement savings.

Rollovers of Life Insurance to IRAs Would be Allowed
The bill proposes several IRA related changes. One proposed change would allow the rollover of insurance contracts from your employer's qualified retirement plan (e.g., 401(k)) into your IRA. Currently, you cannot invest any part of your IRA in life insurance contracts. You can, however, invest a limited amount of your employer retirement plan money in life insurance. Under the current rules, you can’t roll over your life insurance contract in your employer retirement plan to your IRA. The new legislation, if enacted would allow you to do so.

No Required Minimum Distribution for Balances Under $100,000
Currently, everyone who has an IRA or other retirement account must take required minimum distributions (RMDs) starting at age 70 1/2, regardless of the balances in those retirement plans. It doesn’t matter if your total balances are $50,000 or $5,000,000; you have to take RMDs. Under the proposed legislation, the RMD rules would be relaxed and you would not be forced to take RMDs if your total balance in all retirement accounts is $100,000 or less.

60-Day Rollovers for Non-Spouse Beneficiaries
Under current law, if you are a non-spouse beneficiary of someone who died and left you their IRA or employer retirement plan, you cannot move those retirement funds to a beneficiary (or inherited) IRA via a 60-day rollover. If you inherited an employer retirement plan or IRA and you’re not the decedent’s spouse, the only way to move those funds, under current law, is by way of a direct rollover or transfer. When money is moved in this manner, it goes directly from one retirement account to another and you don’t have control or use of the money while you’re moving it. Under H.R. 2117, you would be allowed to take a distribution made payable to yourself and do a rollover within 60 days, similar to the way you can move your own retirement funds.

Caution: The above proposed changes have only been introduced in Congress and are NOT law. Check back to The Slott Report for updates.

-By Joe Cicchinelli and Jared Trexler