Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

Posted in: IRA, net unrealized appreciation, NUA, qrp, qualified retirement plan.
Tagged: IRA · net unrealized appreciation · NUA · qrp

Additional Factors About Survivor Benefits

Jun 8th, 2012

6 comments

Seems like there is always something to learn. No matter how much you know and study a subject, it seems there are always factors that are uncovered that you weren’t aware of – and I find this sort of thing from time to time. Recently, I have been made aware of a couple of factors that I had misunderstood previously about Social Security Survivor Benefits – thanks to my friend Dana Anspach, who blogs over at MoneyOver55.About.com. Thanks Dana!

Limit on Reductions to Survivor Benefits

The first factor is one that I wasn’t even aware of – regarding how reductions on Survivor Benefits work in a very specific situation. The situation is when the deceased spouse was not at least at Full Retirement Age and he or she was receiving retirement benefits as of the date of death.

In this situation, the amount of benefit that is used to begin the calculation for Survivor Benefits is the greater of

The deceased spouse’s actual benefit; or
82.5% of the deceased spouse’s PIA

As such, in this particular set of circumstances, the starting point for determining Survivor Benefits cannot be less than 82.5% of the deceased spouse’s PIA.

Amount of Survivor Benefit Available

The second factor that I wasn’t clear about is where the deceased spouse was, again, not at least at Full Retirement Age (FRA) but in this case he or she was NOT currently receiving retirement benefits as of the date of death.

The part that needs to be clarified is that the deceased spouse’s age isn’t a factor in determining the amount for the base factor unless he or she would now be older than FRA had he or she survived to the date that the widow(er) applies for Survivor Benefits.

In other words, when the deceased spouse was not receiving retirement benefits and he or she would not have attained FRA by this date, the Survivor Benefit is calculated based on 100% of the PIA of the deceased spouse. The Survivor Benefit is not reduced based upon the deemed attained age of the decedent.

On the other hand, if the deceased spouse was at least FRA or older than FRA as of the date of death and not receiving benefits, the Survivor Benefit amount will be based upon the decedent’s PIA plus the applicable credits for delay beyond FRA. The Delayed Retirement Credits are accrued up to the month of death.

In either case, the age of the surviving spouse is a factor – if the surviving spouse is less than his or her own Full Retirement Age (FRA), reductions will be applied to the starting factor mentioned above, based upon the age of the surviving spouse.

Corrections Applied

I’ve gone back through previous articles to update any language that was contrary to these additional factors, but I may have missed some – let me know if you find any others. Hopefully this hasn’t caused any major difficulties for you.

Posted on Jun 8th, 2012

by author: jblankenship.

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Posted in: Social Security, social security benefits, social security survivor benefits.
Tagged: Social Security · social security survivor benefits

What to do When You Receive a Letter from the IRS

Jun 4th, 2012

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No matter how diligent you are, mistakes happen. And sometimes the mistakes are made by the IRS. Or possibly there’s just some additional information required. Whatever the case, you have received a letter or notice from the IRS. Scary stuff, right?? Maybe, but just receiving a letter from the IRS isn’t an immediate cause for alarm.

Just because you’ve received a letter from the IRS doesn’t mean you did something wrong. The IRS has been wrong before, and as mentioned above, there are lots of reasons that might cause them to send you a notice – not all of them are necessarily bad.

The IRS recently published their Tax Tip 2012-73, which lists “Eight Facts to Know if You Receive an IRS Letter or Notice”. The text of the Tip is below.

Eight Facts to Know if You Receive an IRS Letter or Notice

The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with simply, without having to call or visit an IRS notice.

Here are eight things to know about IRS notices and letters.

There are a number of reasons why the IRS might send you a notice. Notices may request payment, notify you of account changes, or request additional information. A notice normally covers a very specific issue about your account or tax return.
Each letter and notice offers specific instructions on what action you need to take.
If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
If you do not agree with the correction the IRS made, it is important to respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left of the notice. Allow at least 30 days for a response.
Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right of the notice. Have a copy of your tax return and the correspondence available when you call to help the IRS respond to your inquiry.
It’s important to keep copies of any correspondence with your records.
IRS notices and letters are sent by mail. The IRS does not correspond by email about taxpayer accounts or tax returns.

For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest is available in Publication 17, Your Federal Income Tax (For Individuals).

Posted on Jun 4th, 2012

by author: jblankenship.

Posted in: income tax, irs.
Tagged: income tax · irs

Investing Truths

Jun 1st, 2012

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This list of factors about investing is part of a document that I often provide to my clients as we’re working with investment planning. The list isn’t intended to be exhaustive, but rather representative of some of the truisms that I have found to be helpful over the years.

Add your own truisms to the list and I’ll put this up as a separate page to include your comments as well!

Investing Success Factors

Time is the most important factor relating to an investment plan’s success. There is no substitute for starting early and maintaining regular contributions to your savings.

Diversification, among asset classes, sectors, and tax treatment, is the second-most important factor relating to an investment plan’s success. The old adage “Don’t put all of your eggs in one basket” applies here.

Keeping expenses down, by utilizing low-cost investment vehicles such as no-load mutual funds and exchange-traded funds, is another very important factor in an investment plan’s success. When you pay extra money in commissions, loads, and management fees, this money is lost to you forever and will not work toward your investment goals.

The principal cause of changes in investment prices is a change in consensus expectation for the future.

Past performance is no indication of future results. Investment returns can only be made in the future – it is impossible to buy past returns.

When you work with a financial advisor, you are not paying for tips, secrets, or inside information. You are paying for knowledge and reason applied to your specific circumstances. Investors who utilize a financial advisor have generally increased odds for success in investing. However, increasing your odds does not mean you will be 100% successful.

Count on its

I refer to the next group of truisms as the “count on its” – meaning, these are things you need to expect as you undertake investing:

The value of opportunities that you’ve missed will always exceed the value of those opportunities that you take. It’s a matter of perception – the grass is always greener on the other side of the fence.

Sometimes we will buy an investment that will immediately go down in value right after we buy. Other times we will sell an investment that will immediately afterward rise in value. It happens, and there’s nothing you can do about it besides sticking with your plan.

Get used to uncertainty. Like it or not, every investment decision is based purely upon reasoned guesses about the future.

That’s my list – add your Investing Truths in the comments below. I’m interested in seeing other perceptions!

Posted on Jun 1st, 2012

by author: jblankenship.

Posted in: financial planning, investing, IRA.

What If My Employer Doesn’t Match My 401(k) Contributions?

May 30th, 2012

2 comments

Should I continue to make contributions to my 401(k)? Is there something else that I should make contributions to instead?

As you may recall, the recommended order for retirement savings contributions is normally as follows:

401(k) contributions up to the amount that the company matches
max out your Roth or traditional IRA contributions for the year (as applicable)
max out the remainder of the available 401(k) contributions
make taxable investment contributions

In the situation where your employer doesn’t match your contributions to a 401(k) plan, the order of contributions is more appropriate if you bump up the Roth or traditional IRA contributions. In other words, just eliminate the first bulletpoint.

Now, the choice of Roth IRA versus the traditional IRA for your contributions is dependent upon your income and the tax impacts. For example, you would not be eligible to make a deductible traditional IRA contribution if your Modified Adjusted Gross Income (MAGI) is greater than $112,000 (if you’re married and filing jointly), or $68,000 if you’re single. (Contribution limits are for 2012 tax year.)

Since the deductible traditional IRA has the ability of being deducted from your income, making your contribution there could decrease taxes. If you’re in a position to take advantage of this, you should probably go this route. In the case where you’re married and your spouse isn’t covered by a retirement plan – either he doesn’t work outside the home or his employer doesn’t have a retirement plan – you can make a deductible IRA contribution for your spouse as well if your MAGI is less than $183,000.

On the other hand, if your MAGI is greater than $112,000 (MFJ) or $68,000 (Single), a Roth IRA contribution might be the best first option for retirement savings contributions. The Roth IRA contribution is available to you if your MAGI is less than $183,000 (MFJ) or $125,000 (Single). The Roth IRA contribution doesn’t reduce taxes for you currently – but in the future your distributions from the account can be tax-free if qualified.

If you don’t fit into those income categories, you still have the option of making non-deductible contributions to a traditional IRA for the tax year. Again, there’s not a tax benefit in the current year, but there are benefits to making such a contribution – such as the ability to convert the funds from this traditional account to a Roth IRA later – that will make the contribution worthwhile.

The reason that the use of either a Roth IRA or a traditional IRA is the first choice (if available to you) over a non-matched 401(k) plan is because with the IRAs, you have much better control over your costs, investment choices, and fewer restrictions on non-qualified distributions.

The 401(k) still offers the greatest amount of tax-deferral – up to $22,500 if you’re over age 50, $17,000 otherwise – versus a maximum contribution of $6,000 ($5,000 if under age 50) for the IRAs. This is the reason that the 401(k) account is still a good choice for making retirement savings contributions, even if your employer doesn’t match your contributions. So if you have more money to contribute to your retirement savings than the initial $5,000 (or $6,000 if over age 50), the 401(k) should definitely still be a part of your plan.

Posted on May 30th, 2012

by author: jblankenship.

Posted in: Annual limits, contribution limit, IRA, ira contribution limits, qrp, qualified retirement plan, Roth IRA.
Tagged: 401 k · IRA · ira contribution limits · qualified retirement plan

Ideal Roth Conversion Candidate – Protecting Non-Taxation of SS Benefits

May 25th, 2012

1 comment

This is the second in a series of posts about Ideal Roth Conversion Candidates. See the first post, Low or Zero Tax, at this link.

One of the planning options that most all folks have available to them is the Roth IRA Conversion. For the uninitiated, a Roth IRA Conversion is a transaction where you move money from a Traditional IRA or a Qualified Retirement Plan (QRP) such as a 401(k) into a Roth IRA. With this transaction, if any of the funds in the original account was pre-tax, that amount would be included in income as potentially taxable in the year of the Conversion.

As you might expect, making a decision like this can result in a considerable tax impact, depending on the individual circumstances. A Roth IRA Conversion may make a great deal of sense for one individual, while another may decide that the Conversion cost is too great for the result. Detailed below is one specific circumstance that indicates a Roth IRA Conversion is a good move – although each individual needs to consider his or her situation carefully, because every situation is unique.

Protecting Non-Taxation of Social Security

In this situation, the individual has a very low taxable income, low enough that she would not likely need to include Social Security benefits as taxable income, once she begins receiving the benefits. However, once she reaches age 70½ and Required Minimum Distributions (RMDs) are necessary, the amount of these distributions will increase her overall provisional income to a point where Social Security benefits will be taxable at the fullest rate, 85%. Converting a portion of the IRA to Roth IRA will help to keep the RMDs low enough that SS benefits can be taxed at a lower (or zero) amount.

For example, Jane is 60, single, and has retired. She intends to begin receiving Social Security benefits of $24,000 at her full retirement age of 66. She needs a total of $40,000 each year to live on. She presently withdraws that amount from her IRA on an annual basis. Her IRA balance at this point is $600,000.

If she did nothing about converting to Roth, when she reaches 70½ the amount of her RMD will be large enough to bump up her provisional income to a point where her Social Security benefits will be taxable at the maximum 85% rate. This comes about because her balance in the IRA (after withdrawals and annual increases averaging 5%) is roughly $557,000 at her age 70½.

If, however, Jane began a process of converting a small portion of her IRA to Roth IRA each year between now and when she reaches age 70½, she could reduce the size of her traditional IRA and therefore reduce the size of her future RMDs to a point where the tax impact on her SS benefits is eliminated. In our example, if Jane withdrew an additional $15,000 from her IRA and converted the after-tax portion to a Roth IRA, this would reduce her IRA balance to a point where the RMD (when required at age 70½) would be low enough that her SS benefits would no longer be subject to taxation at all.

This series of conversions brings her Traditional IRA balance down to approximately $359,000. At the same time, she has amassed a Roth IRA with a balance of approximately $148,000 – so her total of the two accounts is approximately $507,000. The tax cost of the conversions and the lost income/appreciation on the money used for taxes makes up the difference.

This conversion would cost her an additional $3,750 per year for ten years, but the effect of non-taxation of her future SS benefits would be a reduction in future tax of $5,100 – for the rest of her life. With this in mind, approximately 10 years later, at her age 80, this strategy would have paid off. If she died prior to that age, the Roth Conversion would have cost more than the benefit.

Note: the figures used in the examples do not include inflation, and are purposely rounded for simplification. Real-world results will differ, perhaps significantly, from this example.

Conclusion

There are many other situations when a Roth Conversion makes a lot of sense, the above is one example of a very good scenario for the conversion. As I mentioned previously, each individual’s situation will be different and may or may not result in the same decision to convert or not. Watch for more examples in future posts!

Posted on May 25th, 2012

by author: jblankenship.

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Posted in: conversion, IRA, Roth Conversion, Social Security.
Tagged: IRA · roth conversion · Social Security

Ideal Roth Conversion Candidate – Low or No Tax

May 23rd, 2012

3 comments

Low (or Zero) Tax Rate

If an individual is in a situation with a very low tax rate, a Roth Conversion could be a good idea – especially if the situation with the low tax rate is due to change in the future.

An example would be if Joe, a 30-year-old, finds himself taking a year off to go to school and pick up the last few hours of his Master’s degree. Joe has had a good career in sales for the past several years, and he put $100,000 into his former employer’s 401(k) plan. The account grew to $150,000 by this year, when Joe has started going to school, intending for his Master’s degree to allow him to advance further in his career. Joe also has a fairly significant taxable investment account, some of which he plans to use for living expenses, but he also has some extra money in the account which could be used to pay taxes on a Roth Conversion.

Since Joe supports himself and he is a single filer, he should consider converting a portion of his 401(k) account (all pre-tax money) to a Roth IRA. This is because, having no other income for the tax year, the first $9,750 of income that he claims on his tax return will have zero tax (for 2012) because of the standard deduction and personal exemption. After that, his next $8,700 of income claimed is taxed at 10%, for a tax cost of $870 for a total conversion of $18,450 – an effective rate of 4.7%.

He could further convert up to an additional $26,650 at the 15% rate, for a total converted amount of $45,100. The total tax cost of his conversion would be $4,868, for an effective tax rate of only 10.8%. Taking this a step further, the 25% tax rate would be used for up to $50,300 more of conversion. This would result in a total of $95,400 being converted, and a total tax of $17,443 – for an effective tax rate of only 18.3%.

Since Joe expects that his income in the future will be much higher – into the six-figures category, it probably makes sense for him to convert as much as possible in these lower tax brackets while his income is actually zero for the year. Even though it will cost him $17,443 from his taxable account to pay the tax, this is a far lower rate than he could expect to pay on withdrawals from this account in the future.

It should be noted that one of the very important factors in this scenario is that Joe has other funds from which to pay the tax. If he didn’t have this money available from a source other than his IRA, a portion of the IRA would have to be used to pay the tax. This would result in imposition of the 10% early withdrawal penalty in addition to the tax on the distribution. The additional cost of this distribution would weaken the position and increase the overall cost of the conversion.

Conclusion

Posted on May 23rd, 2012

by author: jblankenship.

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Posted in: conversions, IRA, Roth Conversion.
Tagged: IRA · roth conversion

What is Meant by Half Years of Age?

May 21st, 2012

1 comment

If you’ve paid much attention to the rules around retirement plans (IRAs, 401(k)s, and others), you’ve probably noticed that there are a couple of rules that refer to ages that include “½”. So what does this mean??

Well, quite literally, this means 6 months after you reach a certain age. The two primary ages with “½” included are 59½ and 70½. So, to be age 59½, means that you reached your 59th birthday six months prior to that date. Likewise, to be age 70½ means that you reached age 70 six months prior to that date.

These two ages are for different purposes and are (naturally) treated differently.

Age 59½

The rule using age 59½ is for one of the exceptions to the penalty for early withdrawals from your IRA or 401(k) plan: once you’ve reached that age (and not before that age) you can take withdrawals from your IRA or 401(k) plan without limits (401(k) plans may also require a separation from service).

Here is an important point: this rule is specifically applied ONCE YOU REACH AGE 59½, and not before. In the year that you will reach this age, any withdrawals taken from the account before you reach age 59½ will be subject to the 10% penalty if no other exceptions apply.

Age 70½

The rule using age 70½ is regarding Required Minimum Distributions (RMD), as well as limiting contributions to an IRA. For RMDs, the requirement is simply that you must begin taking the required distributions for the year in which you’ll reach age 70½. (You can actually delay the first distribution until April 1 of the following year, but the distribution is based on the year when you reach age 70½.)

Note that this is different from the way the 59½ rule works: it’s simply the year in which you’ll reach age 70½, not the specific date that you reach age 70½. So if your birthday is between January 1 and June 30, your age 70½ year is the year that you reach 70 years of age. If your birthday is between July 1 and December 31, your age 70½ year is the year that you’ll be reach 71 years of age.

The same holds true for contributions to an IRA: in the year that you’ll reach 70½, you are not allowed to make contributions, and you are not allowed to make contributions thereafter.

You Don’t Have to Count Days

The good news is that you don’t have to count days. For the purposes of these rules, the half year is the same date, six months later. For a birthdate of May 11, the half year is reached on November 11 of that same year. For odd circumstances, such as August 31, of course you’ve reached the half year on February 31 of the following year. Actually, I believe the rule is that you reach that milestone on March 3 – I’d use this date if you are in this situation, just to be certain.

Posted on May 21st, 2012

by author: jblankenship.

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Posted in: 72t, Early Distribution, employer plan, IRA, qrp, retirement accounts, rmd.
Tagged: 401 k · early retirement · IRA · qualified retirement plan

2013 Social Security Wage Base Projected

May 18th, 2012

3 comments

Cardpunch operations at U.S. Social Security Administration

jb update 10/16/2012: The wage base for 2013 was confirmed at $113,700.

The Social Security Administration trustees recently projected the wage base for 2013. This is the maximum amount of wage income that an individual earns for the year that is subject to Social Security withholding tax. For 2013, this amount is projected at $113,700.

The new amount is $3,600 more than the 2012 wage base, which is set at $110,100, for an increase of 3.27%. Keep in mind that this is only the increase in the taxed wage base, and there is little correlation between this and any potential increase in benefits for the year.

Future years’ estimated wage bases are projected as follows:

2014: $117,900

2015: $123,000

2016: $128,400

These are only projections, each year in October the SSA trustees will set the amount for the coming year.

Posted on May 18th, 2012

by author: jblankenship.

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Posted in: #noTOP, 2013 tax year, Social Security, social security administration, social security tax.
Tagged: Social Security · social security administration · social security tax

Penalties for Failure to File or Pay

May 14th, 2012

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Exterior of the Internal Revenue Service office

When you don’t file your tax return or if you don’t pay the tax owed on time, the IRS has specific penalties that are applied to your account. Recently the IRS issued their Tax Tip 2012-74, which lists eight facts about these penalties. The actual text of the Tax Tip is listed below:

Failure to File of Pay Penalties: Eight Facts

The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay, or both.

Here are eight important points about the two different penalties you may face if you file or pay late.

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.
The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Posted on May 14th, 2012

by author: jblankenship.

Posted in: irs, tax, tax deferral, tax preparers.
Tagged: irs · tax deferral

Inherited IRA Multiple Beneficiary Example

May 9th, 2012

6 comments

All of the beneficiaries of the future rice mill

I thought it might be helpful to work through an example of an IRA that has been inherited by multiple beneficiaries, so that we can discuss the important components of working with such a situation.

In our example, we’ll say there is an IRA worth $800,000 at the date of death of the original owner, and she has designated four beneficiaries of the account. One of the first factors that is important to note is that the beneficiaries could be anyone – they do not have to be related to the original owner, or likewise they could be the children, grandchildren, nieces, nephews, brothers or sisters of the original owner. For the purpose of this example though, none of the beneficiaries is the surviving spouse of the original owner – surviving spouses have different rules to work from.

Option 1 – Do Nothing

The beneficiaries of the original account could choose to make no changes to the account, leaving it exactly where is was during the life of the original owner. Assuming that the original owner was not subject to Required Minimum Distributions (that is to say, the original owner was not age 70½ or older), the account will be distributed over the lifetime of the oldest of all the beneficiaries, in equal shares to each of the four. Table I, Single Life Expectancy, is used to determine the amount of the distribution, and the age is the age of the oldest beneficiary. (If the original owner was subject to RMD, the beneficiaries have the option of using her lifespan instead of the lifespan of the oldest beneficiary if this would result in a longer payout period.)

This option results in the least amount of “moving parts” and is likely the simplest to implement, but as we all know, getting four people to agree on things like how to manage the account, what investments to make, etc., is a difficult task. This option also requires the younger beneficiaries to take distributions of larger amounts than would be required if the account were distributed over their own, longer, life span.

Option 2 – Separate Accounts

The beneficiaries of the IRA account have the option of splitting up the account into equal shares of the original account. In this fashion, each individual would own an account, titled as “inherited” so that there’s no misunderstanding – the account is inherited, not a regular IRA (more on this later).

Once the separate accounts are set up, each of the four beneficiaries is allowed to (actually required to) take distributions over his or her own lifespan, rather than all being required to take distributions over the oldest beneficiary’s lifespan as was the case in Option 1. In addition, each beneficiary can now make the investment and management decisions about the account separately. The individual beneficiary should now also designate a beneficiary for any amount that is remaining in the account when the individual beneficiary dies.

Important Points

A few points that are very important to note here:

The separate accounts are the property of each individual beneficiary, but the account must retain a title which clearly designates the account as inherited. Since the account is inherited, the owner of the account cannot make contributions to the account, roll it over into another IRA account, or convert the account to a Roth IRA.
When creating the separate accounts, it is important to ensure that the transfer is a trustee-to-trustee transfer. If the funds are removed from the account (as in a 60-day transfer) then contribution back into an IRA is not allowed, and the amount distributed is no longer considered to be an IRA.
The separate accounts must be established by December 31 of the year following the year of the death of the original owner. If not established by this date, then Option 1 is the default, and now only, option available.

Posted on May 9th, 2012

by author: jblankenship.

6 comments already - add to the conversation!

Posted in: inherited IRA, investment, IRA.
Tagged: inherited IRA · IRA

What Options Are Available for a Surviving Spouse Who Inherits an IRA?

May 2nd, 2012

2 comments

First Spouse Program bronze medal (Photo credit: Wikipedia)

When the owner of an IRA dies and leaves the IRA to his or her spouse as the sole beneficiary, there are some unique options available for handling this inherited IRA. Keep in mind that these options are only available to a spouse a beneficiary – a non-spouse beneficiary has much more limited options available.

Options for a Spousal Beneficiary of an IRA

The first and easiest option is for the spouse to leave the IRA exactly where it is and do nothing. In this manner, the IRA will continue to exist as belonging to the deceased spouse – for a time. If the deceased spouse was over age 70½ years of age and subject to Required Minimum Distributions (RMDs), the surviving spouse could elect to continue receiving those RMDs using his or her late spouse’s lifetime as the distribution factor.

On the other hand, if the deceased spouse was not subject to RMDs, the surviving spouse could also begin receiving RMDs from the inherited IRA based upon his or her own age. This is a viable option as well.

On the third hand, after leaving the IRA in the name of the deceased spouse the surviving spouse could also opt to not take RMDs from the account at all – in this case the inherited IRA would be considered to be owned by and controlled by the surviving spouse, no longer an inherited IRA. If the surviving spouse is over age 70½, he or she will need to begin receiving RMDs from the account based on his or her age.

Another option available to a spousal beneficiary of an IRA is to rollover the account into an IRA in his or her own name. This would give the surviving spouse the same result as the “third hand” mentioned above.

In other words, both of these last two options results in the IRA being treated as if it was owned by the surviving spouse. He or she is eligible to make contributions to the account, take withdrawals if over age 59½ (or if one of the exceptions applies) without penalties, rollover the account to another IRA or Qualified Retirement Plan, and convert the account to a Roth IRA.

Why Would the Spouse Choose One Option Over Another?

In some instances, it could be advantageous to leave the IRA in the name of the deceased spouse. For an example, let’s say Jane died leaving John (her husband) as the sole beneficiary of her IRA. Jane was 70 years old and not yet subject to RMD, but eligible for penalty-free distributions. John is 57 years old, and as such he’s not yet eligible to take IRA distributions from a regular IRA in his own name. Once the time has passed when Jane would have reached age 70½, John will be subject to RMDs from the account based upon Jane’s age (since it’s still in her name) but if he needs the income he has it available without penalty. If he rolls over the account to his own name at age 57 he will not have penalty-free access to the funds for 2½ more years.

So, leaving the account in Jane’s name will allow John to take withdrawals from the account without penalty. Once John reaches age 59½ he can rollover the account to an account in his own name, which will allow him to name beneficiaries of the account on his own (otherwise the original beneficiary designations that Jane made are still controlling the account).

Another situation that might make sense for the surviving spouse to leave the account in the name of the deceased spouse is if the surviving spouse is older. From our example, if Jane and John’s ages were switched (Jane, the deceased was 57 and John is 70) then John could benefit from leaving the account in Jane’s name. This is because he could take distributions from the account without penalty (death benefits are penalty-free) without being required to take distributions (when he reaches 70½).

At the point in the future when Jane would have been age 70½, John could rollover the IRA into an account in his own name, again so that he can name his own beneficiary for the account. This way he didn’t have to take RMDs until that point.

Posted on May 2nd, 2012

by author: jblankenship.

Posted in: inherited IRA, IRA, qualified retirement plan, rollover, survivors.
Tagged: inherited IRA · IRA · qualified retirement plan · rollover

Book Review – Backstage Wall Street

Apr 30th, 2012

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This was a good book, I truly enjoyed reading it. The primary reason that I enjoyed it so much is because it’s the book I have been hoping to find from someone like author Joshua Brown: a book that tells the truth about what’s really going on on the seamy side of Wall Street (which is the only side, to be truthful).

Joshua Brown (TheReformedBroker.com) provides a unique perspective – that of someone who has been involved in the “inside” of wirehouse broker-dealers, but who has since seen the light and moved on to a career in independent investment advice. As such, Mr. Brown has seen the worst of the worst, in terms of how these institutions treat the investing public. Once he became aware of how it all worked, through a great degree of soul-searching (and a whole lot of gumption), stepped away from it all and has never looked back.

In Backstage Wall Street, Brown lifts the veil of secrecy around how the process works, explaining how the back-room dialers constantly call folks and work through a script to get the recipients of the call to agree to fork over money. It’s understood that if the person picks up the phone, the longer the broker can keep the person on the phone the better the chance of selling something – no matter how bad it is. This business is similar to the three-card-monte guy on the street, but worse: by working under the seemingly staid letterheads of large corporations, there is the impression that the callers are giving advice. In the end, all they are doing is pushing a sale, and the guy calling you doesn’t care if it’s a good thing he’s selling you or not – only that he’s making a sale.

I found the book to be informative mostly in that it is confirmation of what I’ve learned through the years and believed to be true about these outfits. Joshua Brown has done a great job in exposing the underbelly of the financial industry, and I believe he truly enjoys the position this has put him in. As noted, he has been referred to as the “merchant of snark” by the New York Times for his expose’, and this snarkiness comes through in his book, making it a fun read in addition to an informative book.

If you have any involvement in the financial services industry as a profession, you probably know (or have an inkling about) many of these things already. Brown’s insights and presentation make the book worth the read nonetheless (and you’ll probably learn a thing or two along the line).

If you use a broker to “help” with your investments, you owe it to yourself to read this book – asap. If you have ever found yourself wondering just why it is that your “investment guy” makes one recommendation over another – you need to read this book. If you have money invested anywhere at all other than bank CD’s, you need to read this book. I am certain that your eyes will be opened, and you’ll be a better consumer as a result of it.

Posted on Apr 30th, 2012

by author: jblankenship.

Posted in: Book review, fee-only, fiduciary, investing.
Tagged: book review · fiduciary · investment

When Is a Roth IRA Subject to Income Tax?

Apr 20th, 2012

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Elaine Roth (Photo credit: Wikipedia)

Ah, the Roth IRA. That single bastion of non-taxable money in our arsenal of accounts. When you have investments in a Roth IRA, you can take the money out tax-free, right? Not always.

There are several situations where a Roth IRA’s monies can be subjected to tax, penalty, or both. Listed below are some of those circumstances.

When a Roth IRA is Taxable

It should be noted that contributions to a Roth IRA may always be withdrawn from the account tax-free, for any purpose whatsoever. There are no restrictions on these withdrawals.

1. Taking the money out of the account within the first five years of the account’s existence can result in taxation of a portion of the funds. The portion that is taxable is any withdrawal that exceeds the total of all contributions and conversions into the account. This rule applies without exceptions.

2. If your Roth IRA has been in existence for the required five-year time, there are still some qualifications to meet in order to ensure that the withdrawals are completely tax free. Specifically, you must

be at least 59½ years of age; OR
you must be disabled; OR
you must be taking no more than $10,000 more than the contribution and conversion amount(s) for a first-time home purchase; OR
the account owner has died.

If none of those qualifications applies, any amount greater than the conversion/contribution amounts will be subject to ordinary income taxation.

When a Roth IRA is Subject to Penalty

In addition to the specter of taxation, withdrawals from the Roth IRA could also be subject to a 10% early withdrawal penalty (much like a traditional IRA can be). Here are a couple of cases when the 10% penalty may apply:

1. Within five years of any conversion into a Roth IRA, if you take out amounts that include the converted funds, the withdrawal of the converted amounts will be subject to the 10% penalty. (unless one of the exceptions applies – see 19 Ways to Withdraw IRA Funds Without Penalty for more details)

2. Even after the five year period has elapsed, if you are under age 59½ and none of the exceptions from #2 in the “Taxable” section above applies, any amount withdrawn that is greater than the conversions and contributions to the account will also be subject to the 10% penalty.

Wrap up

If the above is a bit confusing, you might need a refresher on the withdrawal sequence – how each dollar of withdrawal from a Roth IRA is attributed, and in what order. Here’s how it goes:

First, all contributions to the account are withdrawn. After that, all conversion amounts are withdrawn, starting with the amounts that have been converted for more than five years, and then subsequently any amounts that were converted less than five years ago (and therefore subject to penalty unless an exception applies).

After all conversions and contributions have been withdrawn, any growth in the account is withdrawn. Growth occurs when the investments in the account gain in value or generate dividends and/or interest. This money is taken out of the account last – and is the most likely to be both taxable and penalized if taken out before the stipulations above have been met.

For more detail on the withdrawal sequence, see the article Ordering Rules for Roth Distributions.

Posted on Apr 20th, 2012

by author: jblankenship.

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Posted in: Early Distribution, IRA, qrp, Roth Conversion, Roth IRA.
Tagged: IRA · roth conversion · roth ira

Managing Tax Records

Apr 18th, 2012

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(Photo credit: Wikipedia)

Most everyone has a monster file cabinet or file box (or dumpster?) where tax records are kept – and you find yourself wondering if keeping all this junk is really necessary…

The IRS recently published their Tax Tip 2012-71, which discusses how you should go about managing your tax records. The actual text of the Tip is listed below:

Managing Your Tax Records After You Have Filed

Keeping good records after you file your taxes is a good idea, as they will help you with documentation and substantiation if the IRS selects your return for an audit. Here are five tips from the IRS about keeping good records.

Normally, tax records should be kept for three years.
Some documents – such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property – should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
For more information on what kinds of records to keep, IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Apr 18th, 2012

by author: jblankenship.

Posted in: income tax, irs, itemized deductions.
Tagged: income tax · irs · itemized deductions

Paying Estimated Taxes

Apr 17th, 2012

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Taxes (Photo credit: Tax Credits)

If your income, or part of your income, is from a source other than an employer who provides you with a W2 and therefore withholds taxes on your behalf through the year, you may need to make estimated tax payments. There are ways around this, such as having tax withheld from your pension or Social Security payments. But for some folks, estimated tax payments are the way to get your tax paid through the year.

If your only income for the year is from withdrawals from an IRA, you don’t need to make quarterly payments, you can wait until the end of the year to withdraw the amount you need to pay in tax. Otherwise, for most other types of income you need to pay tax as you receive it during the year. You will make one payment in mid-April for your income through March 31; another in mid-June for income through May 31; a third in mid-September for income through August 31, and a final payment by mid-January of the following year for income to December 31.

The IRS recently published their Tax Tip 2012-65, which includes tips for people who pay estimated taxes. Below is the text of the Tip:

Six Tips for People Who Pay Estimated Taxes

You may need to pay estimated taxes to the IRS during the year if you have income that is not subject to withholding. This depends on what you do for a living and the types of income you receive.

These six tips from the IRS explain estimated taxes and how to pay them.

If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.
As a general rule, you must pay estimated taxes in 2012 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return. Special rules apply for farmers, fishermen, certain household employers and certain higher income taxpayers.
For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, for this. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.
The year is divided into four payment periods, or due dates, foe estimated tax purposes. Those dates generally are April 15, June 15, September 15, and January 15 of the next or following year.
Form 1040-ES, Estimated Tax for Individuals, has everything you need to pay estimated taxes. It includes instructions, worksheets, schedules and payment vouchers. However, the easiest way to pay estimated taxes is electronically through the Electronic Federal Tax Payment System, or EFTPS, at www.irs.gov. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

For more information on estimated taxes, refer to Form 1040-ES and its instructions and Publication 505, Tax Withholding and Estimated Tax. These forms and publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Apr 17th, 2012

by author: jblankenship.

Posted in: income tax, irs.
Tagged: income tax · irs

Can’t Pay Your Taxes On Time? Here’s What to Do

Apr 13th, 2012

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Buffington Pockets, Valley of Fire area, southern Nevada (Photo credit: Wikipedia)

It happens. You do your best to prepare for the tax you’ll owe, but here it is, time to pay your taxes and you just don’t have the money. The IRS recently published their Tax Tip 2012-64, which relates five tips when you’re faced with just this situation. Below is the text of the Tip.

Tips for Taxpayers Who Can’t Pay Their Taxes on Time

If you owe tax with your federal tax return, but can’t afford to pay it all when you file, the IRS wants you to know your options and help you keep interest and penalties to a minimum.

Here are five tips:

File your return on time and pay as much as you can with the return. These steps will eliminate the late filing penalty, reduce the late payment penalty and cut down on interest charges. For electronic and credit card options for paying see www.IRS.gov. You may also mail a check payable to the United States Treasury.
Consider obtaining a loan or paying by credit card. The interest rate and fees charged by a bank or credit card company may be lower than interest and penalties imposed by the Internal Revenue Code.
Request an installment payment agreement. You do not need to wait for IRS to send you a bill before requesting a payment agreement. Options for requesting an agreement include:
- Using the Online Payment Agreement Application and
- Completing and submitting IRS Form 9465-FS, Installment Agreement Request, with your return.
Request an extension of time to pay. For tax year 2011, qualifying individuals may request an extension of time to pay and have the late payment penalty waived as part of the IRS Fresh Start Initiative. To see if you qualify visit www.irs.gov and get Form 1127-A, Application for Extension of Time for Payment. But hurry, your application must be filed by April 17, 2012.
If you receive a bill from the IRS, please contact the IRS immediately to discuss these and other payment options. Ignoring the bill will only compound your problem and could lead to IRS collection action.

If you can’t pay in full and on time, the key to minimizing your penalty and interest charges is to pay as much as possible by the tax deadline and the balance as soon as you can. For more information on the IRS collection process go to or see www.IRSVideos.gov/OweTaxes.

Posted on Apr 13th, 2012

by author: jblankenship.

Posted in: income tax, irs.
Tagged: income tax · irs

Errors to Avoid When Preparing Your Tax Return

Apr 12th, 2012

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Error (Photo credit: pastorbuhro)

If you’re deep in the throes of preparing your tax return (as many are) you want to make sure that you avoid errors where possible. The IRS recently published their Tax Tip 2012-58, which details some of the tax preparation errors often seen. Following is the actual text of the Tip.

Eight Tax-Time Errors to Avoid

If you make a mistake on your tax return, it can take longer to process, which in turn, may delay your refund. Here are eight common errors to avoid:

Incorrect or missing Social Security numbers. When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
Incorrect or misspelling of dependent’s last name. When entering a dependent’s last name on your tax return, make sure to enter it exactly as it appears on their Social Security card.
Filing status errors. Choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction and Filing Information, to determine the filing status that best fits your situation.
Math errors. When preparing paper returns, review all math for accuracy. Or file electronically; the software does the math for you!
Computation errors. Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits and the Child and Dependent Care Credit.
Incorrect bank account numbers for direct deposit. Double check your bank routing and account numbers if you are using direct deposit for your refund.
Forgetting to sign and date the return. An unsigned tax return is like an unsigned check – it is invalid. Also, both spouses must sign a joint return.
Incorrect adjusted gross income. If you file electronically, you must sign the return electronically using a Personal Identification Number. To verify your identity, the software will prompt you to enter your AGI from your originally filed 2010 federal income tax return or last year’s PIN if you e-filed. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math-error correction made by the IRS.

Posted on Apr 12th, 2012

by author: jblankenship.

Posted in: income tax, irs.
Tagged: income tax · irs

Social Security Spousal Benefit Calculation Before FRA

Apr 6th, 2012