Ed Slott's Free IRA Update

April 2008

Volume 1, Number 4

In This Issue

· Focus on Roth Accounts

· Question of the Month

· News, Rulings and Other
   Updates

· Retirement Planning
   Tips

· Ed Slott's IRA Advisor -
   April Issue

Resources

April Focus

If you are a procrastinator, you are certainly not alone as is evidenced by the long lines at the post office at 11:00 PM on April 15 each year. Unfortunately, leaving some things until the last minute means overlooking items that would have been obvious during a more leisurely review. For retirement accounts this includes deductions for contributions, filing of certain tax forms, and claiming tax benefits. The good news is that missing these opportunities does not mean that the benefits are no longer available. Therefore, you can use this opportunity to send a reminder to your clients, and include copies (of the reminder) that they can provide to their friends and family members. The reminder can address items such as:

  • Clients who reached age 70½ during 2007 needed to withdraw their required minimum distribution (RMD) for 2007 by April 1, 2008. Those who reached age 70½ before 2007 had until December 31, 2007 to withdraw their 2007 RMD amounts. If they missed the deadline, they can contact you for guidance on working with the IRS to waive the 50% excess accumulation penalty that applies to the required amount they did not withdraw. For individuals who participate in qualified plans, 403(b) accounts & 457(b) plans and are still employed by the plan sponsor, the plan may allow them to defer beginning their RMD until after they retire. This option to defer does not extend to individuals who own more than five-percent of the business, which means that individuals with Solo-Ks/Individual-Ks who reached age 70½ during 2007 or before are subject to the deadlines mentioned above.
  • The Saver's Credit is a benefit often overlooked by taxpayers, which is unfortunate as it can help to reduce the financial impact of contributions made to IRAs and employer sponsored plans for eligible individuals. For those who are eligible and failed to claim the credit, simply filing an amended return and attaching the proper forms will allow them to claim the credit.
  • Many individuals are ineligible to deduct the contributions they make to traditional IRAs. These individuals are required to file IRS Form 8606 with the IRS or they could be subject to IRS assessed penalties and double-taxation. Form 8606 should also be filed for any year that distributions are taken from a traditional, SEP or SIMPLE IRA, if the owner has basis in any of these IRAs. If the form was not filed with the individual's tax return, it can still be filed.
  • 1099-Rs do not always reflect the correct code in Box 7. For instance, an individual may have been taking substantially equal periodic payments (SEPP) from his IRA, but the custodian inputted Code 1 (instead of code 2) in box 7. The individual can correct this by filing IRS Form 5329. Similar to Form 8606, Form 5329 can be filed even if the tax return has already been filed. However, if the penalty was paid on the return, an amended return may be required.

For benefits that are missed, and forms that were not filed, filing an amended return or filing the required forms (after the fact) can often produce the desired results.

Timely reminders on these topics are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of what the newsletter includes, you can preview past issues before subscribing.

Focus on Roth Accounts

Many financial experts agree that Roth accounts are one of the best ways to protect retirement savings from the inevitable increase in income tax rates. With the expanded Roth options now including Roth 401(k)s, Roth 403(b)s, and increased Roth portability, more individuals can now benefit from funding Roth accounts.

Roth Funding Options

Roth 401(k)s/403(b)s

An increasing number of employers are offering Roth 401(k) plans. Eligible individuals can defer up to $15,500 ($20,500 if they are at least age 50 by the end of the year) to their Roth 401(k)/403(b) accounts. These amounts can be rolled over to Roth IRAs when the participant becomes eligible to make withdrawals from the plan, which allows the participant to avoid the RMD rules that apply to Roth 401(k) and Roth 403(b) assets.

Regular (IRA) Contributions

Eligible individuals can make their IRA contributions to Roth IRAs and, as these contributions are nondeductible, they are not taxable when withdrawn. For those who are ineligible to fund a Roth IRA, contributions can be made to traditional IRAs and converted to Roth IRAs in 2010, as the income and married filing separately' restrictions are lifted for conversions completed as of January 1, 2010. See the February 2008 issue of Ed Slott's IRA Advisor for Roth strategies that can be implemented now instead of waiting until the restrictions are lifted in 2010. Contributions can be up to $5,000 per year for each person, plus an additional $1,000 catch-up contribution for individuals who are at least age 50 by the end of the year.

Roth Conversions

Eligible individuals can move their non-Roth retirement assets to Roth IRAs via Roth conversions. For those who are ineligible because of their income and tax filing status, these conversions can be done in 2010 and after.

One of the benefits of converting in 2010 is that the income from the conversion can be spread over two years (2010 and 2011), possibly reducing the tax impact of the conversion.

Detailed Roth strategies and their benefits are explained in Chapter 7 of the Retirement Savings Time Bomb, available in our shopping area.

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Question of the Month

Question: An individual participates in a SIMPLE IRA and a 401(k) plan with two unrelated/unaffiliated employers. He earns enough compensation from each employer that would allow him to contribute the maximum amount to each plan. He received conflicting advice on whether he can contribute the maximum amount to each plan. What is the correct answer?

Answer: Since the employers are unrelated/unaffiliated, he can contribute the maximum amount to each plan. However, he is subject to a salary deferral limit of $15,500, plus an additional $5,000 if he is at least age 50 by the end of the year. Let's take a look at an example:

Assume he earns $200,000 from each employer. The maximum contribution to each plan is as follows:

  • $46,000 to the 401(k) plan. This includes salary deferral and employer contributions
  • $16,500 to the SIMPLE IRA ($10,500 plus 3% matching contribution)

The salary deferral contribution he makes to one plan reduces the salary deferral contribution he can make to the other plan. For instance, if he contributes $10,500 to the SIMPLE IRA, he can only defer $5,000 to the 401(k) plan ($15,500-10,500).

If he is at least age 50 by the end of the year, he can make additional salary deferral catch-up contributions of up to $5,000.

News, Rulings and Other Updates

  • IRS Notice 2008-30 Provides Guidance on Roth Conversions From Employer Plans: For individuals who are considering converting assets from employer plans (not including SEPs and SIMPLEs as these were already covered under the IRA conversion rules), long awaited guidance has been issued by the IRS. This addresses who is eligible, the types of accounts that are eligible, and the means by which the conversions can be accomplished. One of the most impactful (and surprising) provisions is that beneficiaries can also convert inherited assets from qualified plans, 403(b)s and 457(b) plans to inherited Roth IRA accounts. This is surprising because beneficiaries cannot convert inherited IRA assets to Roth IRAs. Read the details of the IRS provided guidance and Ed's tips in our April 2008 issue of Ed Slott's IRA Advisor Newsletter.

  • PLR 200811028: The IRS provided confirmation that if an IRA owner died before the required beginning date (RBD), and the life-expectancy option applied to the inherited IRA, the beneficiary can take distributions over her life expectancy, even if she missed the distributions for some of the years.

Fact Highlights: The IRA owner died before the RBD. The default distribution option was the life expectancy option. While the beneficiary could have elected the five-year option, she did not. But she missed the life expectancy payments for the first couple of years and later paid the excess accumulation penalties that were due on those amounts. In response to her ruling request, the IRS confirmed that the life-expectancy rule still applied.

Reminder: A PLR cannot be cited as precedence or legal reference.

Retirement Planning Tips

  • Form 5498 will be issued by May 31. Now is the time to review last year's statements and make sure IRA contributions, rollover contributions, Roth conversions and recharacterizations, and transfers were processed correctly. Errors that are detected and brought to the attention of the IRA custodian before their cut-off date can help to ensure corrections are completed before the forms are processed, thereby negating the need for corrected forms.
  • Small business owners who are interested in establishing plans with salary deferral features, such as SIMPLE IRAs and 401(k) plans should consider establishing them early. While the deadline for establishing a SIMPLE is October 1 and December 31 for a 401(k), starting earlier allows employees to defer higher amounts. For 401(k) plans, waiting until the last minute can limit owners to lower deferral amounts, as their amounts vs. the amounts their employees defer must pass muster with the IRS and the Tax Code so that the plan maintains its qualified status.
  • Form 5500 for calendar year plans is required to be filed by July 31. For owner-only plans, the return need not be filed unless plan assets exceed $250,000. One more reason not to rollover IRA assets into self-employed 401(k) plans. For owner only plans, if the assets exceed the $250,000 threshold Form 5500-EZ can be filed instead of the full version. Non-owner only plans must file the full version, regardless of the amount of assets held in the plan. Before you know it, July 31 will be upon us. To ensure the deadline is not missed, start gathering the data that is required to be included on the 5500 Form well before the deadline. For details on Form 5500, including how to file for an extension, visit the DOL's website at www.dol.gov, or the IRS' website www.irs.gov.

Highlights from Ed Slott's IRA Advisor Newsletter - April 2008 Issue

The April 2008 issue of Ed Slott's IRA Advisor is now available online. This issue focuses on the recent guidance provided by the IRS on Roth conversions from qualified plans, 403(b)s, and 457(b) plans to Roth IRAs. The areas covered include the following:

  • The conversion of non-IRA based plan assets to Roth IRAs
  • Whether the modified adjusted gross income (MAGI) limit that applies to conversions of traditional, SEP and SIMPLE IRAs also applies to conversions from non-IRA based plans
  • The withholding rules that apply
  • Tax treatment of conversions when the plan includes after-tax amounts
  • Conversion options for non-spouse beneficiaries. The provisions for non-spouse beneficiaries came as a surprise to retirement plan practitioners. Be sure to check out Ed's comments on this particular provision
  • Recharacterization options for conversions from non-IRA plans
  • Required minimum distribution (RMD) rules, as they apply to converted assets
  • An Advisor's Checklist

These changes present new and exciting opportunities for retirement plan participants and beneficiaries alike. But, a successful execution of these opportunities depends on a complete understanding of the rules. Be sure to review the April issue and post your questions on our message board at http://www.irahelp.com/phpBB/index.php?area=, where some of the best experts in the retirement field gather to discuss technical issues.

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