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

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

Moving Your Roth IRA to another Roth IRA

moving Roth IRA to another Roth IRAIf you have a Roth IRA, you may want to move that money to another Roth IRA elsewhere. There are lots of reasons you might want to do so. For example, maybe the current financial organization that has your Roth IRA has high account fees, and you would like to find another custodian with little or no fees. Or maybe you’ve found a new financial advisor who works with a different custodian than your current one. Whatever the reason, you can move your Roth IRA funds to another custodian at any time. But, there are certain rules that must be followed.

There are two ways to move Roth IRA money to another Roth IRA:
1. 60-day rollover
2. Direct transfer

If you choose the 60-day rollover option to move your Roth IRA money, you first must ask for a distribution payable to you from your current Roth IRA custodian. After you receive the distribution, you have 60 days from the date you receive the funds to redeposit (rollover) them to another Roth IRA. If you miss the 60-day deadline, the funds aren’t rollover eligible and you will lose the benefit of future tax-free compounding of earnings on that money inside a Roth IRA. Also, you a
re limited to one-rollover-per 12 months from each Roth IRA you have.

If you choose the direct transfer option, you ask your current Roth IRA custodian to transfer the funds directly to your Roth IRA at another custodian. In a direct transfer, you don’t have use or control of the money; it’s sent right to your Roth IRA elsewhere. The direct transfer option has the advantage of not being subject to a 60-day limit or a one-rollover-per-year restriction. As a result, the direct transfer option is less problematic than the 60-day rollover option.

If you have assets in your Roth IRA such as securities, those assets can also be moved to another Roth IRA. If you choose the 60-day rollover route, the same assets that are distributed to you must be rolled over.

- By Joe Cicchinelli and Jared Trexler

IRA Roundtable: Talking New Tax Laws, Tax Time Planning Strategies

Ed Slott and Company is spending two full days talking about the new tax laws, IRAs, retirement distribution planning and more during our 2-Day IRA Workshop starting tomorrow in Orlando.

We took some time in the video below to talk about the new tax laws (American Taxpayer Relief Act of 2012) and key planning strategies and dates clients and their tax team should be aware of when filing their 2012 tax returns.

We hope you enjoy the video below (take notes), subscribe to this page so you can receive email notifications when we post new articles and visit www.IRAhelp.com to learn more about our IRA seminars and resources.

Slott Report Mailbag: Is a Qualified Disclaimer of an IRA Reported to IRS?

Retirement planning has many nuances, far more than the average investor can adequately negotiate.  That is why an educated financial advisor is so important. He or she can help said investor navigate all pitfalls and answer all questions. This week's Slott Report Mailbag looks at some tricky subjects - disclaimers, step transactions, investing options within a Roth. These people didn't have the right answers - but a knowledgeable financial advisor should.  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.



I have a question:

Send questions to [email protected]
If you disclaim/refuse an IRA inheritance/inherited IRA, is that information reported to the IRS or is it only reported if/when you accept the inheritance and pay tax on it?

Thank You,

A qualified disclaimer of an IRA is not reported to the IRS. The disclaimer is filed with the financial institution that has the IRA. If you as beneficiary do not take a required minimum distribution from the IRA and you disclaim your entire portion, you will not receive IRS Form 1099-R.


Dear Mr. Slott,

I have purchased most of your courses over the years and have been a follower for many years; however, I have never seen anyone address one question I have. I realize that MLPs (master limited partnerships) are NOT a good investment for IRAs, due to tax consequences. However, since my Roth IRAs are supposed to be tax FREE, can I invest in publicly listed and traded MLPs and REITs (real estate investment trusts) or oil trusts, etc, in my Roth IRA, due to the fact that there are supposed to be no further taxes on my Roth IRA or any legitimate withdrawals? After all, I have already paid all the taxes due on the Roth, so wouldn’t the MLP tax problem NOT exist for the Roth?

While some investments such as limited partnerships, REITs, and tax-free municipal bonds have certain tax characteristics and benefits when the investments are owned outside of an IRA, those characteristics generally do not apply when the investment is purchased inside any IRA. The taxation of a Roth IRA generally is based on the aggregation and ordering rules, regardless of the investments inside the Roth IRA. However, certain unrelated business and debt financed investments will create unrelated business income tax which must be paid by the IRA or Roth IRA. The IRA must file Form 990-T to report and pay this tax. The issue of taxation of an investment is something you should explore with the promoter or advisor recommending the investment to you.


Dear Mr. Slott:

I attended one of your Chicago seminars a few years back, and greatly enjoyed it. You are THE Expert!

I have an unusual (perhaps unique?) question for you/your staff. I converted a small IRA in 2011, and inadvertently included a very small $2,000 variable annuity contract in the conversion. This particular annuity contract has very desirable guaranteed growth, income and death benefit features, at a very low internal cost. I now would like to make a large addition of rolled-over 401(k) funds to that same contract, but unfortunately, my retirement funds will roll in a traditional rollover IRA. The desired end investment vehicle (my small annuity contract) is now over in my Roth IRA.

It is too late to re-characterize the 2011 conversion, without a PLR (private letter ruling). But could the following strategy possibly achieve my goal of getting my now Roth account annuity back into a traditional IRA?
  1. Make a new traditional IRA contribution for 2012 or 2013. (This would be my only traditional IRA account, which solves the 'aggregation' issue.)
  2. Convert that IRA to a Roth IRA, combining those converted funds with my small existing Roth IRA account (where the annuity is held).
  3. Then, do a partial Re-characterization a portion of my Roth Conversion amount, and include the annuity contract as part of the value of the recharacterization?
Basically, I am presuming the IRA assets are fungible, and that the IRS only cares about the amounts converted, and not the specific asset type involved. What am I missing?

Your thoughts would be appreciated.

Best regards,

R. Shawn Jones

Your series of step transactions only make sense if you do not want to convert the 401(k) balance to a Roth IRA. You do have the ability to convert the 401(k) funds directly to the Roth IRA holding the annuity. If you do not want to pay the income tax on a conversion of the 401(k) funds to your Roth IRA then your IRA contribution that is converted to a Roth IRA will be taxable unless it was a nondeductible IRA contribution. However, you can recharacterize (reverse) that conversion amount or a portion of it (plus its pro-rata gain or loss) back to an IRA using a formula that uses the entire fair market value (FMV) of the Roth IRA. The FMV of the annuity contract in the Roth IRA may be much greater than its cost because of the guaranteed income and death benefits, which must be included in the FMV calculation.

After the recharacterization amount (including the gain or loss) is calculated, that amount must be transferred back to the IRA. The recharacterization amount can be satisfied by transferring back any asset in-kind from your Roth IRA as long as the FMV of the asset transferred back to the IRA is equal to the recharacterization amount. Also, whether the terms of the annuity contract would allow an in-kind transfer back to your IRA should be addressed with the insurance company before you proceed.

- By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: Did The New Tax Law Add Income Limits to a Roth Conversion?

This week's Slott Report Mailbag talks about how (if at all) the new tax law affected Roth conversion planning, as well as a look at Roth IRA rollover rules and the ways you can withdrawal 401(k) money early without penalty (can you do that?). 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, tax, retirement planning questions
Send questions to [email protected]
I want to convert to a Roth IRA in 2013. Did the 2013 tax law add any income limits to a Roth conversion?

No. There are no income limits to convert IRA funds to a Roth IRA. Any IRA owner can do a conversion. There is also no limit on the dollar amount of IRA funds that you can convert to a Roth IRA.


I wasn't happy with the investments inside my Roth IRA so I took a distribution from it and deposited the funds into a non-IRA investment account. I now found a great financial adviser and would like to roll over all that money into a Roth IRA with my adviser. It's within 60 days of the Roth IRA withdrawal. Can I do the rollover?

Probably. In general, since it's within 60 days of the distribution, the amount of the Roth IRA distribution can be rolled over tax-free to another Roth IRA. It doesn't matter what you did with that money during the 60 days. Any gains you earned in that non-IRA investment account during the 60 days cannot be rolled over. However, if you have made any other Roth IRA-to-Roth IRA rollovers into or out of that account within the past 365 days, you would be prohibited from completing another rollover at this time, and would be forced to keep the funds in a non-Roth IRA account.


I'm age 51, have a 401(k) plan, and would like to withdraw money penalty free for a down payment on a first home. Can I do that?

No. The exception to the 10% early distribution for first home purchases applies to IRAs only; not 401(k)s. However, if you're entitled to take a distribution from the 401(k), you could roll over the funds to an IRA and then take a penalty-free IRA distribution from there, assuming you meet the other first-time home-buyer penalty exception rules.

- By Joe Cicchinelli and Jared Trexler

Don't Forget About Your 2010 Roth Conversion on Your 2012 Tax Return

As we gather our information to prepare our federal income tax return for 2012, don't forget about that Roth IRA conversion you did all of the way back in 2010. A conversion you did from a company plan or IRA to a Roth IRA in 2010 will likely need to be reported on your 2010 tax return.

Before 2010, there were restrictions on who could convert IRA money to a Roth IRA. For example, if you were single or married filing jointly, your modified adjusted gross income (MAGI) had to be less than $100,000 for the year to be eligible to do a conversion. If you were married filing separately, you could not do a Roth IRA conversion, even if your MAGI was less than $100,000.

Starting for 2010, the Tax Increase Prevention and Reconciliation Act (TIPRA) eliminated the $100,000 income limit, allowing you to convert your IRA to a Roth IRA, no matter how much your MAGI was for the year. Also, if you are married filing separately, you are now eligible for a conversion. Basically, every IRA owner could convert to a Roth IRA starting in 2010.

What is the general rule? When you convert IRA or company plan money to a Roth IRA, the conversion is taxed for the year the money was distributed from the retirement plan. But there was a special 2-year tax break for conversions done in 2010. Unless you chose to have the entire conversion amount taxed in 2010, none of the income from the conversion was taxed in 2010; instead, half of the income was taxed in 2011 and the other half in 2012.

If you did a Roth IRA conversion in 2010 and took advantage of the 2-year special tax break, remember that the remaining half of that 2010 conversion amount is taxable for 2012. To figure what’s taxable for 2012, simply go to your 2010 copy of IRS Form 8606, and look at the amount in line 20b, Amount subject to tax in 2012. This is the amount of income that needs to be added to your 2012 federal income tax return (IRS Form 1040).

If you took a distribution of any 2010 conversion funds in either 2010 or 2011, the amount to be included in income for 2012 should be reduced. The reduction would be calculated on Form 8606 in the Distributions from Roth IRAs section of the form.

Article Highlights
• If you did a Roth IRA conversion in 2010 and used the special 2-year tax rule, half of that income is taxable for 2012
• Your 2010 IRS Form 8606 will tell you what amount remains to be taxed for 2012.

-By Joe Cicchinelli and Jared Trexler

RMD Rules: Year-End Rules of the "Game"

The end of the year is rapidly approaching. It is time to make sure that all required distributions are taken from retirement accounts.

Who must take a required distribution?
  • IRA owners who turn age 70 ½ this year or earlier - including individuals with SEP and SIMPLE IRAs who are still working for those employers
  • Plan participants who turn age 70 ½ this year or earlier - unless the employer plan allows them to defer distributions to the year they retire (not available for 5% or more owners of the business)
  • Beneficiaries of all retirement plans, including Roth IRAs, of individuals who died in 2011 or earlier
  • Individuals with 72(t) (SEPP, SOSEP, early distribution payment plans) must be sure they have taken all of their annual distribution amount to avoid the 10% early distribution penalty recapture provisions
Just a reminder - IRA distributions can be taken from any IRA,  but employer plan distributions must be taken from each plan. Of course there is an exception - it is for 403(b) plans. A 403(b) distribution can be taken from any 403(b) plan.

Required distributions are based on the prior year-end account balance. IRA account balances must be adjusted to add back in any rollovers or transfers that are outstanding at the end of the year and any prior year Roth conversion amounts that are recharacterized in the current year.

A final reminder - the qualified charitable distribution (QCD) option is not yet available for this year (2012). It expired at the end of 2011 and has not yet been extended by Congress. This is the provision that allowed IRA owners to transfer amounts directly from their IRA to a qualifying charity and not include the amount (up to $100,000) in their income for the year.

Article Highlights
  • Who must take a required distribution?
  • Aggregating required distributions
  • Adjusting year-end account balances
  • No qualified charitable distribution (QCD) for 2012...yet
-By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can I Roll a Non-Governmental 457(b) Plan to an IRA?

This week's Slott Report Mailbag comes to you live from the Arizona Biltmore Resort and Spa and our Fall 2012 Master Elite and Elite IRA Advisor Group Workshop.  We answer questions about rolling before-tax and/or after-tax money to an IRA, non-governmental 457(b) plans and rolling money to an IRA during bankruptcy.  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, tax, retirement planning questions
Send your questions to [email protected]
I turned 70 1/2 this year and I am retiring before the end of the year. I understand I need to take my RMD (required minimum distribution) from my 401(k) before I can transfer it to an IRA. I have before-tax and after-tax money in my 401(k). If I move it to an IRA, can the after-tax money be moved to a Roth IRA instead of receiving a check for that amount? Thank you.

IRS Notice 2009-68 says that if a direct rollover of only part of your funds is made (and some is paid to you), each distribution includes a pro-rata amount of the after-tax funds. It appears that the only way you could rollover only the pre-tax funds to your IRA and only the after-tax money to your Roth IRA would be to have the entire amount paid to you (i.e., not choose a direct rollover) and use the 60-day rollover rule. You could then fund the IRA first and the Roth IRA last. However, the 20% withholding rules would apply to the pre-tax portion. You would have to be able to make up the withheld amount from other personal funds. Any overpayment of taxes would be refunded to you when you file your tax return. This is a controversial topic and tax advice is needed. Further IRS clarification is needed. Your RMD cannot be rolled over.


Can a non-governmental eligible 457(b) plan be rolled into an IRA? I've checked five different sources and three of them say "no" and two of them say "yes" it can.

Who’s right?


Only governmental 457(b) plans can be rolled over to an IRA. Non-governmental 457(b) plans cannot be rolled over to an IRA.



I am in the middle of a bankruptcy and my attorney told me I could legally put some money into an IRA to protect it. I have done some research and found that you can only deposit $5,000 a year into an IRA. I have more than that to work with. I need some help with this, and I hope you can help.

The annual IRA contribution limit is $5,000 (or $6,000 is you are age 50 or older this year). If you roll over employer retirement plan money to an IRA, those rollover funds will be protected in bankruptcy. Other funds cannot be put into an IRA.

- By Joe Cicchinelli and Jared Trexler

Election Week Videos: Taxes on the Rise; Will Government Change Roth IRAs?

The Slott Report's Election Week 2012 coverage is coming to a close, just as a "mega" storm has its eyes set on the Northeast and Election Days is just 11 days away. We hope you refer back to our coverage all week to determine what IRA, tax and retirement planning issues you should read up on before the Election and watch out for no matter who comes out victorious.

And we are extending Election Week until Monday, as we will publish Jeff Levine's open letter to President Obama. Make sure to check back on Monday for that.

Ed Slott taped two special videos to wrap up our coverage.  This first video highlights an article from earlier in the week titled, "10 Ways You Might Pay More Tax in 2013" and goes into detail about several of the tax provisions listed in the piece.

The second video talks about a fear of many individuals: will the government renege on its tax-free promise with the Roth IRA?  Ed Slott explains how that is unlikely.

-By Ed Slott; compiled by Jared Trexler

Slott Report Mailbag: Can I Use My Roth IRA Contributions To Buy My First Home?

This week's Slott Report Mailbag comes during an important time. The election is less than two weeks away, and we have devoted an entire week to covering the IRA, tax and retirement planning issues you care about. This week's mailbag includes questions on life insurance, using Roth IRA funds for a first-time home purchase and how to take the required minimum distribution (RMD) for a deceased parent in the year of death. 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.


Dear Mr. Slott,

I just purchased your book "Retirement Savings Time Bomb." A client that is going through the estate planning process recommended it to me. My favorite life insurance agent borrowed it before I could finish, but I have one question for you. In your section on roll back, you mention purchasing the life insurance within the plan without taking a taxable distribution. Don´t the life insurance benefits remain in the estate in case of death?
Send questions to [email protected]

Eric L. Hughes

Yes. The value of your retirement plan assets, including life insurance within your employer plan, is included in your estate. Even though life insurance is income tax free, it could be subject to estate taxes. Purchasing life insurance in a plan is a last resort. Generally it should only be done when the individual cannot otherwise purchase life insurance. There should also be an exit strategy for the life insurance. It is an asset that cannot be rolled over to an IRA.


I am 26 and I have been contributing to my Roth IRA since I was 18. I originally had an account with American Funds, but due to fees, etc. I opened a Roth IRA with Vanguard earlier this year and transferred the funds. Now, I am looking to purchase my first home and was considering taking funds from my Roth IRA. The “5-year rule” is confusing me and I am not sure how this applies to me, given my circumstances. Are the funds in my Vanguard IRA subject to penalty free, tax-free withdrawal for the purpose of buying my first home? Or must I wait the full 5 years from the date I opened my new Roth IRA to be able to withdrawal the funds tax free?


Mark McLaughlin

You can always withdraw your contributions to the Roth IRA tax and penalty free. In your case, the five year rule for withdrawing up to $10,000 of earnings tax-and-penalty free has been satisfied. Because you will use the funds for a first home purchase ($10,000 lifetime limit) and you started a Roth IRA more than five years ago, the withdrawal of earnings will be tax and penalty free (known as a qualified distribution). The five-year clock does not reset when you opened your new Roth IRA.

I have read numerous stories but can’t seem to get a clear answer. My mom passed away this June and did not take her 2012 RMD (required minimum distribution). The beneficiaries on her IRA CD are my brother and I. I have read that we take the RMD amount just as if she were still living, but do we take the distribution reporting it under her Social Security number and report the income on her final 2012 taxes or do we each report half of that distribution on each of our 2012 taxes as income? The IRA CD is still right now in her name and no changes have yet been made since her death. Please help.



You and your brother must take the distributions under your respective Social Security numbers. It is taxable to you and your brother as a death distribution. The IRA must be split and properly retitled as inherited IRAs. For example, Mom Smith (deceased June 3, 2012) IRA fbo Carol Smith.

Article Highlights
  • Even though life insurance is income tax free, it could be subject to estate taxes
  • If you are using Roth IRA funds for a first home purchase ($10,000 lifetime limit) and you started the Roth IRA more than five years ago, the withdrawal of earnings will be tax and penalty free (known as a qualified distribution)
  • As a beneficiary of a deceased parent, the required minimum distribution in the year-of-death must be taken under your social Security number and it is taxable to you as a death distribution
- By Joe Cicchinelli and Jared Trexler

Recharacterize a 2011 IRA Contribution After October 15? Probably Not

Monday October 15, 2012 was the deadline to recharacterize an IRA contribution for 2011. Now that we are past that date, is it possible to get an extension for time to do a recharacterization? Probably not.

ed slott recharacterization deadlineWhen you recharacterize, you essentially change your IRA contribution from one type of IRA to another. In most cases, a recharacterization involves reversing a Roth IRA conversion. Some or all of the conversion can be recharacterized with its net income attributable (gains or losses). A recharacterization can be done for any reason but certain rules must be followed. For example, both the Roth and the traditional IRA custodians must be notified of the recharacterization in writing and the recharacterization must be done as a trustee-to-trustee transfer (a direct transfer, not a withdrawal from the Roth IRA and a subsequent deposit to an IRA).

Even though the 2011 recharacterization deadline has passed, it might be possible to get more time to recharacterize. The IRS can give you more time beyond the standard October 15 deadline to recharacterize when, based on the facts and circumstances, you acted reasonably and in good faith. The IRS gives the extra time through a private letter ruling (PLR) request. In most of these PLRs, the taxpayers determined, after the October 15th deadline, that their conversions were not allowed because their income exceeded the $100,000 limit in years before 2010. However, the IRS fee for a Roth recharacterization is $4,000, not including professional fees to prepare a PLR request, which can run an additional $5,000 to $10,000.

From a practical standpoint, unless you can convince the IRS that you have an extenuating circumstance that warrants more to time to recharacterize and you can pay the $4,000 IRS fee plus the tax pro’s fee, you won’t get more time to recharacterize.

Article Highlights
  • The 2011 recharacterization deadline was October 15, 2012
  • IRS sometimes will give you more time to do a recharacterization
  • The IRS fee for a later recharacterization request (PLR) is $4,000 
- By Joe Cicchinelli and Jared Trexler

Paying the Tuition Bill with Retirement Assets

A friend of mine, who was paying college tuition for twins, once said to me that you should borrow for college expenses because you cannot borrow to pay retirement expenses. While this is true, the reality is that sometimes we may have to look at funding some of our children's higher education expenses from whatever assets we can find, including our retirement accounts. There are differences, though, in how distributions from different types of accounts will be treated.

Employer Plans - Distributions of pre-tax funds for higher education will be taxable and also subject to the 10% early distribution penalty if you are under age 59 ½ (there is an exception to the penalty if you separated from service in the year you turned age 55 or later).

IRA Accounts - Distributions of pre-tax funds for higher education will be taxable but will not be subject to the 10% early distribution penalty if they meet certain guidelines. We are currently running a series on the educational expense exception to the 10% penalty. CLICK HERE to read the first 3 of 4 parts.

Roth IRA Accounts - Distributions of contributions and converted amounts will not be subject to income tax. Distributions of pre-tax converted funds for higher education will not be subject to the 10% early distribution penalty if they meet certain guidelines. Distributions of earnings take place once all the contributions and converted amounts are deemed to be distributed. Earnings will be taxable if there has not been a Roth IRA in place for five years and if you are under the age of 59 ½. The 10% early distribution penalty can again be avoided if certain guidelines are met. This procedure runs in accordance with the Roth IRA 5-year rules. CLICK HERE to read some of our other articles on these tricky guidelines.

You can find more information on the guidelines for the early distribution penalty exception for higher education in IRS Publication 590 which is available on the IRS website at www.irs.gov. On the left hand side of the screen, click on Forms and Publications.

- By Beverly DeVeny and Jared Trexler

IRAtv: Roth IRA Contribution and Conversion Differences and Limits

Ed Slott answered a consumer question about Roth IRA contributions and conversions in this installment of IRAtv. America's IRA Expert details the differences, limits and processes involved with Roth IRA contributions and conversions. You can subscribe to our IRAtv page by CLICKING HERE. 
IRAtv videos can also be seen here at The Slott Report and at our website, www.IRAhelp.com.

-By Ed Slott and Jared Trexler

July 4th: Your Independence From Taxes

Ed Slott, America's IRA Expert, talks about halftime in 2012 and the upcoming July 4th holiday as a backdrop for moving more of your money from FOREVER taxed to NEVER taxed while tax rates are at historic lows. Ed provides some key 2012 retirement planning strategies, including Roth IRAs and Roth 401(k)s, in this IRAtv video.

IRA Rollovers, Roth IRA Conversions and Inherited IRAs Highlight Slott Report Mailbag

This week's Slott Report Mailbag answers your questions on IRA rollovers, the Roth conversion conversation when dealing with Social Security benefits as added income, and inherited IRAs. We answer situational questions asked by individuals, couples, and parents who are searching for the best way to leave an inherited IRA to their daughters. 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.

Slott Report Mailbag
Send questions to [email protected]

I transferred a stock from my IRA to my regular (non IRA account) and then transferred the exact same number of shares of the same stock back into my IRA within 60 days. However, the value of those shares was $10,000 higher.

Do I have a problem because I put more money into the IRA even though I transferred the same number of shares?



There is no problem. Your distribution of property (shares of stock) from your IRA qualifies to be rolled over tax-free within 60 days only if the identical stock is rolled over to a receiving IRA. It is common for the value of stock to change during the 60-day window. That’s OK and still qualifies as a tax-free rollover. When your tax return is filed for the year, your tax preparer may want to attach a note to explain the different values.


We currently have $460,000 in traditional IRAs. I am 65 years old and must start taking RMDs (required minimum distributions) at 70 1/2 years of age. We also have $150,000 in Roth IRAs over 5 years old. My wife and I are not consuming any IRA money at this point. I do have the funds to pay the taxes on conversion from outside the IRAs.

We are both on Social Security and a fixed benefit pension, but have low expenses and no outstanding debt. If we convert some of the IRAs each year from now to 70.5, it will make 85% of our Social Security taxable each year, while it is only taxed a small amount now. Would it be better to do it all the conversions in one year, bite the bullet and pay the higher tax rate, or do 10 or 20% each year, thus having to include 85% of our Social Security as income? What do you think?

The taxation of your Social Security benefits is one of many factors to look at. Whether you should convert your IRA to a Roth IRA depends on many other factors. Basically, you must decide whether the future benefits of the Roth IRA (i.e., tax-free withdrawals) are better than the cost of paying taxes on the conversion.

IRA owners who have non-retirement plan money to pay the taxes on the conversion often benefit from a conversion because they are not depleting their tax-advantaged retirement plans to pay taxes. There are also benefits from a Roth IRA as an estate planning tool (i.e., to leave funds to heirs tax-free).

We recommend that you speak with a qualified advisor who can get more detailed financial and tax information from you to help you make the right decision.


Our son died of cancer last year and left his approximately $85,000 taxable funds to my husband and myself, each getting half. However, his instructions were that the funds were to go to his four sisters. We rolled the funds over into an inherited IRA, with the plan of taking it out over 3 years, paying the taxes (we don't have enough income to pay taxes, but adding this amount will make it necessary for us to pay taxes on our Social Security, which we have never needed to do) expecting the girls to choose cash or rollover if one of us passes before the 3 years is out. The first distribution would be taken this December.

I am 79 and my husband is 90.

Is there any better way to do this to lessen the tax burden?

We will assume that by taxable funds you mean that you inherited either an IRA or an employer plan from your son. We will also assume that you did a direct transfer of the funds from his IRA to a properly titled inherited IRA - example Son, deceased, IRA fbo Parent - and that a check was not payable to you.

Now, can you lessen the annual tax burden? Only by taking smaller distributions each year. Your husband’s required distribution should be less than $8,000 on his half of the inherited $85,000 and your required distribution would be even less than that. In addition to the income taxes owed on the IRA distribution and on your Social Security payments, you may also see an increase in your Medicare Part B premium two or three years from now as that is also based on your annual income. You might want to look at the tax costs if you empty the account in one year compared to the tax costs if you empty the account over three years to see which method will actually cost you less. You might also want to consider asking the girls to help you out with the tax costs.

This was an expensive way for your son to leave some funds to his sisters. It would have been better all around if he had simply named them on the beneficiary form. Then any taxes due would have been their responsibility, and if they had wanted to stretch out the distributions they could have done so over their own life expectancies.

In order for the girls to be able to keep the funds in an inherited IRA at your death, they must be named as successor beneficiaries of your inherited IRA. Distributions at your death (or at your husband’s death) would have to continue to be made using your life expectancy, not the life expectancy of the girls.

-By Joe Cicchinelli and Jared Trexler

Social Security as a Cheap Annuity Option (Part 2 of 2)

Receiving Social Security Check
A recent report released by the Center for Retirement Research at Boston College shows that Social Security is one of, if not the cheapest annuities available (click here to see the report). "Well that doesn't make much sense" you might be saying to yourself. After all, you don’t "buy" your Social Security annuity payments right? You're simply entitled to receive them after meeting certain requirements.

We first touched on this subject in an article last Wednesday. CLICK HERE to read Part 1 of the article.

Part 1 of the article concluded with the following text:
According to the study, if you compare the cost of buying this annuity to other alternatives, you’re usually going to find it’s a less expensive option. Plus, unlike many other lifetime income options, Social Security payments are indexed for inflation, meaning that the additional $800 you receive will increase in future years along with the costs of goods and services, helping you to retain your purchasing power.

That’s nice, but what does this mean for IRA owners?

Well, here's your answer.

Well, it means that you may want to seriously consider using your IRA and/or other retirement funds to meet your living expenses and delay taking Social Security. The longer you wait to take those payments, the higher they will be (up to age 70). Of course, using IRA funds in lieu of Social Security payments has a number of disadvantages as well, and you have to look at both sides of the coin here before making any decisions.

One downside of drawing down your IRA sooner than you’d otherwise have to is the acceleration of income tax owed on the distributions. As tax-deferred accounts, IRAs aren’t taxed until the money is withdrawn, which helps to minimize income tax and enhance growth. IRA owners, including SEP and SIMPLE IRA owners, don’t have required minimum distributions until the year they turn age 70 ½, and that first distribution is not required to come out until the following April 1st. Therefore, any IRA owner using IRA distributions to supplement their living expenses in order to get a higher Social Security payout is taking IRA funds out before they would otherwise have to.

Along that same line of thought, IRA income is more “expensive” than Social Security retirement benefits. What exactly do I mean by that? Simple: a $10,000 IRA distribution will generally raise your tax bill more than $10,000 over what Social Security retirement benefits would. “Why is that” you might ask, “after all, aren’t they both taxed as ordinary income?” Yes, they are, but there is an exclusion formula for Social Security benefits. The formula is somewhat complicated, so to keep it simple, let’s leave it at this; depending on your income, you might pay ordinary income tax on anywhere from none of your Social Security income all the way up to 85% of it.

Note that you are not paying an 85% tax on those payments (even the government has a heart), but merely paying tax on 85% of what you received at whatever your personal income tax rate is. In other words, at least 15% (and potentially all) of your Social Security payments will be tax-free. In contrast, IRA distributions are generally fully taxable.

So are Social Security payments always more tax-friendly than IRA distributions? No, that would simply be too easy. If you happen to have an IRA with a significant amount of after-tax money in it, it’s possible for an IRA distribution to be more income-tax friendly than Social Security payments.

For example, let’s say you are in the top federal income tax bracket and could receive a $20,000 Social Security payment. In addition, you also have a $20,000 IRA with $10,000 of after-tax funds. If you take the Social Security payment, you will owe what I like to call “max on max,” or in other words, the maximum income tax rate on the maximum amount of Social Security that can be included in your income. The maximum amount that can be included is 85% and the maximum federal income tax rate is 35%, so your $20,000 Social Security benefits would be subject to $5,950 ($20,000 x 85% x 35% = $5,950) of federal income tax.

In contrast, if you emptied your IRA, the tax impact would actually be about $2,500 less. Recall that out of our $20,000 of total IRA money, $10,000 was after-tax money. That’s already been taxed, so only the remaining $10,000 would be subject to income tax when it was withdrawn, leaving you with a tax burden of $3,500 ($10,000 x 35% = $3,500).

Looking at the taxes in a bubble though, isn’t really fair. In fact, it’s not fair at all. To make an eco-friendly analogy, using Social Security payments to meet your living expenses is kind of like burning wood, in that the Social Security payments are a renewable resource. You can “make” more of them by simply not kicking the bucket. Using your IRA, on the other hand, is kind of like burning oil. It is not renewable. Once it’s gone, it’s gone, and when you’re retired, there’s no way to make any more of it.

Following that line of reasoning, by drawing down your IRA earlier than you have to, it stands to reason that your IRA has less value than it otherwise could have. In certain cases, that might mean a diminished emergency fund, while in other cases, where there are ample other funds available, it could impact legacy goals.

For instance, withdrawing funds from an IRA means there will be fewer funds available for your beneficiaries to stretch once you’re gone. Remember, Social Security payments are an annuity, not an asset, so they generally die with you (although exceptions, like a spouse stepping up to your higher payments, may apply). IRAs, on the other hand, are an asset and can be passed to the beneficiary of your choosing. Withdrawing IRA funds sooner than you have to also means that there is less available for you to convert to a Roth IRA, if that is a part of your overall plan.

So what strategy is right for you? Should you spend down your IRA to “buy” an increased Social Security annuity or should you take your Social Security payments sooner and preserve more of your IRA assets?

Well, that depends on a lot of factors, most notably, how long you live. In general, the longer you live, the better off you’ll be drawing down your IRA to max out Social Security payments. Of course, since none of us have a magic crystal ball that can see into the future, it can make these types of decisions particularly difficult to make. If you’re on the fence, the best advice is probably to make sure you’re including all the relevant factors, such as legacy goals and your tax bracket, and to work with a financial professional who can help you balance some of these competing interests.

-By Jeff Levine and Jared Trexler

Accounting Firm Penalized $34 Million for Promoting Illegal Tax Shelters Involving IRAs

The IRS announced that it reached a financial settlement with an accounting firm that promoted illegal tax shelters, some of which involved Roth IRAs. BDO USA LLP was fined $34.4 million dollars for its part in promoting and not reporting various tax shelters over seven years. Some of these abusive tax shelters involved the use of Roth IRAs.

When someone engages in transactions with a business whose shares are owned by his Roth IRA, that transaction is a “listed transaction” that must be reported, generally by both the Roth IRA and by the individual.

In this case, BDO did not report these listed transaction as required by law. In addition to the $34 million penalty, BDO also agreed to cooperate with the IRS in IRS audits and litigations involving its tax shelter products.

Reminder: The IRS has been warning taxpayers for many years that transactions involving using Roth funds to hold a business may be illegal. These transactions often involve a taxpayer who runs a business that is owned by his Roth IRA. An example would include an IRA owner who owns and creates separate businesses and then runs his money through these Roth IRA-owned businesses. As a result, money that should be taxed flows tax-free into his Roth IRA.

Another problematic scenario is what IRS is calling ROBS (rollovers as business start-ups). This transaction involves the set-up of a new business that sponsors a 401(k) plan. Retirement assets are rolled into the 401(k) plan and are then invested in the stock of the company. The cash then ends up in the bank account of the business, income tax free, where it can be used to start up the business. While this strategy is technically legal, many business owners fail to follow the rules to implement the strategy correctly or fail to operate the 401(k) plan properly. IRS has warned that it will continue to scrutinize these types of transactions.

Ed Slott’s Elite Advisors have been educated on this topic. You can click here to find one in your area.

-By Joe Cicchinelli and Jared Trexler

Excess IRA Contributions, Company Plans, Roth Conversion Conversation Highlights Mailbag

This week's Slott Report Mailbag includes questions on excess IRA contributions, company plan rules and the Roth IRA conversion conversation. 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.


Dear Ed,

Send questions to [email protected]
If a person makes contributions to an IRA then realizes they are over the income level to get a tax deduction, can they remove those contributions plus income if they haven’t filed their tax return for the year of the contributions?

Situation: $4,800 was contributed to an IRA in 2011. I am extending my tax filing so I have not filed Form 8606 for 2011. I filed the IRS Form 5498 showing the contributions.

If I can remove the contributions, what steps do I need to take?

Thanks for your help.


You have until October 15, 2012 to remove the $4,800 plus income as an excess contribution. The income will be taxed for 2011 (the year in which the deposit was made) and thus should be reported on your 2011 tax return. Another option is recharacterize (change) the $4,800 to a Roth IRA contribution for 2011, if your income is within certain limits. IRS Publication 590 shows how to remove or recharacterize the contribution plus income. You can find it at www.irs.gov; on the left hand side of the screen click on Forms and Publications.


Dear Mr. Slott:

I have a 457(b) plan from a private university where I was previously employed.

I have to make an irrevocable decision on distributions - 30 year fixed vs. Minimum Distributions and the latter is much more favorable in regards to heirs.

However it not clear from what I have be able to gather if the MDO in such a plan can be stretched to my children as beneficiaries after my wife's death / my death. Also can I exercise disclaiming the inherited 457(b) plan to pass onto my children at their life expectancy?

Thank you for any help you can provide on this matter.


Fred Petry

As long as you leave your funds in the 457(b) plan, you and your beneficiaries will be limited by whatever options the plan offers. They will be outlined in the Summary Plan Description for your plan. While the tax code allows for a disclaimer of assets at death, again, it is up to the terms of the plan to allow the use of a disclaimer.


I'm 70 and my wife is 67. I have a SEP IRA in my name with a value of $55,000 and a rollover IRA with a value of $750,000. My wife has both a rollover IRA and a traditional IRA with a $160,000 in each. At our ages does it make sense to convert any of these to a Roth IRA? Our combined income from Social Security and dividends and interest is approximately $70,000. We can pay the taxes from our after-tax account.



Basically, you must decide whether the future tax benefits of the Roth IRA (i.e., tax-free distributions) are greater than the cost of paying taxes on the conversion.

Generally, a conversion may be beneficial for IRA owners if your marginal tax rates are likely to be higher when you withdraw the money, because Roth IRA distributions would be tax-free. Having non-retirement plan funds to pay the taxes is beneficial because you and your wife won’t deplete your IRAs to pay the income taxes on the conversion. Also, you would be leaving the Roth funds to your beneficiaries tax-free.

The decision whether or not to convert depends on many factors and should be addressed by a competent advisor.

-By Joe Cicchinelli and Jared Trexler

IRAtv: Can You Consolidate Converted Roth IRA Funds?

We received an IRA mailbag question from Greg, who wanted to know if he could consolidate all of his separate converted Roth IRA funds into one account. Two important factors to answer this question are: 1)how long have the converted funds been in the Roth IRA? 2)how old is Greg?

Ed Slott provides that information and answers Greg's question in this IRAtv video on consolidating converted Roth IRA funds.

Compiled by Jared Trexler

IRAtv: Roth Conversion Eligibility Video

The question of Roth IRA conversion eligibility is one of the more popular inquiries we receive each week. The Roth IRA is such a powerful retirement planning vehicle that it is important to understand the conversion eligibility requirements. This IRAtv video talks about this very topic.

-Compiled by 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.