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Ed Slott's Free IRA Update

August 2009

Volume 2, Number 8

In This Issue

• Focus on - Upcoming Deadline for Correcting Excess IRA Contributions

• Question of the Month

• News, Rulings and Other Updates

• Retirement Planning Tip

• Ed Slott's IRA Advisor - August Issue

























Emerald Publications






Ed Slott's Exclusive 2-Day IRA Workshop - Instant IRA Success

August Focus:  Upcoming Deadline for Correcting Excess IRA Contributions


IRA owners who contribute more than the statutory limit to their IRAs for the 2008 tax year have until their tax filing deadline, including extensions, to correct those excess contributions. Individuals who file their tax return or file for an extension by their tax-return due date receive an automatic six-month extension. This would make October 15, 2009 the deadline for calendar year filers. Failure to correct the excess by this deadline will result in the IRA owner owing the IRS a penalty of 6% of the amount of the excess contribution. This penalty will continue to apply for each year the excess remains in the IRA.


How Excess Contributions Occur

In most cases, excess contributions occur because the IRA owner made a mistake and sent in too much to fund their IRA. However, excess contributions can also occur in other cases such as when an individual rolls-over amounts to the IRA that are not rollover eligible, or when an employer makes an excess SEP contribution to an employee's SEP IRA. Regardless of the source of the excess, it must be removed by the aforementioned deadline in order to avoid the 6% penalty.


Removing by the Deadline Vs Not Removing by the Deadline

If the excess is removed by the deadline, it must be accompanied by any net income attribute (NIA) to the excess. The NIA, which can either be earnings or losses, is determined by use of a special formula. Earnings are added to the excess and losses are subtracted from the excess, and the net amount is removed. The formula for computing the NIA can be found here     http://www.retirementdictionary.com/definitions/netincomeattributablenia . The IRA owner should inform the IRA Custodian that the distribution represents a return-of-excess contribution, so that the Custodian completes the 1099-R correctly.

If the excess is not removed by the deadline, it is treated as a regular distribution when it is removed, and is not accompanied by any NIA.


Who Calculates the NIA

Some IRA Custodians will calculate the NIA. If your Custodian does not provide that service, you will need to compute the amount before submitting your request. You should clearly indicate the excess amount separately from the NIA as these amounts are processed and reported differently by your IRA Custodian. If you are unable to compute the NIA, you can consult with a tax-professional or retirement plan consultant for assistance.


Tax Treatment of Distribution of Excess

Generally, the excess amount that you remove is nontaxable if it is removed by the deadline. If any earnings accrued on the amount, the (earnings) amount would be taxable in the year that you made the contribution, which may not necessarily be the year you make the withdrawal. In addition, you may owe the IRS a 10% early distribution penalty on the earnings if you are under age 59 1/2 when the distribution occurs, unless you qualify for an exception. Your IRA custodian is required to indicate the year for which the earnings are taxable on your Form 1099-R.


If you fail to remove the excess by the deadline, it could result in the amount being double-taxed if it exceeds the statutory contribution limit for the year. It could also be subject to the 10% early distribution penalty, unless an exception applies. All this would be in addition to the 6% penalty.



This is just a high level overview of the excess contributions as they apply to IRAs. As with most other rules that apply to IRAs, there are exceptions to the general rule. Review your IRA statements and your Form 5498 for 2008 to determine if you have an excess contribution. If you do, talk to your IRA custodian about their correction policies & procedures, and consult with your tax professional to ensure that you take the proper corrective steps.



Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of the content of the newsletter, you can preview past issues before subscribing.


Set yourself apart from the competition, and bring in millions in new IRA rollover business by subscribing to Ed Slott's IRA Advisor Newsletter and attending Ed Slott's IRA Workshops. Click here to see a schedule of upcoming workshops.


Question of the Month



Question:  I am 39 years-old and have a balance of $35,000 in a 403(b) account to which no contributions (neither employer nor employee salary-deferral) are being made. In fact, this account has been dormant for at least two years. To complicate matters, the financial institution with which the account is held is not an approved vendor for my employer. My new contributions are being made to another 403(b) account with a financial institution which is an approved vendor for my employer.


Can I rollover the funds from my dormant 403(b) account to my IRA since the account is no longer being funded?



It depends. You cannot rollover the amount simply because the account is inactive and is not held with an approved vendor of your employer. Instead, you must first experience a triggering event. Contact the financial institution and ask them to provide you with a list of the triggering events that apply under your account. This usually includes reaching age 59 1/2, no longer being employed by the employer under which the account was established, and death of the account owner-none of which seem to apply in your case. Check the document for the complete list.


If you are not eligible to rollover the amount, talk to your employer about moving the old account to the active account which is held with the approved vendor.



News, Rulings and Other Updates



HSAs Are Subject to IRS Levy


The IRS issued a Chief Counsel Advice memorandum (CCA) 200927019, in which they indicate that HSAs are subject to IRS levies. Unlike IRAs, where the levied amount would not be subject to the 10% early distribution penalty, distributions from HSAs due to a levy are subject to a 10% early distribution penalty, unless an approved exception applies.


Note: Similar to private letter rulings (PLRs), CCAs cannot be cited as precedence, but they give an idea of how the IRS would respond to issues with similar fact patterns.



August Retirement Planning Tip:  Start Planning for Year End


December may seem far away and mislead you into thinking that you have a lot of time to complete your transactions for which a December 31 deadline applies. But, before you know it, December will be here and your requests can get lost in the high volume that financial institutions usually receive at year end. If you have transactions that need to be completed by year end, such as Roth conversions, SOSEPPs, and distributions, submit your requests early. Be sure to double check your statement to ensure that the transaction was processed accurately.



Highlights from Ed Slott's IRA Advisor Newsletter - August 2009 Issue


Your August 2009 issue of Ed Slott's IRA Advisor is now available online.   You may access your newsletter at IRAhelp.com by clicking here:  http://www.irahelp.com/newsletter.php?area=a


Anyone who converted their traditional IRA or plan balances to Roth IRAs in 2008 when account values were higher can have a do-over, technically called a "recharacterization." This is one of the rare second chances available in the tax code. Every advisor should be looking at this before October 15, 2009 at which time the opportunity to recharacterize a 2008 Roth conversion expires.


The recharacterization won't make up for the market losses, but it can prevent you from paying tax on an account value that is no longer a true reflection of the real value of the conversion. In this issue we show you exactly how to do the recharacterization, including the calculation and the tax reporting. 


Also in this issue...Checking life insurance policies for your clients and reinforcing them with IRAs.

- What to look for to make sure the policy holds up over time and how and when to use IRA funds to beef up policies that need help.





Feature Article

Feature Article

• Recharacterizing Roth IRA Conversions

• How to Recharacterize a Roth Conversion

• Calculating Gains or Losses

• Tax Reporting

• For the Conversion

• For the Recharacterization

• For Conversions and Recharacterizations Done in the Same Year

• For Recharacterizations Done in the Year After the Conversion

• Partial Recharacterizations

• Avoid Complications

• Reconversions

• Advisor Action Plan



Guest IRA Expert

David Buckwald, CFP®, CLU, ChFC               

Atlas Advisory Group

Cranford, New Jersey


Review and Reinforce Life Insurance with IRAs

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