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Showing posts with label Tax Planning. Show all posts
Showing posts with label Tax Planning. Show all posts

A Medicaid and Roth IRA Planning Horror Story

An attorney's client has a couple of small IRA accounts. He is not currently working. There is a possibility that he may need to qualify for Medicaid in the future. He has a large amount of cash just lying around. The attorney's idea? Just tuck the cash into a Roth IRA. After all, it is after-tax money so what's the problem?

medicaid Roth IRA planningWell, there are several problems. First of all, there are the Roth IRA contribution rules. You must have some sort of compensation, like earned income, and your modified adjusted gross income (MAGI) must be below a certain threshold. This client is not working. If his spouse is employed, he could use his spouse’s earnings to make his Roth contribution, assuming their combined income is below the applicable MAGI threshold. The next problem - you can only contribute $5,500 in 2013 to a Roth IRA (if you are age 50 or older during the year, you can contribution an extra $1,000 for a total of $6,500).

Suppose he makes the contribution anyway. Then what? The problems continue. Our client now has an excess contribution in the Roth IRA. Excess contributions are subject to a penalty of 6% per year for every year that they remain in the Roth IRA. This penalty is reported on IRS Form 5329, which is required to be filed with the client’s tax return each year.

Suppose he does not file this return. Then what? Again, the problems continue. There is a signature line on Form 5329. It is considered a separate tax return. If you don’t file a tax return, then there can be failure to file penalties for each year you do not file. And, if the unpaid penalty is large enough, our client could be subject to accuracy related penalties.

Finally, if our client does not file Form 5329, the statute of limitations does not start to run on all of these penalties. IRS can assess them at any time - along with interest.

Bottom line…You need to know the rules for retirement accounts before you make your contributions. IRS Publication 590, Individual Retirement Arrangements (IRAs), is a good place to start. If something goes wrong, it is not the advisor who will be responsible for taxes, penalties and interest. It will be you, the client.

- By Beverly DeVeny and Jared Trexler

Department of Labor Recognizes Same-Sex Marriages for Retirement Plan Purposes

The Department of Labor’s Employee Benefits Security Administration (EBSA) issued Technical Release 2013-04, describing its position on the recognition of same-sex couples with respect to employer retirement plans and other employee benefits as a result of the Supreme Court’s decision in United States v. Windsor.

department of labor retirement plans same-sex marriageOn June 26, 2013, the Windsor decision struck down part of the Defense of Marriage Act that denied federal benefits to legally married, same-sex couples. In the technical release, EBSA provides guidance to retirement plans, fiduciaries, participants and beneficiaries on the Supreme Court decision's impact on pension law (i.e., the Employee Retirement Income Security Act of 1974 (ERISA)).

The release states that, in general, the terms "spouse" and "marriage" in ERISA and in related DOL regulations should be interpreted to include same-sex couples legally married in any state or foreign jurisdiction that recognizes such marriages, regardless of where they currently live. However, same-sex couples in domestic partnerships and civil unions will not be treated as married. Note that EBSA is taking the same position the IRS has taken in IRS Revenue Ruling 2013-17, which states that same-sex marriages performed in a state that recognizes that marriage will be recognized for federal tax purposes.

EBSA’s position will impact employer retirement plans, such as a 401(k) plan. Specifically, a same-sex married spouse who is named as the beneficiary of his or her spouse’s employer retirement plan would be entitled to spousal benefits that have previously been available to opposite-sex married couples. One of these benefits would be the ability of the same-sex spouse beneficiary to do a spousal rollover to his or her own IRA when the plan participant dies.

EBSA protects the retirement and health benefits of America's workers, retirees and their families. The agency oversees approximately 701,000 private sector retirement plans, 2.3 million health plans and other plans that provide benefits to more than 141 million Americans. Collectively, these plans hold more than $7.3 trillion in assets.

- By Joe Cicchinelli and Jared Trexler

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

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

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

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

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

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

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

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

- By Jeffrey Levine and Jared Trexler

Slott Report Mailbag: Is a Conversion From an IRA to a Roth IRA Subject to the 10% Penalty?

This week's Slott Report Mailbag looks at the 10% early distribution penalty, which is in affect before age 59 1/2 in many cases. We also answer a tricky question about Roth recharacterizations. 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.



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My daughter is 47 years old. She wants to convert funds from her traditional IRA to fund her Roth IRA each year. Even though she is not age 59 ½, can she move these funds without the 10% penalty since the funds are moving from one IRA to another?


Scott Wheeler

A conversion from an IRA to a Roth IRA is taxable, but not subject to the 10% early distribution penalty.


I have always considered my contributions to my Roth IRA as part of my emergency fund, knowing I could take the contributions (but not the earnings) before I reach age 59 ½ with no penalty. I also contribute to a traditional IRA. There was one year when my income unexpectedly jumped up above the level allowed for a tax-deductible IRA, but I didn’t realize I wasn't eligible until months after I made my contribution. Come April when I did my taxes I had this contribution re-characterized as a Roth IRA and paid taxes on it. My question is this: can the money I re-characterized be included as the portion of my Roth IRA, which can be taken out before 59 1/2 without penalty?

Yes. Your recharacterized IRA contribution is treated as a Roth IRA contribution that can be withdrawn tax-and-penalty free at any time.


I made three conversions in 2010. I know that I will be able to make qualified withdrawals on January 2, 2015. I also made a conversion on 1/3/2012. Must this conversion be governed by its own 5-year rule, meaning, qualified withdrawals will begin on 1/3/2017?


Assuming you are now age 59 ½ or older, there is no separate 5-year clock for purposes of the 10% penalty on the 2012 conversion because that penalty doesn’t apply any longer. But, if you’re under age 59 ½, the 2012 has its own separate 5-year clock with respect to the 10% penalty. With respect to a qualified withdrawal of interest, there is only one 5-year clock that expires on 1-1-15. All of your future Roth IRA withdrawals will be qualified (tax-free) from then on.

- By Joe Cicchinelli and Jared Trexler

How IRA Distributions Impact the 3.8% Healthcare Surtax

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

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

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

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.

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

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

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

-By Jeffrey Levine and Jared Trexler

IRS Issues DOMA Ruling

On August 29th, IRS issued Revenue Ruling 2013-17 to clarify some of the federal tax issues raised by the U.S. Supreme Court’s ruling in the Windsor case.

IRS DOMA federal taxesIn case you have not been keeping up with the news for the last couple of months, the Supreme Court ruled that Section 3 of DOMA (Defense of Marriage Act) was unconstitutional thus making same-sex marriages “legal” at the federal level. The Court’s decision left the definition of marriage up to the individual states.

Federal agencies, such as IRS, are now left with the task of revising their policies to accommodate the current interpretation of the law. The IRS came out with their first official pronouncement in Rev. Rul. 2013-17.

IRS has decided to keep things simple. For federal tax purposes, any same-sex marriage performed in a state or country that legally recognizes that marriage will be recognized at the federal level. The current state of residence of the married couple will be ignored. For example, a couple who got married in Connecticut, a state allowing same-sex marriages, could live in Florida, a state not allowing same-sex marriages, and they will now be treated as married for federal tax purposes.

The effective date of Revenue Ruling 2013-17 is September 16, 2013. The Ruling also says that tax returns that are within the legal amendment period can be amended. That will generally apply to returns filed for 2010, 2011, and 2012. Going forward, same-sex couples who are legally married will be required to file their tax returns as married - the same as opposite-sex couples.

The Ruling also stated that domestic partnerships and civil unions will NOT be recognized as “marriages” for federal tax purposes.

IRS has said that there will be further guidance issued for retirement plans.

 - By Beverly DeVeny and Jared Trexler

Japanese Estate Tax Rate Proposal vs. Current U.S. Law

The Japanese prime minister has come up with a new estate tax rate proposal that is far different than current United States estate tax law. Ed Slott and Company IRA Technical Consultant Jeffrey Levine looks at the Japanese proposal and how it compares to U.S. law (along with some helpful information on the United States' estate tax benefits) in the IRAtv video found at this link or embedded below.

You can subscribe to our IRAtv YouTube page at www.youtube.com/edslottandcompanyira.

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

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

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

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

 - By Jared Trexler

IRA Contributions After Death

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

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

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

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

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

- By Beverly DeVeny and Jared Trexler

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

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

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

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

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

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

- By Joe Cicchinelli and Jared Trexler

"How is My Annuity Going to Be Taxed?"

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

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

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

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

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

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

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

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

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

- By Jeff Levine and Jared Trexler

Using Post-Nuptial Agreements for Employer Plan Benefits is RISKY

A recent court case highlights how risky it is when a married couple attempts to use a post-nuptial agreement when trying to waive spousal benefits to an employer retirement plan. In the case of Mid-American Pension v. Michael Cox, the court ruled that a surviving wife’s promise to waive her rights to her husband’s 401(k) funds by signing a post-nuptial agreement was invalid because the agreement wasn’t drafted correctly. As a result, she didn’t waive her rights and inherited his 401(k) money after he died, even though her husband wanted his parents to get the money. The interesting part of the case was that the husband and wife were married and divorced to each other twice before.

While the husband was single, he named his parents as the beneficiary of his 401(k) plan where he worked. Sometime later, he and his ex-wife remarried for the third time. Apparently, they both thought that the marriage might not work, so they both signed post-nuptial agreements.

In the post-nuptial agreements, they agreed that if their marriage ended again, they each waived their rights to each other’s property. With respect to her husband’s 401(k) plan, the wife specifically disclaimed all of her rights to it. A little over a year after the remarriage, the husband filed for divorce from her for the third time. Unfortunately though, he died about a week later, before the divorce was finalized.

His parents, who were named as the beneficiaries, and his surviving wife fought over who should get his 401(k) money. The court decided that his wife should get the money as her husband’s surviving spouse, despite the fact that she signed a post-nuptial agreement waiving her rights to his 401(k). Generally, a spouse is entitled to their spouse’s employer retirement plan funds unless they sign a waiver. Basically, if the idea was for her to waive her rights to the plan benefits, she should have signed a form provided by the plan.

Under federal pension law, there are many very strict legal requirements that must be met when a spouse tries to waive his or her rights to the other spouse’s retirement benefits. In this case, those rules weren’t met because the post-nuptial agreement was drafted incorrectly. So because the agreement wasn’t written properly, the soon-to-be-but-not-yet ex-wife got everything.

Whoever drafted the agreement didn’t understand the rules on how a spouse waives his or her rights to retirement plan money. In hindsight, they should have taken the easy route and used the plan’s form.

- By Joe Cicchinelli and Jared Trexler

The Kay Bailey Hutchison Spousal IRA Receives Congressional Agreement

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

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

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

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

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

- By Beverly DeVeny and Jared Trexler

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

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

The story goes...

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

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

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

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

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

- By Beverly DeVeny and Jared Trexler

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

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

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

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

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

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

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

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

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

- By Jeffrey Levine and Jared Trexler

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

How the Supreme Court's DOMA Decision Creates More of the Same

On June 26, 2013 the United States Supreme Court struck down part of the Defense of Marriage Act, commonly known as DOMA, as unconstitutional. In particular, the Supreme Court decided that if same-sex marriages are recognized under state law, the federal government must recognize those marriages as valid too. This has obvious implications for a virtually infinite list of financial items including federal tax issues, Social Security benefits, healthcare benefits and various rights with regard to retirement assets afforded under ERISA.
state versus federal government IRAs and taxes
While there are, no doubt, a host of new planning strategies, rules and issues to discuss as a result of DOMA, in one important aspect there is nothing new at all. Much has been made about the various complications that are going to result due to some states recognizing same-sex marriages, while others will not, but this issue is hardly unique to same-sex marriages. In fact, there are many ways in which state and federal laws interact.

When our Constitution was first created, it required a delicate balance of states’ rights versus the rights of the federal government in order to garner enough support to become law. Some, like Alexander Hamilton, believed the federal government should have the bulk of the power and were called Federalists. Others, like Thomas Jefferson, believed that the majority of governmental power should rest with the states and were called anti-federalists or Jeffersonians. The compromise that resulted in our Constitution, including the Bill of Rights, gave some powers to the federal government, while keeping other powers in the hands of the states.

One result of this split of power between states and the federal government is that when states choose to exercise their rights differently from one another, there can be some pretty dramatic differences in how very similar people in very similar situations are treated for federal purposes, despite the fact that the same federal laws apply to everyone no matter what state you live in. Same-sex marriages are now an excellent example of this, but it’s far from the only one.

Just as states have the authority to decide upon their own definition of marriage, they also have most of the control when it comes to property law. Most states (roughly 40) follow what is known as “separate property” law, but a handful of states, mostly in the South and West, use what is known as “community property” law. There are very unique federal tax complications created by community property that, for the most part, only affect the people living in those states. Now, in a similar fashion, most states do not allow same-sex marriages, but a handful of states do. This will, no doubt, create a whole host of interesting complications, some of which are yet unknown.

Other state’s rights issues that impact IRAs are the creditor protection afforded to IRAs, how income from an IRA is defined when it is left to a trust and whether a state imposes its own income tax on IRA distributions. Now, thanks to the Supreme Court’s decision on DOMA, we can add same-sex marriages to the list. This is now one more example of why it’s important to make sure that when you choose your tax and financial professionals, you chose those who are knowledgeable at both the federal and (applicable) state(s) level.

-By Jeffrey Levine and Jared Trexler

Supreme Court Rules Defense of Marriage Act is Unconstitutional: IRAs are Affected

On June 26, 2013, the Supreme Court ruled that the Defense of Marriage Act (DOMA) was unconstitutional. The ruling opens the door for same-sex couples who are married under state law to enjoy the same tax benefits that opposite-sex married couples have.

Under DOMA, only opposite-sex couples were considered married under federal law; however its legality was challenged by Edie Windsor. Ms. Windsor and her partner, Thea Spyer, were considered married in New York. Spyer left her entire estate to Windsor, but because of DOMA, the estate did not qualify for estate tax breaks for married couples, resulting in the payment of federal estate taxes of over $363,000. Windsor sued for a refund of those taxes claiming DOMA violated the equal protection clause of the Fifth Amendment of the Constitution.

The Federal District Court and an Appeals Court agreed with her and ruled she was entitled to a refund of the estate taxes, plus interest. The US Supreme court agreed to hear the case.

The Supreme Court ruled that DOMA is unconstitutional by treating legally married same-sex couples differently from married opposite-sex couples. This ruling has an impact on how same-sex couples will be taxed. It also affects IRAs.

The same federal tax benefits that have been available to opposite-sex couples will now be available to same sex couples. These benefits include, among other things, the ability to file a joint federal income tax return, and the ability to claim each other’s tax deductions, for example medical expenses.

With respect to IRAs, many spousal benefits will now also be available. For example, when an IRA owner dies, a spouse beneficiary can do a spousal rollover (or transfer) of the deceased spouse’s IRA to his or her own IRA, and not have to take death distributions until they reach age 70 ½. Now, that option will be available to same-sex married couples. As long as the couple is considered married under state law, the spousal IRA benefits are available.

Other spousal IRA benefits include the ability to make spousal IRA contributions for the nonworking spouse and the ability to split retirement plan assets tax free in a divorce.

The states that currently recognize same-sex marriage are: Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective 8/1/13), New Hampshire, New York, Rhode Island (effective 8/1/13), Vermont, Washington, and the District of Columbia.

-By Joe Cicchinelli and Jared Trexler


Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

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


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