In This Update

Q of the Month: Non-Working Spouses Contributing to Roth IRAs
Key Focus: Making Retirement Contributions For a Deceased Individual
Ruling to Remember: Don't Mess With IRS

Resources

Expert Professional Assistance

??Question of the Month: Can a Non-Working Spouse Contribute to a Roth IRA?

Q: Can the spouse of a self-employed earner contribute to a Roth IRA? I would like to contribute, but the information I have read is unclear on the subject.

A: A non-working spouse can contribute to a Roth IRA so long as the working spouse has enough earned income. There are, however, earned income phase-out limits for contributions to Roth IRAs. If you are filing a joint tax return the phase-out starts at $169,000 and completely phases-out at $179,000. If you are filing married-separate your phase-out range is $0 to $10,000.

The Roth contribution can be made up to the tax filing date. There is no extension beyond that date, regardless of whether an extension is filed for the income tax return. The contribution limit for 2011 is $5,000. However, if you are age 50 or older by 12/31/2011 you can add a catch up contribution of up to $1,000 for a total of $6,000.

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Court Ruling: The 401(k) Beneficiary Form Trumped!

The June issue of Ed Slott's IRA Advisor Newsletter goes through the court case, Cajun Industries, LLC vs. Robert Kidder, et al., in which the 401(k) beneficiary form was trumped.

The United States District Court for the Middle District of Louisiana ruled that despite having previously named his three children as beneficiaries of his 401(k) plan, a deceased plan participant�s 401(k) balance would pass to his new wife.

WHY DID THE COURT RULE THIS WAY? FIND OUT IN JUNE'S ISSUE OF ED SLOTT'S IRA ADVISOR

Inside Ed Slott's IRA Advisor Newsletter

401(k) Beneficiary Form is Trumped by Remarriage; Disinheriting Children

The Plan Beneficiary Form was Trumped
Facts of the Case
The Arguments
- From Section 6.13 of the Cajun Industries, LLC 401(k) Plan
The Court's Decision
Preventing Clients from Making Plan Beneficiary Mistakes
- Roll Plan Funds to IRAs
Schwab v. Chandler January 20, 2010
- Facts of the Case
Spousal Rights under ERISA do NOT Apply to IRAs
Update Beneficiary Forms
Proactively Monitor and Plan for Changes in Clients' Lives
Advisor Action Plan

Guest IRA Expert
Christian Cordoba
CFS, RFC
California Retirement Advisors
El Segundo/Manhattan Beach, CA

What Advisors Need to Know About IRAs Payable to Trusts

If you are not already an Ed Slott's IRA Advisor Newsletter subscriber, you can preview past issues before subscribing.

June Key Focus

Making Retirement Contributions For a Deceased Individual

Making a retirement contribution for a deceased individual... this is an interesting situation that comes up more often than you may think. A taxpayer dies. He or she had earned income during the year before death. The tax preparer or estate administrator suggests making an IRA contribution to reduce the income tax on the final return.

It sounds logical that you should be able to do this. After all, he or she had earned income. And maybe he or she even made their annual contributions at the end of the year; they just didn't live long enough to do it this year.

IRS was asked to rule on this issue in 1984 (Private Letter Ruling 84390066). It stated that a contribution made after the death of the account owner "would not be a contribution for retirement purposes." In other words, you cannot make a retirement contribution after you are dead because you no longer need a retirement plan. It is hard to argue with that logic.

IRS also ruled that a contribution made to a deceased individual's account after his death would be treated as an excess contribution. An excess contribution is subject to a penalty of 6% for every year that it remains in the account. To avoid the penalty, you must tell the IRA custodian that you are removing an excess contribution (this way they code the 1099- R correctly and you are not taxed twice on the same money). The funds, plus any earned income or losses deducted, must be removed by October 15th of the year after the year for which they are contributed.

In a later ruling, (PLR 8527083), IRS allowed for a contribution to a non-working surviving spouse's IRA made after the death of the working spouse. After all, the surviving spouse will still need a retirement account.

Ruling to remember

Private Letter Ruling 201118025

A taxpayer we will call "Jerry" received a distribution from his IRA, using it as part of a plan to allow his ailing mother to move residences with the intention of rolling it back into his IRA within the allowable 60-day period. After pulling together funds which included "Jerry's" IRA distribution, the mother would purchase a new residence in cash, enter into reverse-mortgage financing and receive a lump-sum cash payment which she would use to repay "Jerry" and the rest of his siblings.

So, "Jerry" received the distribution, and seven days later, it was applied to the purchase of his mother's new residence. On that same date, the bank began processing the reverse mortgage. "Jerry" asserted that the bank promised him the entire process would be completed within a time frame which would have allowed him to meet the 60-day period for rolling the money back in this IRA. However, numerous delays resulted in this process taking longer than the prescribed time frame. "Jerry" did eventually redeposit the money back into this IRA, but not until after the 60-day period. He blamed the bank and filed a Private Letter Ruling.

The IRS disagreed.

It asserted that "Jerry" made a short-term loan when he withdrew money from his IRA, and while he intended on redepositing the funds into his IRA prior the expiration of the 60-day rollover period, he assumed the risk if the process took longer than expected (which it did). His request was denied.

LESSON TO LEARN:
No matter what the reason is, if you use your IRA distribution as a shortterm, interest-free loan and cannot pay it back within the 60-day rollover period, IRS will NOT grant an extension of time for you to complete the rollover. You will end up with a taxable distribution.