For many folks, attaining age 70 ½ means the beginning of required minimum distributions (RMDs) from their 401k, 403b as well as traditional IRAs. There are however, some individuals that will continue to work because they want to or (unfortunately) have to and still want to save some of their income. At age 70 ½ individuals can no longer make traditional IRA contributions. They are allowed to make contributions to a Roth IRA as long as they still have earned income. Earned income is generally W2 wages or self-employment income. It is not pension income, annuity income or RMD income. Also, if they are still employed by an entity that offers a 401k or 403b then they can still contribute to that plan and are not required to take RMDs from that plan until their employment ends. For individuals that want to continue to save for retirement or continue to […]
As you plan and save for your retirement, it’s nice to have multiple types of taxation for your income sources. You may have a pension, Social Security, and a traditional IRA, all of which are taxed to some degree or another. Adding to this list you might have a Roth IRA which generally will provide you with tax-free income in retirement. The problem with the Roth IRA is that you have some strict limits on the amounts that you can contribute, and typical Roth Conversion strategies are costly and complicated. With the recent pronouncement from the IRS in Notice 2014-54, there is a brand new, sanctioned method, to fund your Roth IRA.
This year marks the 40th anniversary of the Individual Retirement Arrangement (IRA). In 1974 via the ERISA law, Congress made this new type of retirement plan available for employees whose employers who could not provide them with the traditional type of retirement plan. In 1981, the plans were made generally available to all taxpayers. The Tax Reform Act of 1986 limited the deductibility of IRAs by income. 1997 saw the launch of the Roth IRA, as a part of the Taxpayer Relief Act of 1997. This type of IRA came with no deductibility, but earnings (and contributions) would be tax free upon distribution, following the rules associated with the accounts. With the exception of changes to limits of contributions, income limits, and catch-up provisions, little has changed for these accounts since 1997, with the exception of the introduction of the Roth-IRA-like myRA account that was established in 2014 for the […]
At some point in almost everyone’s lifetime they have gone through the process of changing jobs. Many times those jobs offered retirement plans such as 401(k)s 403(b)s, etc. Conventional wisdom would say that for most employees it may make sense to roll their employer sponsored plan into an IRA. Based on a request from a reader (thanks David!), I thought I would go over some of the issues to consider before rolling your employer sponsored plan to an IRA.
The IRS recently published the new contribution limits for various retirement plans for 2015. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw a few increases for some contribution amounts, and the income limits increased for most types of accounts after virtually no changes to the contribution amounts in 2014.
Recently the IRS issued a Notice, 2014-54, which details some information regarding the allocation of pre-tax funds from a qualified plan (such as a 401(k) plan) into a Roth IRA. This is a clarification of a question that has been on the minds of folks in the financial services industry for some time, and it’s a good result. Now the question becomes: does this help to clarify NUA basis allocation strategies? If you’d like additional detail on Notice 2014-54, you can find the actual text of the Notice by clicking this link. What I find interesting about this Notice is that this is the first time that the IRS has used this interpretation of the rules referenced specifically in IRC Section 402(c)(2), which is the code section I’ve referenced before regarding allocation of basis for Net Unrealized Appreciation (NUA) treatment for employer stock. (See more information in this most recent […]
As you may recall from this previous article, it is possible to use a rollover into an active 401(k) plan as an RMD avoidance scheme. Of course, this will only work as long as you’re employed by the employer sponsoring the 401(k) plan and you’re not a 5% or greater owner of the company. In addition, the rollover must be done in a timely fashion, prior to the year that you will reach age 70 1/2 in order to avoid RMD. An example of where timing worked against a taxpayer (at least temporarily) recently came to me via the ol’ mailbag:
When you are first subject to RMD (Required Minimum Distributions), which for most folks* is the year that you reach age 70½, you are allowed until April 1 of the following year to receive that first minimum distribution. For all other years you must take your RMD by December 31 of that year. For many folks, it makes the most sense to take that first year RMD during the first tax year (by December 31 of the year that you’re age 70½), because otherwise you’ll have two RMDs hitting your tax return in that year. However, in some cases, it might work to your advantage to delay that first distribution until at least the beginning of the following year – as long as you make it by April 1, you’re golden. There may be many circumstances that could make this delay work to your advantage – maybe you’re still working […]
What happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA? In other words, what are your options if you’ve missed Required Minimum Distributions (RMDs) in prior years? The Inheritance So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point, and had designated you as the sole primary beneficiary. Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… and in this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMD) from your inherited IRA as of December 31 of the year following the year of your mother’s death. As of now, for example’s sake, let’s say we’re in the […]
Forever and a day, the rule of thumb has been that you should not use IRA funds to purchase an annuity – primarily because traditional annuities had the primary feature of tax deferral. Since an IRA is already tax-deferred, it’s duplication of effort plus a not insignificant additional cost to include an annuity in an IRA. This hasn’t stopped enthusiastic sales approaches by annuity companies – plus new features may make it a more realistic approach. Changes in the annuity landscape have made some inroads against this rule of thumb – including guaranteed living benefit riders, death benefits, and other options. Recently the IRS made a change to its rules regarding IRAs and annuities that will likely make the use of annuities even more popular in IRAs: The use of the lesser of 25% or $125,000 of the IRA balance (also applies to 401(k) and other qualified retirement plans) for […]
This past week the US House of Representatives passed a bill (HR 4719, known as the America Gives More Act) which would re-instate the Qualified Charitable Distribution from IRAs and make the provision permanent. This provision expired at the end of 2013, as it has multiple times in the past, only to be re-instated temporarily time and again. A Qualified Charitable Distribution (QCD) is when a person who is at least age 70½ years of age and subject to Required Minimum Distributions from an IRA is allowed to make a distribution from the IRA and direct the distribution to a qualified charitable organization without having to recognize the income for taxable purposes. This has been a popular option for many taxpayers, especially since the QCD can also be recognized as the Required Minimum Distribution for the year from the IRA.
Divorcing couples often face the need to split up some retirement account assets. This can be done from a retirement plan such as a 401(k) or 403(b), or from an IRA. Depending on which type of account you’re splitting, the rules are very similar but are referred to by different names. For a qualified retirement plan (401(k) or 403(b) plan), the operative term is Qualified Domestic Relations Order or QDRO (cue-DRO). For an IRA, the action is known as a transfer incident to a divorce. We discussed the QDRO in several other articles, so we’ll focus on the transfer incident to a divorce in this article.
In a previous article we discussed the changes to the IRA One-Rollover-Per-Year rule. There are certain types of rollovers that are not included in that restriction, detailed below. As mentioned in the earlier article, trustee-to-trustee transfers are not considered “rollovers” by the IRS regarding this rule. So you are allowed to make as many trustee-to-trustee transfers in a year as you like – no restrictions on these kinds of transfers at all. This includes trustee-to-trustee transfers from or to IRAs, 401(k)s, 403(b)s, or any eligible plan. In addition, a rollover from an IRA into a 401(k) or other Qualified Retirement Plan (QRP) is not impacted by this rule. This means that you can roll funds out of your IRA and into your employer’s 401(k) plan with no restriction – regardless of whether or not you have already made an IRA-to-IRA rollover in the previous 12 months. Similarly, a rollover from […]
Procrastination is a silent and slow killer. Everyone, including yours truly, is guilty of putting things off, waiting until the last minute and then scurrying around frantically to get done what we could have easily gotten finished weeks or months ago if we would have either planned ahead or simply started. Let me give you an example. Last year my wife and I were debating whether or not to have a tree removed from our back yard. The culprit is the much loathed sweet gum tree that is common in this area of the country. Readers familiar with this pariah of the deciduous family of trees recognize it with annoying “gumballs” that are far from being smooth but rather are the sharp and pointy fruits that fall relentlessly from the tree mainly in the fall and work wonders on mower blades and bare feet. Needless to say they are a […]
As a follow-up to the recent post on this blog The One-Rollover-Per-Year Rule: Revised, the IRS has recently released some additional guidance on the subject, via Announcement 2014-15. As previously mentioned, the IRS has determined to begin using the one-rollover-per-year rule applied to ALL IRAs that the taxpayer owns, rather than only the affected IRAs that have been involved in a rollover. According to the Announcement, the IRS fully acknowledges that the previous understanding of the rule was that it applied on an IRA-by-IRA basis. In fact, there was a Proposed Regulation § 1.408-4(b)(4)(ii) on the books that was to further define the rule as applied only to the involved IRAs. Ever since the Tax Court decided otherwise in the case Bobrow v. Commissioner (TC Memo 2014-21), the rule has been changed. According to the recent announcement though, this will not take affect across the board until January 1, 2015. […]
Oftentimes we are faced with difficult situations in life – where we need extra money to pay for a major car repair, a new roof for the house, or just day-to-day living expenses – and our emergency funds are all tapped out. Now your options become poor: should I go to a payday loan place, put more on my credit card? My mortgage is upside-down so there’s no home equity loan in my future, and I can’t ask my folks for a loan, I’ve asked them for too much. Hey, what about my retirement plan? I’ve got some money socked away in an IRA that’s just sitting there, why don’t I take that money? It’s really tough to be in a situation like this, but you need to understand the impacts that you’ll face if you decide to go the route of the IRA withdrawal, especially if you’re under age […]
While the time has passed to make a contribution into your employer’s retirement plan it may not be too late to make a contribution to your IRA. The IRS allows taxpayers to contribute up to the maximum allowed ($5,500 annually if you’re under age 50 and $6,500 if you’re 50 and over) to your IRA up until you file your tax return. This means that at the latest one could contribute to their IRA for 2013 as late as April 15th, 2014. In fact, if you qualify you can also make a deductible contribution to your Traditional IRA. To qualify either you or your spouse are not covered for any part of the year by an employer sponsored plan or if you were covered, you fall within the MAGI phase-out guidelines of $95,000 – $115,000 for married filing jointly, $59,000 – $69,000 for single or head of household and $0 […]
In 2013 the market and those invested in it experienced a nice return on their investments. The S&P 500 rose an amazing 29.6% while the Dow rose 26.5%. Needless to say 2013 was an amazing year for investors – but try not to make the following mistake: Don’t confuse investment returns with savings. While it is true that the more of a return an investor receives on his or her investments the less they have to save it still does not mean that your returns should take the place of systematic saving for retirement, college or the proverbial rainy day. And by no means should you reduce the amount you’re saving thinking that the returns from 2013 and other bull years will repeat and continue their upward bounty. Investment returns are the returns that an investor receives in a particular time frame. For 2013, if an investor was invested in […]
In a surprising decision, US Tax Court has ruled that the One-Rollover-Per-Year rule applies to all IRAs, rather than to each IRA separately as was previously thought. IRS Publication 590, Individual Retirement Arrangements (IRAs), has the following information in regard to the one-rollover-per-year rule: Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. The use of the term “that same IRA” has always been taken to mean that the rule applies […]