The IRA Corner

Mike Roberts is a member of the Ed Slott Elite IRA Advisor program*.

June 29, 2016

This June the Bipartisan Center issued the "Report of the Commission on Retirement Security and Personal Saving."  The report includes recommendations in several areas such as Social Security and IRAs.

Some of the IRA recommendations are:

  • Setting limits on amounts in IRAs.  There are 314 IRAs that have balances in excess of $25 million.  That amounts to at lest $7,850,000,000 that is not currently subject to taxation.
  • Ending the "Stretch" for non-spousal beneficiaries with all amounts distributed within 5 years.
  • Ending Required Minimum Distributions when the aggregate balacnce of IRAs and defind contribution plans is less than $100,000.
  • Harmonizing the early withdrawal rules for IRAs and 401k-type plans. 


June 9, 2016

Ever hear the adage, "No good deed goes unpunished."  That is certainly true when it comes to Medicare premiums.  When your gross income is above certain amounts, you pay more for Parts B&D of Medicare even though the services and reimbursements from Medicare are unchanged.  Many government programs are structured so that people below a certain level of income get more.  Medicare on the other hand is structured so that people who have higher income pay more for the same.  Without going into the details of the formula, Social Security looks at your income tax filing from two years prior and if under the formula, your income as a single filer is above $85,000 and as a married filing jointly filer is above $170,000, you are subject to additional premiums.  There are situations where you can appeal the increase such as you were working full time two years ago and have retired and will not exceed the $85,000 or $170,000 in the current year.

So why do I say that good deed goes unpunished?  You have this income because you diligently saved into a retirement plan such as a 401k or an IRA and are now subject to Required Minimum Distributions now that you have reached 70 1/2. 

Let's say you are single and you have $1,000,000 in retirement funds, your first Required Minimum Distribution will be somewhere between $36,500 and $37,735 based on whether you are 70 or 71 at the end of the calender year.  Under the formula, 50% of your Social Security is used in the calculation.  If your monthly gross benefit is $2,000, add $12,000.  Now those may be your only resources and you are fine.  But you may have other sources of income (and, believe it or not, tax exempt municipal is part of the formula) and end up at $90,000.

Is there anything that I can do quickly to prevent this? If you have charitable inclinations, the answer is yes.  Legislation in 2015 made the IRA Qualified Charitable Distribution, or QCD, permanent.  The QCD allows you to direct the custodian of your IRA to pay a recognized charity from your IRA.  You are allowed to move as much as $100,000 per year out of your IRA using the QCD including your Required Minimum Distribution.  Amounts used for the QCD are not considered in the Medicare premium formula or the calculation of your Federal income tax (it may have no benefit for state income tax purposes).

So let's say the person above, has the custodian direct $2,000 to a 501(c)(3) and $3,000 to their house of worship - he is below the threshold for the additional Medicare premium.  He cannot claim these amounts as an itemized deduction as that would be double counting.  It does reduce adjusted gross income and, therefore, lower the threshold for some other itemized deductions that are only deductible to the extent that they exceed a specified percentage of adjusted gross income such as medical expenses.

We often think of tax planning as something for the wealthy but there are things that we can do to structure our financial affairs.  In the illustration above, the use of the QCD would eliminate premiums of about $500.


February 12, 2016

Each year the President formulates a budget request for the Federal governmnet, whihc Congress than considers in coming up with its own budget resolution.  While the proposals don't require Congress to act on the buget request, it is considered an indication that it's on Washington's "radar screen."

The President's request for 2016 asks Congress to consider eliminating the "Back Door Roth" strategy, adding required minimum distributions to Roth IRAs, elimination of Net Unrealized Appreciation for employer stock in an employer retirement plan and only allowing the stretch for inherited IRAs for spousal beneficiaries.

January 7, 2016

You forgot to take your Required Minimum Distribution ("RMD") for 2015 and you found out that it is now subject to a 50% penalty on the undistributed amount of the RMD.  Don't close your eyes and hope that it goes away because the IRS will get to it after the IRA custodians files all of their Forms 5498 - this is the informational return you receive at some point every year and either toss it away or call your tax preparer in a panic and are told nt to worry.

So what do you do - File a Form 5239 for each year that an RMD was missed an requestg an abatement for reasonable with an attached note that explainign the reasonable cause, the corrective action such as taking the RMD now and indicate that future RMDs will taken in a timely manner.  There is no provmise that the IRS will abate the penalty.

The dsitribution may need to include the income attributable to having the funds in the IRA for the period after the due date for the RMD and it can get complicated.  So file that under, "don't try this at home."

June 22, 2015

The Roth IRA has the potential to be one of the strongest weapons in the fight to fund higher education - if you don't think it's a fight then explain to me why there is more outstanding college loan debt than credit card debt.  Actually, it is more like a war - to win a war, developing a strategy is a good idea.

If you are under 59 1/2 and traditional IRA funds are used for education costs (tuition and fees and room and board), for yourself or a dependent, you can withdraw funds without the 10% penalty for early withdrawal.  There is a catch if you are applying for financial aid because your taxable income from the withdrawal increases your income for your next FAFSA filing.  Even if you are not requiring financial aid, the withdrawal increases your taxable income.

What are the advantages of the Roth - retirement accounts are not included in FAFSA assets and withdrawals from a Roth may be both income and penalty free as long as meet certain criteria.  If you meet the criteria, Roth withdrawals will not be taxable.  If you are under 59 1/2, contributions come out before any income is withdrawn and if you are over 59 1/2, your income probably won't be included in your taxable income either.

Withdrawals of contributions are not taxable even if you are under 59 1/2 regardless of the intended purpose of the money even if it is a trip to Angor Wat.  Seriously, the flexibility of a Roth withdrawals might allow you to purchase a car for your child to commute to campus or allow you to fund a down payment to purchase an apartment at school as an investment, neither of which can be funded from the traditional IRA without penalty.  Such expenditures are related to your children's education but do not strictly qualify as "educational expenses."

Similar strategies can be used with cash value from life insurance but do you really want to reduce potential survivor benefits at a time of possibly the greatest financial need.

One other strategy is to use the Roth to help your child pay off student loans after graduation if you have concerns about his or her being motivated to do well in school or obtain a degree.  Too many young people are deep in debt from college loans and do not have an opportunity to dig out of their hole because college debt is not discharagable in bankruptcy.

The bottom line is that the Roth is a potential weapon in the war to fund education.

A few caveats:  Certain highly selective schools may require more information than the FAFSA, the decision should always be analyzed based on your individual tax situation and you should consider whether using retirement funds for education is aligned with your personal financial goals.  Talk to an advisor who understands both your strategy and the tax impact of implementing it.

June 19, 2015

SEP contributions can made into either an employee's traditional IRA (if the IRA agreement allows it) or into a separtate SEP IRA account.  The IRS doesn't require SEP funds to be kept in a separate SEP  IRA, but many financial institutions do, simply as a matter of policy.  Contributions under a SIMPLE plan, howewer, must be mae into A SIMPLE IRA account - it cannot go into a traditional IRA.  Early distributions from IRAs and SEP IRAs can be subject to a 10% penalty.  Early distributions from a SIMPLE IRA are subject to a 25% penalty.

May 26, 2015

The rules relating to IRAs and employer retirement plan cna be an alphabet soup.  If you are approaching 70 1/2, you need to know this alphabet soup or find someone who does (a little advertisement for myself!).

At 70 1/2, you need to decide about your RMD ("Required Minimum Distribution") and know your RBD ("Required Beginning Date").  In other words, you have to start taking distributions from your IRAs and your retirement plans, the year you turn 70 1/2 although you may delay that until April 1st of the following year (April 1st of the following year is the last date to do this so April 1st is the Required Beginning Date).  Bear in mind, the amount you must take is based on a calculation and not your judgement (and, you can always take more).  If you take it after January 1st but before April 1st, you have to make sure that you take the current  year's RMD as well - that is, you have to jump into the pool twice or take enough to meet both years' RMD.  If your head is spinning, that's okay because mine isn't.

There is a one execpetion, if you are still working and are over 70 1/2(and own 5% or less of the company), you do not have to take money out of that employer plan until you leave the company.  But it is only that employer plan and not any other employer plans from previous employment or your IRAs (including SEPs and SIMPLEs).

And, you thought that you knew the I write this, I am reminded of the small print in lots of TV ads that tell you not to try this at home!

May 21, 2015

Have you heard of a QLAC and how it can be used to reduce your IRA Required Minimum Distributions?

A QLAC is a Qualifying Longevity Annuity Contract.

So, the year your reach 70 1/2 (with one exception) you will need to start withdrawing money from your traditional Individual Retirement Accounts based on a calculation which looks at the Fair Maket Value of all of your IRAs at December 31st of the previous year and your age at the end of the current year.

A QLAC in the IRA is not counted in the Fair Market Value for the purpose of the Required Minimum Distribution calculation.  That may be beneficial for current income tax purposes and provides the opportunity to "Stretch" your IRA since distributions from the QLAC do not need to begin until the month after you turn 85.

Of course, there are limits on QLACs - the limit is the lesser of $125,000 or 25% of your applicable retirement account balances.  QLACs cannot be varaible or equity-indiexed annuity contracts nor offer any cash surrender value.  QLAcs may provide death benefit options by the issuer.

Like any investment or annuity, there are risks involved.  If you would need to take a lump sum out of your IRA, it may not be suitable for you.  Additionally, make sure that you understand the legal and tax consequences of these contracts if you are considering putting them in any of your retirement accounts.


May 6, 2015

When is the last time that you confirmed who the beneficiary of your IRAs, employee benefit plans and life insurance?  Are you aware that if you die, the named beneficiary on the account or policy gets the money, regardless of whether you had intended to be someone else.

During the Ed Slott IRA Elite Advisor conference last, it was emphasized that there is no recourse to make changes as it is a matter of contract law and neither the IRS nor anyone else has the authority to make any post-mortem change (except, perhaps, in the case of proving that there was "undue influence" in making a change in beneficiary).

Additionally, indicating your wishes about these accounts in your will does not supersede the contract.  Having money going to the "wrong" beneficiary is generally because of not making the appropriate update and not because of undue influence.  It is crucial that the change be made on the appropriate legal form and not just by letter. 

*Ed Slott's Elite IRA Advsior Group, is solely an indication that the financial advisor has attended training provided by Ed Slott and Company.  Ed Slott is not affiliated with Woodbury Financial Services.

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