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IRA RMD Reporting

So we’ve talked about how to calculate your Required Minimum Distributions (RMD) from your IRA and when you must take it. But how does the IRS know that you’ve done what you’re supposed to? How does RMD reporting work? As you might expect, the IRS doesn’t leave it to chance. They know exactly what you’ve done or not done.

1099r for rmd reportingWhen you receive a distribution from an IRA, a Form 1099-R is generated at the end of the tax year.  If the distribution is for your RMD for the year (treated as a normal distribution) there will be a Code of 7 in Box 7 of the form.  This will be true of any amount that you receive from your IRA in a “normal” distribution.  The amount of the distribution will be found in Box 1 of the form, and the taxable amount will be in Box 2.

5498 for rmd reportingIn addition, Form 5498 will be generated for your IRA and sent to you by January 31 of the following year – meaning, if you receive a 5498 before January 31 of the current year, it is relating to an IRA balance as of December 31 of the prior year.  This statement will detail the amount of your RMD if you’re over age 70½ (based on your age, the standard table, and the balance in the IRA as of 12/31).

Both of these forms are filed with the IRS at the same time that they’re sent to you. So the IRS simply cross-references the distribution (Form 1099-R) with the balance information from Form 5498, thereby making sure that you have taken the appropriate distribution. It’s not always as simple as that, since the IRS must aggregate all of your IRA balances together, as well as all of your distributions, before making the calculations.

If you haven’t taken the distribution as you should have, you’ll receive a communication (often a year or two later) from the IRS asking what’s up (in so many words). The unfortunate problem is that you’ll be subjected to a 50% penalty for not taking the RMD in a timely manner – quite an exorbitant amount, you’ll agree.

Do I have an RMD reporting requirement?

So when you take the distribution, is there a check-box or something for RMD reporting? Maybe something that says the distribution is an RMD? The answer is no. When you’re subject to RMDs, the first money that you take out of your IRAs is counted toward satisfying your RMD for the year. As long as you take that required amount out, whether from one IRA or all of your IRAs together, the RMD is satisfied.

For employer plans, including 401(k), 403(b), 457, and SEP/SIMPLE plans, you must take the RMD from each account separately, they’re not aggregated like IRAs are, nor are they lumped together with IRAs. Just keep this in mind as you plan your distributions for the year.

Exemptions and Dependents for 2017 Tax Returns

Understanding dependent and exemption rules for 2017 income taxes is important.It is important to know and understand who can be claimed as a dependent, as well as who can generate a personal exemption for your taxes. It’s not as simple as you might think, especially in complex family situations, such as when a child lives separate from one of his parents, or when there are more than two generations living in the same home.

And best of all, you only really need to know this for the 2017 tax year (at least the exemption part), since exemptions are eliminated for your 2018 tax return.

Recently the IRS published IRS Tax Tip 2018-20, which outlines several reminders about exemptions and dependents for 2017 returns. The text of the Tip is reproduced below:

Five Things to Remember About Exemptions and Dependents for Tax Year 2017

Most taxpayers can claim one personal exemption for themselves and, if married, one for their spouse. This helps reduce their taxable income on their 2017 tax return. They may also be able to claim an exemption for each of their dependents. Each exemption normally allows them to deduct $4,050 on their 2017 tax return. While each is worth the same amount, different rules apply to each type.

Here are five key points for taxpayers to keep in mind on exemptions and dependents when filing their 2017 tax return:

  1. Claiming Personal Exemptions. On a joint return, taxpayers can claim one exemption for themselves and one for their spouse. If a married taxpayer files a separate return, they can only claim an exemption for their spouse if their spouse meets all of these requirements. The spouse:
    • Had no gross income.
    • Is not filing a tax return.
    • Was not the dependent of another taxpayer.
  2. Claiming Exemptions for Dependents. A dependent is either a child or a relative who meets a set of tests. Taxpayers can normally claim an exemption for their dependents. Taxpayers should remember to list a Social Security number for each dependent on their tax return.
  3. Dependents Cannot Claim Exemption. If a taxpayer claims an exemption for their dependent, the dependent cannot claim a personal exemption on their own tax return. This is true even if the taxpayer does not claim the dependent’s exemption on their tax return.
  4. Dependents May Have to File a Tax Return. This depends on certain factors like total income, whether they are married, and if they owe certain taxes.
  5. Exemption Phase-Out. Taxpayers earning above certain amounts will lose part or all the $4,050 exemption. These amounts differ based on the taxpayer’s filing status.

The IRS urges taxpayers to file electronically. The software will walk taxpayers through the steps of completing their return, making sure all the necessary information is included about dependents.  E-file options include free Volunteer Assistance, IRS Free File, commercial software and professional assistance.

Taxpayers can get questions about claiming dependents answered by using the Interactive Tax Assistant tool on The ITA called Whom May I Claim as a Dependent will help taxpayers determine if they can claim someone on their return.

More Information:

New Deadline for Rollover of 401k Loan Distributions

TCJA allows an easing of the deadline for rollover of 401k loan distributions.Under the newly-passed Tax Cuts and Jobs Act of 2017 (TCJA), there has been a slight change for folks who have taken loans from their workplace retirement plan and subsequently left the job before paying the loan back. These 401k loan distributions (as they are known) are immediately due upon leaving the job, considered a distribution from the plan if unable or unwilling to pay it back. This results in a taxable distribution, plus a 10% penalty unless you’re over age 59½. (You could avoid the 10% penalty as early as age 55 if you’re leaving the employer.)

The distribution could be mitigated by rolling over the same amount of the distribution into an IRA within the regular 60-day limit. The new provision in TCJA allows an extension of this time, up to the due date of the tax return for the year of the distribution. This applies to 401k, 403b, and 457 plans equally, but we’ll just call them 401k loan distributions for brevity.

For example, Willard has a loan with a balance of $10,000 against his 401k plan. He’s been paying it back regularly, per the plan rules. In 2018 he leaves the job, but he doesn’t have enough money to pay back the loan right away. So his old job’s 401k administrator considers this a distribution from the plan, and since Willard is 50 years old, there are no exceptions to apply. This will result in a 1099R at the end of the tax year from the 401k administrator, indicating a fully-taxable distribution with no exceptions applied.

In the olden days, Willard could still avoid the tax and 10% penalty on the distribution if he could somehow come up with $10,000 within 60 days and roll that money into an IRA. In the new world of TCJA, Willard doesn’t have to come up with the money within 60 days: he has until April 15, 2019 to come up with $10,000 and roll that money into an IRA. This will avoid all tax and penalty on the rolled-over distribution.

Keep in mind that this only applies to 401k loan distributions that occur as a result of the employee terminating his employment or the company terminating the retirement plan. If the plan loan distribution occurs because the employee has not kept up with his payments against the loan, this is still considered a distribution subject to ordinary income tax and the 10% penalty if applicable. This type of distribution has no way to avoid the tax and penalty by a rollover.

Best and Worst States for Retirement Finances

statesRetirement can be one of the most anticipated and exciting times in a person’s life.  When the time comes to start this new chapter, it is important to consider all of the factors to make the transition as easy as possible.  Diligent financial planning is one of the most important things that can make a senior’s retirement successful, and it is especially helpful to know that there are some states that have better financial environments than others.  Whether retirees already live in one of these states, or are looking for a new place to reside, knowing expense expectations can help seniors make the right decision about their future.

In order to help retiring seniors discover this information in a simplified manner, developed a list of the best and worst states in America for retirement finances.  Using SeniorScore™, the first comprehensive data-driven scoring system specifically designed to identify and measure the livability for seniors, the most and least accommodating states for retiring seniors have been identified. By analyzing over 100 variables, and heavily weighing financial factors such as tax rates, cost of living expenses, average income, and senior living costs, we have ranked the states based on retirement financial planning.

The best state for retirement finances also happens to have some of the most beautiful terrain in the country.  Wyoming came in at the top of the list due to it’s low nursing home costs as well as low property taxes.  When analyzing retirement finance data, a few Southern United States fared well as well.  Assisted living costs in Alabama are very low and Louisiana boasts a low cost of living in general.  For these and other reasons, Alabama and Louisiana made the top 5 best states for retirement finances list.

Surprisingly, two of the worst states for retirement finances are at opposite ends of the country.  California is the number one worst state on the list for seniors who want to retire, based on its financial landscape, according to  Property, sales and income taxes are all very high in California, and the cost of living is much higher than the national average.  Moving on to the opposite coast, Maine also made the list of the worst states in America for retirement finances.  The average household income in Maine is lower, yet the cost of living is very high, making it difficult for savers to reach their retirement goals.

Read more about “The Best and Worst States for Retirement Finances.”

The article above was provided by which connects older people and their support systems to more than 50,000 housing options. The free senior living search engine contains comprehensive information on providers nationwide, including assisted livingnursing homesmemory carehome healthcare, independent living, adult day services, retirement homes, respite care, and hospice care.

No K-12 Tax Break for Using Illinois’ Brightstart

brightstartOne of the provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) included the ability for an owner of a 529 education savings plan (such as Illinois’ Brightstart) to use the funds for K-12 private schooling just the same as for post high school expenses. This means that, at least at the federal level, owners of these plans will not pay tax on the growth of these funds if used for any private K-12 schooling. Previously this option was only available with a Coverdell savings plan, but TCJA extends this treatment to 529 plans.

In Illinois however, the state Treasurer and Department of Revenue have come forth to state that this usage will not be allowed by the state. This means that, if an owner of an Illinois Brightstart or Bright Directions 529 plan uses the funds from that account for K-12 tuition, the state of Illinois will tax the growth of the funds. The income will be included as ordinary income in Illinois, taxed at the standard 4.95% rate.

Not only that, but the state income deduction for contributions to either plan is effectively nullified if the money is not used for post-secondary expenses. So if a family contributed money over the years to a Brightstart plan and deducted those contributions from income for Illinois tax, and then they ultimately use those funds for K-12 expenses, the state requires a claw-back of the original deduction. This would effectively penalize the family for saving – for taking the tax reduction incentive and then using the funds in a manner not allowed by the state.

Behind this move is the assertion that the 529 plans were put in place to save toward college education expenses, not private K-12 schooling.

The Brighstart and Bright Directions plans’ disbursals for K-12 expenses would still have the federal tax break – which is non-inclusion of growth on the funds at the federal level. But the clawback inclusion of prior contributions and inclusion of growth as income at the state level will likely eliminate that federal tax benefit for most savers.

This does not eliminate the long-standing option of contributing funds to one of the Illinois plans (and thereby generating an income deduction) and then as quickly as the following day generating a distribution to pay for college expenses. Illinois’ Treasurer Michael Frerichs acknowledged this is still available, although likening the strategy to money laundering. I wouldn’t be surprised if this option receives more scrutiny in the near future.

Other states?

There are 30+ states that provide similar tax breaks as Illinois’ for their residents saving in the state-sponsored 529 plans. Some states, including Missouri, Utah and Delaware, have come out to indicate that they will follow the federal tax-treatment of 529 distributions. Many other states are considering their options and proposing legislation for how to handle this new provision. Thus far, only Illinois has published their choice to not follow the feds.

Coverdell plans, originally slated to be eliminated with TCJA, are still available and still have the ability to be used without tax consequences for K-12 expenses as well. But Coverdell plans do not provide the tax reduction option for contributions that Illinois’ 529 plans do. Plus, Coverdell plans have a very limited contribution level: $2,000 per beneficiary (student) per year, and this contribution amount is only available for couples earning less than $220,000 in 2018.

Back-door Roth Blessed by Congress

back-door RothFor years now, the back-door Roth IRA contribution method has been discussed ad nauseam in the financial industry press. It’s been touted as a possibility, but always with a caveat: taking this course of action may ultimately be disallowed by the IRS. As of the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, all skepticism about this method should be removed.

Let’s back up a bit and talk about the back-door Roth. This is the action where you make a non-deductible contribution to your traditional IRA, followed later by a tax-free Roth conversion of that contribution. Folks often took these steps because they were above the income limits for a normal Roth IRA contribution. The problem was that the IRS had never weighed in on the concept. As such, there were many folks in the industry who took a conservative point of view with regard to this action. The IRS has ways to disallow such an action if they deemed that it was to work around the law. But that’s all over for now.

Tax Cuts and Jobs Act

The back-door Roth contribution is not specifically addressed in TCJA, but it was discussed on the record by the Conference Committee in their Explanatory Statement of the TCJA. In that document, the Conference Committee states in four places that “Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA…” (for full context, see the Joint Explanatory Statement of the Committee of Conference, footnotes 268, 269, 276, 277, beginning on page 114.)

This verbiage not only blesses the back-door Roth contribution technique currently and going forward, the matter-of-fact manner of the footnotes seems to declare that this has always been acceptable.

So – have at it with your back-door Roth contributions!

Life Moves Pretty Fast…

In the classic 80’s movie, Ferris Bueller’s Day Off, Ferris Bueller says, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”

In other words, life happens. That’s why it’s important to meet with your financial planner to see if anything has changed, and if there’s anything that needs to be done to assist with those changes.

The reason it’s important to meet with your planner is that he or she can ask questions and propose situations that you might not even be aware of or think about. A recent example would be how the new tax law affects your situation. Another example would be a child that is going to college, a job change, death, divorce, or 2018 being the year you plan to retire.

A financial planner will be able to provide another set of eyes to your situation to perhaps think of things you may not have, or to potentially look at your situation objectively, without any personal bias you may have. An example being hanging onto an investment you fell in love with and don’t want to sell, but the prudent thing to do is to sell. Or, it may mean preventing you from a bad financial decision (bitcoin, or unnecessary debt).

However, life does move pretty fast. We get caught up with our careers, family, friends, among other things. Sometimes we tend to be reactive, rather than proactive. That is, we usually think about things only when they need to be taken care of, or after something has happened.

That’s why it’s good to periodically meet with your financial planner. And if you don’t have one, consider meeting with a few and finding one that works well with you and your situation. Even if you think you don’t need any help or your situation hasn’t changed, a financial planner may be able to see something you don’t. And if you’re concerned about a planner creating an artificial need or overselling you, find a fiduciary. They’re legally required to educate you and tell you whether or not you have an issue that needs to be addressed.

Roth Recharacterization is No Longer Allowed

recharacterizationWith the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, recharacterization of a Roth Conversion is no longer allowed. This begins with tax year 2018.

Briefly, recharacterization of a Roth conversion is (used to be) useful if you wanted to undo a Roth conversion sometime before your tax return is filed for the year in question. If you’d like more information on recharacterization and why you might want (or have wanted) to do this, you can check out the article on Recharacterizing.

So now, if you convert funds from an IRA or 401k into a Roth IRA account, you no longer have this back-out option available to you.

The legislation did not make it clear whether the restriction takes place for any recharacterization after 2017 or if it’s based on any conversion done after 2017. This makes it unclear whether a 2017 conversion could still be recharacterized by October 15, 2018, or if the recharacterization had to be complete by year-end 2017. The verbiage used indicates that the recharacterization disallowance “shall apply to taxable years beginning after December 31, 2017.”

Some think this means the ban applies to conversions after 2017 – while others think this means the ban applies to recharacterizations after 2017. Jury is still out on this, and IRS is likely to clarify later this year.

jb note: Astute super-reader clydewolf mentions: 

Kaye Thomas at says he has confirmed with the IRS
that 2017 Conversions can be recharacterized.,84769

Other types of recharacterization are still allowed – the primary one being recharacterizing of an unintended IRA rollover or contribution that is later disallowed due to income limitations. This type of recharacterization is still allowed after TCJA 2017.

For example, if you contribute the maximum amount ($5,500) to your IRA this year and later you discover that your income is above the limits for a deductible IRA contribution (but still under the Roth IRA contribution limits). You have the option of recharacterizing the contribution in your traditional IRA to a Roth IRA contribution. With this action, your recharacterized contribution will be treated as if made to the Roth IRA at the same time as you originally made it to the traditional IRA – as long as you recharacterize before the filing date of your tax return (generally October 15 of the following year after the contribution).

Income ≠ Wealth

There’s a big difference between income and wealth. Income can be considered the amount of money an individual earns on a consistent basis. For most individuals, this is a paycheck. Wealth can be considered an individual’s net worth, or, more specifically, how much income their wealth generates and how long they can sustain a given lifestyle without having to receive a conventional paycheck.

Some individuals may confuse the two. Some may feel that a high income equates to wealth. They may also think that to be wealthy or to generate wealth, their income must be high. This isn’t the case. While a high income may help to build wealth faster, it is no guarantee that an individual is or will be wealthy.

Let’s look at an example of two couples, about the same age, nearing retirement and wondering if they have enough wealth to do so. These are based on actual client interactions, although some info will be generalized to maintain anonymity.

The first couple, Hank and Bess, has saved roughly $3 million in retirement accounts. They are both in their mid-50sand neither earned more than $50,000 annually throughout their careers. This couple is debt-free, while owning two vehicles, two homes, a business (purchased with cash just before retirement) and needs about $38,000 annually to meet their retirement expenses – half of which will be covered by their Social Security when they take it.

Conservatively, this couple needs to earn just over half of a percent (.00633) annually to cover the $19,000 needed for their expenses, from their $3 million portfolio, while leaving the principal untouched. This couple is very wealthy.

The second couple, Stan and Kat, currently still work and earn about $750,000 annually. They have a big house with a mortgage, no kids, and make payments on two luxury sedans. They make quite a bit of money annually and their lifestyle shows it. However, when considering retirement, this couple’s wealth – what they have currently saved to support their wanted retirement lifestyle, would last them between 10 to 13 years.

On the outside, it may look like Stan and Kat are very wealthy. However, compared to Hank and Bess, their wealth is quite low. Unless they change their lifestyle, or saving habits, Stan and Kat’s retirement outlook remains grim.

Income doesn’t not equate to wealth. As you can see from the examples above, it doesn’t take a huge income to build wealth. It takes discipline to save, avoiding unnecessary debt, and delaying gratification to have a comfortable retirement in the future.

How to Build Wealth

owe taxesHow you choose to spend or invest your money can have an impact on your net worth. Many of you are familiar with the net worth equation which is Assets – Liabilities = Net Worth. In other words, what you own, minus what you owe, equals what’s yours.

However, what is conventional wisdom isn’t always what’s best. What I mean is, just because something is generally known as an “asset” doesn’t mean it’s going to help your wealth. Here are a few examples.

  1. Your house. While generally considered an asset, and to some, an investment, your home can also drain you of net worth and cash flow. Homes need upkeep, repairs, insurance, utilities, taxes, and many have mortgage payments. Additionally, your home does not produce any free cash flow. There’s also no guarantee your home will appreciate (it may even depreciate). However, paying down your mortgage will generally help your net worth.
  2. Your car. Let me be blunt. Your car is a wasting asset. It depreciates over time and in many cases, ends up costing you more that you paid for it. Vehicle loans aside, cars need insurance, gas, maintenance, and upkeep. A loan on a vehicle is making payments on a depreciating asset. Like your home, your vehicle produces zero cash flow.
  3. Your things. Your things include furniture, knick-knacks, toys, appliances, etc. Like vehicles, they generally do not appreciate. Like your home and vehicles, they produce zero cash flow.

The reason I mention the above examples is to encourage you to think of buying true assets, if your goal is to increase your wealth. True assets appreciate and may provide cash flow. Here are some examples.

  1. Stocks and bonds. Stocks represent ownership of a company and provide cash flow via dividends. Bonds represent owning a company’s debt and provide cash flow in the form of interest payments. Additionally, you can own multiple stocks and bonds with mutual funds or ETFs – which pass the cash flows and appreciation to their investors.
  2. Real estate. By real estate, I do not mean your home. I mean real estate that produces cash flow such as commercial properties or residential rental real estate. Real estate also provides tax advantages through depreciation, like-kind exchanges, and other business expenses.
  3. A business. Owning a business may provide opportunities to create cash flow and potential tax advantages through business deductions. Additionally, businesses that provide value (in addition to cash flow) can also be sold for profit.
  4. Education via college, internships, or self-education can increase your knowledge, human capital, and can increase your cash flow through promotions, pay increases, and intellectual capital.

By focusing on true assets – those that can provide cash flow and potential for appreciation can have a beneficial impact on your net worth and wealth. While it’s not a bad thing to have a home, furniture, vehicles, etc. (I own these), if your goal is to increase your wealth and net worth, consider focusing on true assets.

Non-Spouse Rollover of Inherited IRA or Plan

750-year-old-gija-jumulia-by-sridgwayWhen you inherit an IRA from someone other than your spouse, you are able to take advantage of certain protections or deferrals of tax inherent in the IRA, but you are somewhat restricted in your actions with the account.  These non-spouse rollover rules also apply to a spouse who has elected NOT to treat the inherited IRA as his own IRA.

Other than the trustee-to-trustee transfer, an inherited IRA is not permitted to be rolled over – in other words, a non-spouse rollover (the 60-day variety) is not allowed.


First of all, you are not allowed to treat the IRA as your own – in other words, the account can only be re-titled as an inherited IRA.  This means that you can move the account to another custodian (via trustee-to-trustee transfer only) or leave it at the same custodian, and change the title to read as “John Doe IRA (Deceased January 1, 2009) FBO Janie Brown” or something very similar.

In addition to the restriction on titling, the IRA beneficiary must begin taking Required Minimum Distributions (RMD) as described below:

  • If the owner of the account died on or after his Required Beginning Date, which is generally April 1 of the year following the year in which he reached age 70½, the RMD is based on the longer of: 1) the owner’s life expectancy¹; 2) the beneficiary’s life expectancy¹; 3) the oldest of multiple beneficiaries’ life expectancy¹ (if there are more than one beneficiary).
  • If the owner of the account died before his Required Beginning Date, the RMD is based upon the beneficiary’s life expectancy¹ or the life expectancy¹ of the oldest beneficiary if there are more than one beneficiary.

The Designated Beneficiary

The designated beneficiary is a specifically-named individual (or individuals, if more than one beneficiary is to inherit the account). The designated beneficiary is determined on September 30 of the year following the year of the death of the plan owner.  In order to be named the designated beneficiary, an individual must be named on the plan documents as of the date of death (no changes can be made after death).  If any person named in the plan documents as beneficiary but is no longer a beneficiary as of September 30 of the year following the year of death, that person will not be considered when determining the designated beneficiary.  This could come about if one of the original beneficiaries chose to disclaim entitlement to the account.

If an individual who is a beneficiary as of the owner’s date of death dies prior to September 30 of the year following the year of death, that individual is still considered to be the beneficiary, rather than any contingent beneficiaries.  The deceased beneficiary’s estate would receive the account and her age would be used for determining distribution.

Required Minimum Distribution (RMD) Rules

It is important to note, the following RMD rules apply:

  • you’re allowed to spread the distribution out in monthly, quarterly, or any schedule of payments as long as it’s at least annually;
  • if you’re the beneficiary of more than one IRA, you must determine the RMD and withdraw it from each inherited IRA individually; as well as
  • if you receive more than the minimum required in any one year, you do not receive “credit” against future distribution requirements.

Multiple Beneficiaries

If there are multiple beneficiaries of a single account, and all of the beneficiaries are individuals (not trusts), as indicated earlier, the beneficiary with the shortest life expectancy¹ is used to determine RMD for the account.  If an account is split into separate accounts with separate beneficiaries prior to the September 30 deadline in the year following the death of the owner, each account is treated separately with regard to inheritance rules, not aggregated.

Trust as a Beneficiary

If a trust is the named beneficiary, on September 30 of the year following the year of the death of the owner, the beneficiary(s) of the trust will become the designated beneficiary(s) of the IRA as long as the following are true:

  1. The trust is a valid trust under estate law, or would be but for the fact that there is no corpus.
  2. The trust is irrevocable or will become irrevocable by terms, upon the death of the owner.
  3. The beneficiary(s) of the trust are specifically identified from the trust document.
  4. The IRA custodian or trustee has received documentation of the trust by October 31 of the year following the year of the owner’s death.

If the beneficiary of the trust is another trust, as long as the second trust meets the requirements above, the beneficiary(s) of the second (or subsequent) trust will become the designated beneficiary(s) of the IRA. The four points above are a definition of a See-Through Trust (or Look-Through Trust), which is the only valid type of trust that can be a beneficiary of an IRA and allow the trust beneficiary(s) to defer distribution beyond the default five-year distribution period. 


¹ Life expectency is generally determined in these cases by the IRS Single Life Table, also known as Table I, which you can find by clicking this link.

Photo by sridgway

Divorcee Social Security Benefits

divorcee social securityThe below article is an excerpt from my new book Social Security for the Suddenly Single. This focused book is all about divorcee Social Security retirement and survivor benefits, and it’s available on Amazon. The book was written to address the lack of information about divorcee Social Security. You’ll find everything you need to know about divorcee Social Security retirement and survivor benefits within.

Divorcee Benefits Matrix

Below you will find a matrix that describes the various divorcee Social Security benefits you may have available to you.

To use this matrix, start at 1, choosing your birth year. Then move to 2 and choose the age you wish to learn about available benefits. Now choose your length of marriage (3), and your ex-spouse’s status (living or deceased) – 4. Lastly, choose the appropriate column for 5, whether or not you have a Child in Care under age 16.

Case: Bernadette

As an example, Bernadette was married to Robby for 17 years. Robby is still living, age 62, 2 years older than Bernadette. Robby has not begun collecting benefits at this point. The couple has no children, and they have been divorced for one year.

Bernadette is wondering about the earliest benefits she can receive from Social Security. She starts in column 1 with “Any Birth Year”, and then reviews the second column. At her present age of 60, she sees that while Robby is still living she is not eligible for any benefits.

So she looks to the next row in the Age column (2) – indicating age 62 to FRA. Since her Step 3 value is that the Marriage lasted 10 years or longer, Bernadette next checks step 4 – Robby is still living, and not presently collecting benefits. However, by the time Bernadette reaches age 62, it will have been two years since the divorce. Because of this, Bernadette sees that she is (between the ages of 62 and her FRA) eligible for the larger of the reduced Spousal Benefit or her own reduced benefit.

Bernadette would also like to estimate what her benefit would be if she waits until her FRA or later to apply for benefits. Knowing what she knows from the previous exercise, she would just move down the table to the appropriate Step 1 value. Her birth year is 1957 so she chooses the row “1954 or later”. This indicates that Bernadette will be eligible for the larger of her own benefit or the Spousal benefit – neither benefit is reduced since this estimate is assuming she’s either at or older than FRA.

Lastly, Bernadette would like to check on what benefits she might be eligible for upon Robby’s death. Moving to the right on the matrix to the set of columns indicating the ex-spouse is deceased, and since there is no Child in Care, Bernadette can review the various Survivor Benefit options that are available at various ages for her. At her present age (60) she would be eligible for a reduced Survivor Benefit if Robby were to die. At any age from 62 to FRA, she would be eligible for her choice of the reduced Survivor Benefit or her own reduced benefit. At or older than FRA, she has the same choice available, but neither benefit is reduced once she’s reached FRA or older.

divorcee social security


Creditor Protection for Retirement Plan Assets

In this day and age with bankruptcies on the rise, quite often this question comes up:  are my retirement plan assets protected from a creditor? And of course, there are two ways you can take this – are the assets protected from a creditor of my employer; and are the assets protected from my personal creditors?


Employer Creditors

Your vested qualified retirement plans (401(k), 403(b), etc.) are always protected from creditors, in the event that your company should declare bankruptcy. Vested retirement plans are your property (*upon distribution), not the property of the employer.  The same is true for vested traditional qualified pension plans.  However, with certain nonqualified retirement plans and non-vested plans or funds, there is a strong possibility that these assets could be accessed by your employer’s creditor in the event of a bankruptcy of the company.

The nonqualified plans are often called executive compensation, rabbi trust, deferred compensation, or supplemental retirement savings (among many other terms).  The key here is that these accounts are “non-qualified”, and as such are not protected by the ERISA law.  These accounts are very often open to access by creditors, so be aware of this if you’re a participant in such an account.  Check with your HR department if you’re unsure if your retirement account(s) are qualified (and thus protected by ERISA) or not.

IRAs, being individual accounts totally separate from your employer (unless you’re self-employed) are not considered in any way to be assets of your employer.  If you are self-employed and are not incorporated in some fashion, depending upon your state law, some of your IRA assets could be at risk, depending upon the state that you live in, and the balance of the account (see below).

Personal Creditors

In general, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides that both traditional and Roth IRAs derived from contributions are protected from creditors up to $1 million.  This protection only applies to bankruptcy, not to other judgments, and as such state law applies for all other situations. For example, your IRA is not protected against a judgment in the case of divorce, an IRS lien, or a criminal judgment against you.  The level of creditor protection varies widely by state.  For more up-to-date information on the protection within your state, click this link.  Rollover (including trustee-to-trustee transfer) amounts from employer plans, SEP or SIMPLE IRAs  maintain the original account’s ERISA protection from creditors.

There are cases, as illustrated recently in a case that was decided in 2007, where an inherited IRA with a revocable trust as the beneficiary became available to the decedent’s creditors.  This case was in the state of Kansas, so other states may have differing laws, this was just an example.  The way to resolve or avoid this is to use an irrevocable see-through trust as the beneficiary and use discretionary and spendthrift clauses within the trust as protection.  Otherwise, naming an individual (or individuals) as the IRA beneficiary(s) would avoid this problem as well.

Further problems develop in the inherited IRA spectrum due to the fact that most state courts do not consider an inherited IRA to be a “retirement account”, since the owner (the beneficiary of the decedent) is currently receiving an income from the account.  This is important because retirement accounts are specifically protected from creditors (due to BAPCPA).


Even though the IRA has somewhat fewer protections against creditors versus the employer plans, if you’ve left the employer this shouldn’t be the reason to leave funds in the old account.  An IRA account can be considerably more flexible, easier to access, and (likely) lower in cost overall. Rolled-over funds maintain ERISA protection, as well.

Photo by Hryck.

7 Mistakes With Stretch IRAs

exercise-stretch-discuss-by-filtranThe stretch IRA, when implemented properly, can be a great vehicle for transferring wealth to your heirs. Using this method, you pass along the tax-deferred status of the account until it is withdrawn, which may be much later.  The problem is that there are some very specific rules that must be followed in order to achieve the stretch IRA – and if you screw it up, there’s definitely not a do over in most of these cases.

Ground Rules

First, let’s run through the specifics that make up a stretch IRA.  When an IRA account owner dies, the beneficiary(s) are eligible to re-title (or transfer) the account(s) as inherited IRAs in the name of the deceased owner. At that point the beneficiary(s) must begin taking Required Minimum Distributions based upon the beneficiary’s age. This is much better (tax-wise) than having to take the entire sum all at once and pay tax on it, or the onerous five-year distribution rule that can come into effect if things aren’t done properly. (more on the specifics of the Stretch IRA can be found in this article.)

Keep in mind that these stretch IRA rules apply to both Traditional and Roth IRAs – because, even though Roth IRA owners are not subject to RMD, their beneficiaries are.

7 Mistakes

Here are some of the common mistakes that can be made when attempting to stretch an IRA:

  1. Not properly titling the account – There’s no remedy to this one, the account has to be titled as “John Doe IRA (Deceased January 1, 2009) FBO Janie Brown” or something very similar. If the account is set up in the name of a non-spouse beneficiary, the funds would be immediately taxable and the IRA would be distributed – all tax deferral is lost.
  2. Doing a “rollover” – While it may seem like a simple question of semantics, there is a technical difference between a direct trustee-to-trustee transfer and a rollover.  The trustee-to-trustee transfer is, as the name implies, a transfer directly between one trustee and another – the account owner never has possession of the funds. On the other hand, a rollover is when the beneficiary receives a payment made out in his own name, which he then deposits into an IRA.  A rollover is disallowed in attempting to set up a stretch IRA – you must always do a direct trustee-to-trustee transfer.
  3. Neglecting timely transfer – Sometimes estates can be tied up for years getting everything sorted out.  IRAs and 401(k) plans should not have this problem, as generally there is a specific beneficiary or beneficiaries designated on the account documentation. If the beneficiary is named on the account docs, the transfer to the beneficiary occurs outside of the testate process – no need to wait on the courts.  It is critical that the funds are transferred into a properly titled account before the end of the year following the year of the deceased owner’s death – otherwise the stretch IRA option is lost, and the funds will have to be paid out via the five year rule.
  4. Failing to take RMD for year of death – If the IRA owner dies after his Required Beginning Date (usually the year he reaches age 70½), a Required Minimum Distribution must be taken for the year of his death. This RMD cannot be included in a transfer to an inherited IRA, it must be received by the beneficiary (or estate) in cash.  This one can cause some hiccups, but in general can be resolved if caught in a timely fashion. If the RMD for the year of death was not taken in a timely manner, the beneficiary should take the distribution in the name of the decedent and pay the applicable penalties for excess accumulation.  If the amount is transferred to the inherited IRA and isn’t caught quickly, it could negate the stretch IRA altogether, potentially causing big tax headaches.
  5. Missing or neglecting RMD payments – If the beneficiary forgets to take the Required Minimum Distribution payment in a timely fashion, technically the five-year rule could kick in, requiring that the entire balance is paid out within five years rather than the beneficiary’s lifetime.  However, it is possible to recover from this mistake, according to the outcome of a Private Letter Ruling (PLR 200811028, 3/14/2008).  What happened in this case was that the beneficiary neglected to take two years’ worth of RMD, and then corrected her mistake in the third year, taking all three years’ worth of RMD, followed by paying the penalty (50%) on the missed two years.  The IRS ruled in this case that the failure to make these distributions in a timely fashion did not require that the five year rule apply.  Since she maintained the appropriate distributions, caught up on the “misses” and paid the penalties, she is allowed to continue stretching the IRA over her lifetime. Interestingly, this particular PLR is the first place where the stretch IRA was determined as the default rather than the five-year rule, breaking ground for this to be the case across the board, unless the plan’s provisions require the five-year rule.
  6. Not properly designating the beneficiary(s) on the account – IRS regulations state that the beneficiary must be identifiable in order to be eligible for the stretch IRA provision.  This means naming an individual or individuals as specific beneficiaries on the account forms, or designating a proper see through trust (with specific beneficiaries named) as the beneficiary.  The account form cannot have something ambiguous like “as stated in will” – since this does not name an identifiable beneficiary.  In addition, if the original IRA beneficiary is a trust and any beneficiary of the trust is not a person, then the stretch IRA provision is lost for all beneficiaries.
  7. Transferring the balance to a trust – if a qualified see-through trust is the beneficiary of the IRA, the balance of the funds in the IRA are NOT transferred to the trust. Rather, the IRA is transferred directly to a properly-titled inherited IRA, and then RMDs are taken from the inherited IRA and paid to the trust.  According to the trust’s provisions, the payments are then made to the trust beneficiary(s).  If the payments are simply passed through the trust to the trust beneficiary(s), then each beneficiary will be responsible for any tax on the distribution.  If the funds are accumulated in the trust, they are taxable to the trust as ordinary income.

Obviously this isn’t an exhaustive list, but rather a sampling of the more common errors that folks make when attempting to set up a stretch IRA. Done properly, this arrangement can turn an IRA of a sizeable amount in your lifetime into a very significant legacy to your heirs.  Proper setup is very important – get a professional to help you with it if you are confused by how this works!

Photo by filtran

Tough Love on Saving for Retirement (for Millennials)

Periodically, I read articles that appear antithetical to the premise of paying yourself first and saving as much as you can, as early as you can to have enough saved for retirement. In the last few weeks, I’ve read two articles – one saying that traditional retirement savings for millennials is useless, and the other saying that it was ok that you’re not saving enough for retirement. Both articles mention their collective disdain for the recent tweet by Jean Chatzky saying that by the time you’re 30, you should aim to have 1x your salary saved, 3x at 40 and so on.

I happen to agree with Ms. Chatzky. In fact, you should aim to have more if possible. In my opinion, both articles disagreeing with Ms. Chatzky (as well as the replies to her tweet) seemed befitting of excuses – which are easier to agree to, and may encourage readers to not be proactive when it comes to their retirement saving.

Many of the excuses in the articles (and sarcastic replies to Ms. Chatzky’s tweets) mentioned skipping lattes, avocado toast, and how hard it can be to save given the costs of living, annual salary, when a person starts saving, and underemployment. And of course, there was the ominous student loan argument.

While I agree that all the above will impact your ability to save, I still feel that it’s very possible to have 1x or more of your annual income saved by 30 or before. It really boils down to priorities.

Think of it this way. If you tell yourself you can’t do something, or that something is too hard to accomplish, what does your mind do? It shuts down. In other words, when you give yourself excuses, it’s easy to believe them. However, by changing your words and asking yourself how could you accomplish something (saving more, for example) you automatically force your mind to think about a solution. You become proactive – not passive.

While I don’t disagree with all of what the articles say (saving what you can, getting rid of debt), they do seem to contradict themselves by saying on the one hand the traditional advice won’t work, but on the other hand to save early and often – which is as traditional as it gets.

In my opinion, sometimes people need tough love. It may rub them the wrong way, but too often articles like these pander to folks looking for excuses, instead of telling them the hard truth. At the risk of stepping on some toes, here are my thoughts.

  • Pay yourself first. Treat your retirement savings as the first bill you pay each month. Live off the rest. Then cut out what you can’t afford (such as dining out).
  • Save a minimum of 15-25% of your gross income. More if you can. Prioritize.
  • The little things add up and yes, they do matter. Avocado toast and lattes do make an impact. For example, at $5 per day, that’s $1,825 per year. If you invest that at 5% over 30 years that’s over $121,000 saved. The same calculations can be done with car payments, TV, phone, dining out, and other “little things”.
  • Underemployed? Get another job. Get a different job. Work two jobs to earn more, save more, and pay down debt. Don’t wait for your ship to come in, swim towards it.
  • Cost of living high? Live somewhere else. Downsize. Reduce your living expenses.
  • Remember, you chose your education (and the debt that came with it), career, where to live, and how to spend your money. You have the choice to change it if you’re unhappy.
  • Stop making excuses. Stop believing what you read by individuals who tell you it’s ok if you’re not saving or that saving advice isn’t for you (likely because they themselves cannot manage their money). These principles are timeless, and they work (ask your parents and grandparents who did it making much, much less).
  • Start asking yourself how you can save and or earn more. Write down the ideas that come to your mind.
  • Take action. The best laid plans are useless unless you act. Be proactive and take responsibility for your retirement savings. Because no one else will.

Ultimately, you have the choice if you want to save more for retirement. Find a way that works for you and keep at it. It’s really a matter of how you approach it. You’re not a victim; you can choose to be in control.

A SIMPLE Kind of Plan

The SIMPLE Plan is a type of retirement account for small businesses that is simpler (ah hah!) to administer and more portable than the 401(k) plans that are more appopriate for larger businesses.  SIMPLE is an acronym (probably a backronym, more likely) which stands for Savings Incentive Match PLan for Employees.

A simple kind of planA SIMPLE typically is based on an IRA-type account, but could be based on a 401(k) plan. What we’ll cover here is the IRA-type of SIMPLE plan.  The difference (with the 401(k)-type) is that there are more restrictions on employer activities, and less room for error (as can be the case with 401(k) plans).

A SIMPLE Kind of Plan

Much like a regular 401(k) plan, a SIMPLE Plan is an agreement between the employer and employee where the employee agrees to a salary deferral.  This deferral effectively reduces the employee’s taxable take home pay, and the employer then contributes the deferred amount into the SIMPLE IRA account on behalf of the employee.  These contributions must be made to a SIMPLE IRA account, not a Traditional IRA.

To be eligible for a SIMPLE Plan, the employee must have received at least $5,000 in compensation during any two years (need not be consecutive) prior to the current tax year, and can reasonably expect to receive at least $5,000 in compensation in the current tax year (calendar year).  For the purposes of the SIMPLE Plan, a self-employed individual would be considered an employee if she received earned income as described (at least $5,000).

Also, certain classes of employees can be excluded from participation, such as union members subject to collective bargaining, or nonresident aliens who have received no compensation from US sources. The employer can have no more than 100 employees who are in the class that are allowed to participate in the SIMPLE plan.

No eligible employee may “opt out” of participation – however, eligible employees are not required to defer salary into the plan. This just means that they would have no deferral contributions or company matching contributions to the plan while they choose not to defer. Nonelective contributions by the employer would still be added to the account, regardless of whether the eligible employee defers salary for that year.

Types of Contributions

There are three different types of contributions that can be made to a SIMPLE Plan – salary deferrals, employer matches, and nonelective contributions.

Salary Deferrals are much the same as 401(k) salary deferrals.  The employee decides to defer a percentage of his salary, which reduces his taxable take-home pay, and the deferral is contributed to a SIMPLE IRA on his behalf.

Employer Matches are also similar to the same activity in a 401(k) plan.  The employer elects to match the employee contributions, dollar-for-dollar, up to 3% of the employee’s salary, although this amount can be less.  (see Limits below for additional information)

Nonelective Contributions – in some cases, the employer may decide to make contributions on behalf of ALL eligible employees, rather than only for those that are participating in the SIMPLE Plan.  In this case, the employer has opted for making the Nonelective Contributions instead of Employer Matching Contributions.  These Nonelective Contributions are for 2% of employee salary.


For Employer Matching contributions, the employer has some leeway in making the contributions for a particular tax year, but there are quite a few restrictions on how this leeway can be applied:

  • as described above, in general the matching contribution must be dollar-for-dollar up to 3% of the employee’s deferral for the year; however –
  • the matching contribution can be reduced to as little as 1% (or any amount between 1% and 3%) for a tax year as long as the amount is not reduced below 3% for more than two out of five tax years (including the current tax year) and the employees are informed in a timely fashion of the reduction in match.
  • the Nonelective Contribution of 2% can be substituted for the Employer Matching Contribution for any given year as long as employees are notified.

Contributions (for 2016-2018) are limited to $12,500 in employee deferrals, plus a catch up provision of $3,000 if the employee is age 50 or older during the tax year. (These figures are subject to annual adjustment due to inflation.)

Employer matches are limited to the amount the employee defers, up to 3%.

Note that SIMPLE deferral is counted toward the overall 401(k) limit ($18,000 for 2017; $18,500 for 2018; $24,000 and $24,500 respectively if over age 50) in deferrals for the tax year.  If an employee is subject to more than one retirement plan, this limit applies to all deferrals to 401(k)’s and SIMPLE plans for the tax year.


There are a few additional things of interest regarding rollovers and the SIMPLE plan that must be pointed out:

  • After you’ve had the SIMPLE IRA open for 2 or more years, you are allowed to rollover other IRA funds into a SIMPLE IRA. Before that, you are not allowed to rollover IRA or other accounts (besides another SIMPLE IRA) into your SIMPLE IRA.
  • In order to rollover amounts from your SIMPLE IRA into a Traditional IRA, the account must have been in existence for at least two years; otherwise your only option for a rollover is into another SIMPLE IRA (which then inherits the earlier SIMPLE IRAs starting date for rollover purposes).
  • The same two-year rule applies to Converting a SIMPLE IRA to a Roth IRA. There is no SIMPLE Roth IRA.
  • Early distributions (not subject to any of the exceptions) that occur during the first two years of the account’s existence are subject to a 25% additional penalty (instead of the usual 10% penalty for other IRA accounts).

Other than those restrictions, all of the other distribution rules apply to SIMPLE IRAs that apply to Traditional IRAs:  distributions are taxable as ordinary income; with some exceptions, qualified distributions can not begin until age 59½; rollovers and trustee-to-trustee transfers are allowed as non-taxable events (subject to the two year rule above); conversions to Roth IRAs are allowed without penalty (subject to the two-year rule); and early distributions not subject to exception are subject to an additional 10% penalty (25% in the first two years as described above).

(* a hodgepodge of additional stuff)

Contest for today:  The first person to leave a comment that explains why I used the particular picture above for this article will receive a pound of our delicious virtual back-bacon.  Extra points if you can mention something unique about that particular picture, as well.  Best of luck to all participants! (Canadians are welcome to guess this time as well!) :-)

Photo by Thomas Hill

Social Security Terms

social security termsAs you learn about Social Security and your possible benefits, there are several unique Social Security terms that you should understand. Below is a list and brief definitions of the most important of these Social Security terms.

Average Indexed Monthly Earnings (abbreviated as AIME) – this is the average of the highest 35 years of your lifetime earnings, indexed to inflation. Each year’s earnings is indexed based on when you reach age 60, and the highest 35 years are averaged. This average is divided by 12, to result in the monthly average. The AIME is used to determine your PIA. Your AIME can increase after age 62 if you’re continuing to work and earn in excess of some of your earlier indexed earnings amounts.

Bend Points – these two amounts are determined for each individual based upon the year that you will reach age 62. The Bend Points are applied to your AIME to calculate the PIA.

Delayed Retirement Credits (DRCs) – when you delay filing for benefits after your FRA, you accrue credits for the delay, known as a DRCs. You earn DRCs for delaying your filing for Social Security benefits after your FRA up to age 70 at maximum. No DRCs are earned after you reach age 70. Presently this delay credit is equal to 2/3% for each month of delay, or a total of 8% for each year of delay. These credits are accumulative – meaning that if you delay for 3 years your DRCs are 24%.

Full Retirement Age (FRA) – this is the age at which your Social Security benefit is equal to your PIA. The age is 66 for folks born between 1946 and 1954. FRA increases by 2 months for each birth year after 1954, up to a (current) maximum of 67 for those born in 1960 or later. For each month before this age that you file for benefits, your benefit will be reduced from the PIA amount; for each month after this age that you delay filing, your benefit is increased from the PIA amount.

Primary Insurance Amount (PIA) – Using the AIME, three amounts (bound by Bend Points) are applied to the average. The amount of your AIME up to the first Bend Point is multiplied by 90%; the amount of your AIME from the first Bend Point to the second Bend Point is multiplied by 32%; and the amount above the second Bend Point up to your total AIME is multiplied by 15%. These three amounts are added together to result in your PIA.

Social Security Changes for 2018

In 2018, there will be some slight changes to Social Security. For individuals receiving benefits, there will be a cost of living (COLA) increase of 2 percent. While 2 percent may not seem like a lot, it certainly does help. Additionally, it’s better than nothing. That is, Social Security remains one of the few retirement vehicles available with a COLA. Many defined benefit pensions (if an individual is lucky to have one) do not have COLA increases. Their payments remain fixed for the retiree’s lifetime.

Individuals still working will see the wage base subject to the OASDI tax of 6.2 percent increase from $127,200 for 2017 to $128,700 for 2018. As always, the Medicare tax of 1.45 percent remains on an unlimited amount of wages, with an additional .9 percent tax added for those with incomes above $200,000 (single) or $250,000 (MFJ).

For individuals receiving benefits yet continuing to work, the annual income thresholds have increased for the temporary reductions in benefits. For those under full retirement age (FRA) the annual income threshold rises to $17,040 for 2018. This means that while receiving benefits in early retirement, for every $2 of income above this threshold, benefits are reduced $1. The threshold increases in the year an individual reaches FRA to $45,360. These thresholds are annual, but the calculation is done monthly per individual.

It should also be noted that once an individual reaches full retirement age, these temporary reductions stop, and the benefit is recalculated. In other words, once and individual reaches FRA, he or she can earn as much as they want, and not have their benefit reduced. It should also be mentioned that temporary reductions are in addition to permanent reductions that occur when benefits are taken before FRA.

Finally, should it make sense for their situation, individuals may consider delaying their benefits after FRA. This allows an individual to receive a two-thirds of 1 percent monthly increase, or 8 percent annually, on their primary insurance amount (PIA). So not only does Social Security have a COLA, it also allows those who delay a permanent increase in their benefit, up to 8 percent annually (until age 70), with an inflation adjustment.

Social Security Bend Points Explained

i love deep blue by JennyHuangBend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series.  They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA. The points on the graph “bend” as the rate of inclusion changes.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA.  Here, however, we’ll go over how Bend Points are calculated each year.  To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis.  According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2018 bend points is from 2016.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085.  I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth quite a while ago.  At any rate, now that we know these two numbers, we can jump back to 2016’s AWI Series figure, which is $48,642.15.  It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points

So here is the math for 2018’s bend points:

$48,642.15 / $9779.44 = 4.9739

4.9739 * $180 = $895.31, which is rounded down to $895 – the first bend point

4.9739 * $1,085 = $5,396.70, rounded up to $5,397 – the second bend point

And that’s all there is to it.  Hope this helps you understand the bend points a little better.

Photo by JennyHuang


big-cedar-tree-tiny-girl-by-woodleywonderworks1/1/2018 Note: Recharacterization of Roth conversion is no longer allowed as of tax year 2018. The last tax year that you could recharacterize Roth conversions is 2017. See Roth Recharacterization is No Longer Allowed for more details.

For IRA contributions, the concept is simple:  a certain amount may be contributed to the account each year, dependent upon the type of IRA and your MAGI (Modified Adjusted Gross Income).  But what if you find out that you are ineligible to contribute to a Roth IRA due to the MAGI limitation?  How about if you made contributions to a Trad IRA and, upon filing your taxes found out it would be in your best interest to put those funds in your Roth instead?  Enter the Recharacterizing.

Recharacterization of IRA Contributions

This is a relatively simple process, but, as with most things, the Code makes it seem like rocket surgery.  Essentially, if you make a contribution to one type of IRA and then decide that you’d rather have it in the other type of IRA, you can affect this recharacterization by:

  • notifying both trustees (the original IRA and the second IRA) of the transfer
  • requesting a trustee-to-trustee transfer
  • include in the transfer any net income attributable to the contributions being recharacterized
  • report the recharacterization on your tax return for the year (Form 8606)
  • treat the contribution to the second IRA as if made on the date of the contribution to the first IRA (in other words, as if you had done it the right way the first time)
  • if the first IRA was a Traditional IRA, you are not allowed a deduction for that contribution for the tax year (obviously, since it wasn’t left there)
  • All of this has to happen before the due date of your tax return, plus 6 months – for most calendar-year taxpayers this is October 15. (see Footnote below  for additional info)

Wrinkles with recharacterizing

Now, if you thought that was way too many steps to get something really simple accomplished, look at the following examples of additional confusion to add to the mix:

Conversion by Rollover from Traditional IRA (TIRA) to a Roth IRA (RIRA)… if you’re converting funds from your TIRA to a RIRA and the transfer occurs within two tax years (but still within the allowed 60 days)  you would treat the activity as having been completed before the end of the first tax year if you needed to later recharacterize the conversion.

Rollovers… if you’ve already made a tax-free transfer of the funds, in general those funds are not eligible to be recharacterized.

Recharacterizing Excess Contributions… since excess contributions must be removed prior to filing that tax return for the applicable tax year, any recharacterization of those amounts would have to be accomplished strictly by the due date of the return – no extra 6 months in this case.

Recharacterizing SEP or SIMPLE funds… if you’ve converted funds from a SEP-IRA or a SIMPLE IRA to a Roth IRA and wish to recharacterize those funds, they must go back to the type of IRA that they came from, either a SEP or a SIMPLE, and not a Traditional IRA.  But these can be new accounts if the old account was closed.

Mistaken Rollover to SEP or SIMPLE… if you mistakenly made a rollover transfer of Traditional IRA funds to a SEP or SIMPLE (which is not allowed), you can recharacterize those amounts back into a Traditional IRA.

Employer Contributions… it is not allowed to recharacterize employer contributions to a SEP or SIMPLE plan as contributions to another type of plan.

NOT a Rollover… when considering the “once a year” restriction on rollover transfers, recharacterization is not counted as a rollover, so roll away!

No Reconversions (within limits)… if you converted from a TIRA to a RIRA and the recharacterized the conversion, you cannot then re-convert those funds to the RIRA again in the same tax year, or within 30 days of the recharacterization (if after the end of the tax year).

Decedent… the election to recharacterize can be made on behalf of a deceased IRA owner by the executor, administrator, or other person responsible for the decedent’s final tax return.

So as you can see, there are lots of ways to complicate the process, but in general the act of recharacterization is pretty simple, as long as you follow the rules and pay attention to the dates.

Footnote: In this one case, the IRS allows additional time for completing the recharacterization activity even if you have not completed it by the prescribed dates.  There are some specific things that have to be accomplished in order to receive this extra time:

  • your return must have been filed on time
  • you must have done the following within 6 months of your filing date:
    • notify the trustees of the intent to recharacterize
    • provide trustees with all necessary information
    • request the transfer

Once complete, you must amend the return, write “Filed pursuant to section 301.9100-2” on the return, and refile with the recharacterization noted.  File the return at the same address as your original return.

Photo bywoodleywonderworks
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