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April 2013 Click here to view previous issues Volume 6 Number 4

 In This Update:
  • Q of the Month:
    Do I Have to Track My Employer's Contributions to My 403(b)?
  • Key Focus:
    Last-Minute Tax Questions Answered
  • Ruling to Remember:
    IRA, Plan Creditor Protection Lost




?? Question of the Month: Do I Have to Track My Employer's Contributions to My 403(b)?

Q: If my employer matches my Roth 403(b) contributions, do I have to track the employer (pre-tax) contributions separately from my Roth 403(b) contributions or should my employer be contributing the matching contributions to my 403(b) plan? I'm concerned both might be going into the Roth 403(b), which would result in a pro-rata distribution when I start taking my distributions.

A: The plan must track the employer and employee contributions as well as the "regular" 403(b) portion and the Roth 403(b) portion. The match must be allocated to the regular portion of your 403(b) account. If you believe that there is a mistake on how the plan is allocating the contributions, you should ask the plan administrator.

CLICK HERE to view other questions and answers from The Slott Report Mailbag.



Help Clients Contribute to More Than Their Own IRA

Most clients are aware of the rules for contributing to their own IRAs. Married couples, however, are often able to make two IRA contributions, even if only one spouse is working.

Since 2012, IRA and/or Roth IRA contributions can be made up until the April 15th tax filing deadline, so advisors have just one precious week left to contact their clients and make sure they are maximizing their 2012 tax benefits.

The April issue of Ed Slott's IRA Advisor Newsletter talks about how you can help clients contribute to more than their own IRA through spousal contributions, spousal Roth IRA contributions, Roth IRA contributions for working kids and more!


Inside Ed Slott's IRA Advisor Newsletter

Help Clients Contribute to More Than Their Own IRA

  • Spousal IRA Contributions
  • Deducting Spousal Traditional IRA Contributions
  • No Spousal Contributions for Married Couples Filing Separately and Same Sex Couples
  • Spousal Roth IRA Contributions
  • Roth IRA Contributions for Working Kids

Guest IRA Expert
Marty James, CPA, PFS

Martin James Investment & Tax
Management, LLC
Mooresville, IN

Plan for the Widow's (or Widower's) Penalty

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April Key Focus

Your Last-Minute Tax Questions Answered

We are now one week away from the April 15th tax filing deadline. With crunch time here, the questions have been pouring in, so with that in mind, here are the answers to 5 of the most common questions we have been hearing over the past few weeks.

What's the difference between a tax deduction and a tax credit?
While both a tax deduction and a tax credit are good things, a tax credit is generally much, much better. A tax deduction reduces your overall tax bill by reducing the amount of income you have subject to income tax.

So, for example, say you are in the 25% tax bracket and have $100,000 of income. If you were able to take a $10,000 tax deduction, your tax bill would drop by about $2,500 ($10,000 x 25% rate). That's nothing to sneeze at, but if you were somehow eligible for a $10,000 tax credit, your tax bill would be reduced dollar-for-dollar by $10,000. For instance, let's say the tax bill on your $100,000 of income was $16,000. If you had a $10,000 credit, your tax bill would be reduced all of the way to $6,000.

I got married/divorced in 2012. What's my filing status?
Your filing status is generally determined on the last day of the year, so even if you were single for the entire year and got married at 11:59 p.m. on December 31st, you can file a joint return with your spouse as if you were married for the entire year. The reverse, of course, would be true if you got divorced on December 31.

There are a few exceptions to these rules that you should know. For instance, if you are married, but legally separated at the end of the year, you may be able to file as single or head of household. Also, if your spouse passed away in 2012 and you did not remarry, you can file a joint tax return.

I received a K-1 for my IRA investment. Where do I report this?
If this question has got you stumped, you are going to love this generally don't! Gains and losses inside an IRA are generally not taxable. Instead, you are taxed at ordinary rates on distributions you take from your IRA. Therefore, information on a K-1 issued to an IRA, just like 1099s issued to an IRA, for interest, dividends or capital gains earned in the IRA account generally does not have to be reported anywhere. Of course, there are always exceptions to the rule, such as if your K-1 shows unrelated business taxable income, which can be taxable to your IRA (and not directly to you).


Ruling to Remember

IRA and Plan Creditor Protection Lost

The debtor, Daniels, tried to claim his profit sharing, and the two IRAs that were funded with distributions from the plan were exempt from creditors in his bankruptcy filing. Daniels was a sole proprietor and was the only participant in this profit sharing plan, which means that his plan did not have the broad federal creditor protection under ERISA (Employee Retirement Income Security Act). His plan had the same creditor protection as an IRA. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides creditor protection for IRAs in bankruptcy.

The bankruptcy court found that Daniels had not operated his plan in compliance with the tax code. He argued that he had a "favorable determination letter" from IRS, and that his plan was qualified. A determination letter from IRS merely states that the language in the plan conforms with the tax code requirements. It does NOT imply that the plan itself has been operated in accordance with the tax code. In fact, Daniels' letter was issued as a result of an IRS audit of one tax year, and it stated that certain transactions in that year were considered prohibited transactions. The court determined that the plan was no longer a qualified plan, that it had lost its tax deferred status due to the prohibited transactions. Since the plan was not qualified, transfers to the IRAs were also of non-qualified assets, which were no longer tax deferred. In the court's opinion, both the plan and IRA assets were available to pay off Daniels' creditors. The bankruptcy court's decision was upheld by the U.S. District Court.

Lesson to Learn:
All employer plans have rules that must be followed in order for the plan to remain qualified. Individuals cannot treat their employer plans as their personal piggy bank. They cannot comingle personal and plan assets. Certain transactions between a plan and the covered participant or certain family members will be considered prohibited transactions. The penalties vary. In this case, the transactions were so egregious and occurred over an extended period of time, which caused the plan to be totally disqualified. It lost all of its tax favorable characteristics.