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Ed Slott’s Free IRA Update |
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Volume 1, Number 2 |
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In This Issue ·
Focus
on 1099-Rs ·
Question
of the Month ·
News,
Rulings and Other Updates ·
Tips
for the IRA Season ·
Ed Slott’s IRA
Advisor- January’s issue ·
Ed Slott’s IRA
Advisor Newsletter |
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It’s
IRA Season! February is the beginning
of the tax season for many individuals. W-2s and other income
statements that are required to be issued by the end of January are
usually received during the first week of the month. With the season
comes an opportunity to make IRA contributions for the previous year.
In their haste to get their tax returns completed, many individuals
overlook available benefits for retirement savings. One of the biggest
mistakes an individual can make is to think that the tax preparer will
make all the right deductions and elections on the individual’s tax
return. But, a tax preparer can only work with what they are provided.
You can help your clients experience a seamless IRA contribution season by being prepared, and
providing them with helpful tips. |
Focus
on 1099-Rs Custodians, trustees and
plan administrators who process distributions (Payers) are required to
issue IRS Form 1099-Rs for 2007 by January 31, 2008. These are issued
to individuals who received distributions from their retirement
accounts during 2007. Remind clients to check their 1099-Rs for
accuracy. Mistakes are more likely to be corrected if they are detected
early. Common mistakes include: ·
The
incorrect code being used in Note: The
payer is not required to use the exception codes in all cases. For
instance, if the distribution was used to cover eligible expenses for a
first-time home, the
custodian is allowed to use Code 1 (which indicates that the
distribution is subject to the early distribution penalty). In such
cases, the taxpayer is required to file IRS Form 5329 along with the
tax return, in order to claim the exception. ·
A
transaction that should not be reported, being treated as reportable: For
instance, if the retirement account owner requested a non-reportable
trustee-to-trustee transfer from one IRA to another, but the payer
issued a 1099-R, showing the transaction as a distribution. This may
occur if someone makes a data entry error. But in most cases, the IRA
owner simply completed the wrong paperwork. If a client receives an
unexpected 1099-R, the first step is to determine whether he had
completed a distribution request, or a transfer request. If he
completed a distribution request, it may make sense for him to contact
the receiving custodian with
instructions to code the transaction as a rollover contribution, which
is reported on IRS Form 5498 and offsets the 1099-R. Of course, this is
a solution only if he had not completed a rollover for the two IRAs
involved in the distribution/rollover during the preceding 12 months. If he completed the correct
paperwork, the custodian must issue a corrected 1099-R. If a client is expecting
a 1099-R and does not receive it within the first two weeks of
February, consider contacting the payer, or checking their website.
Larger financial institutions often maintain copies in password-protected locations on their
websites, for clients who have online access to their accounts. |
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Question
of the Month Q: I have a client who is
an independent consultant, with approximately $180,000 in income for
2007. We know that he missed the deadline for establishing an
Individual (k)/Solo-401(k) plan. Can he establish any other retirement
plan for the 2007 year? And if so, how much can he add to the plan? A: Yes. Your client may
establish a simplified employee pension (SEP) plan, commonly referred
to as SEP IRAs. SEP IRAs can be established by the tax filing deadline
for the business, including extensions. Your client may
contribute (add) up to (the lesser of) $45,000 or 25% of W-2 wages he
received from his business to the plan for the 2007 tax year. If the
business is not incorporated, the percentage amount is 20% of his
modified net profit, instead of 25%. Some important reminders; ·
If he
has employees working for his business, he will need to make SEP
contributions to their SEP IRAs, if they meet the eligibility
requirements for receiving contributions. If his company is
incorporated, his contributions are required to be based on W-2 wages
he received from the company ·
If
your client decides to adopt an Individual (k)/Solo-401(k) Plan before
the end of this year, he has the option of rolling over the SEP IRA
balance to his Individual (k)/Solo-401(k) Plan ·
Contributions
to the SEP must be made in cash or cash-equivalent. |
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News,
Rulings and Other Updates ·
Waiver
of Excess Accumulation Penalty Update from the IRS: The
IRS has confirmed in writing what most of you have already known to be
true. Individuals who apply for a waiver of the excess accumulation
penalty should not pay the penalty unless the IRS refuses to honor the
waiver-request. In versions of IRS Publication 590 that were issued
before 2006, the stated requirement was that taxpayers who are subject
to the 50% excess accumulation penalty , which applies to required
minimum distributions that are not withdrawn by the deadline, should
pay the penalty and apply for the waiver. If the waiver request was
approved, the amount would then be refunded by the IRS. However, the
2007 version of IRS Form 5329 now includes instructions that give
taxpayers the option to indicate that they are requesting a waiver of
the penalty, and therefore, the penalty amount is not included as a
payment on their tax return. ·
PLR
200802035-Extension of 60-Day Rollover Period Approved due to Financial Advisor error: The
IRS granted an extension of the 60-day period for completing a rollover
contribution. Facts
Highlights: The
individual had moved assets from her IRA to a non-retirement account
based on the advice of her broker. She completed paperwork provided to
her, and was told that the assets would be moved to a nonqualified
account, which she assumed to mean an account that was not a ‘qualified
plan’. The IRS agreed that she was not at fault and granted the waiver.
A key determining factor is the fact that the funds remained in the
“non-qualified” account instead of being withdrawn. ·
PLR
200752038- Extension of 60-Day
Rollover Period Approved due to Plan
not providing required notification: The IRS
granted an extension of the 60-day period for completing a rollover
contribution. Facts
Highlights: The
individual separated from service with her employer and had an
outstanding loan at the time. She was told that she would be notified
when the loan was treated as a distribution from the plan. However, the
notification was not provided, and she became aware of the distribution
when she received the 1099-R, which was after the 60-day deadline. The
IRS granted the extension, reasoning that if she had no knowledge of
the distribution, then she could not have completed the rollover. |
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Tips
for the IRA Season Due diligence during the
IRA season can help to avoid frustration for both you and your clients
later on. Here are a few tips that can help to ensure transactions are
processed correctly and avoid the need for corrections: ·
Note
Tax Year on Contributions: It’s
easy to assume that an
IRA contribution received in January is intended for the previous year.
However, making such assumptions can result in excess contributions for
clients and possible penalties, if they already made their contribution
for the previous year to another IRA. To help ensure contributions are
applied to the right tax year, make it a requirement that clients note
the tax year to which the contribution applies on their checks, or any
other instrument used to make the contribution ·
If
Contribution is Nondeductible- File Form 8606: Many taxpayers
pay taxes on traditional IRA balances that should be tax-free, because
they did not file IRS Form 8606. Remind clients that if they are unable
to deduct their traditional IRA contribution, or choose not to take a
deduction though eligible, they should file IRS Form 8606. This helps
to provide proper tracking on amounts in the IRA that are nontaxable,
for both the client and the IRS. ·
Provide
tax preparer with copies of all year-end reports for IRAs: Something
that may seem unimportant may very
well be important. If an individual is unsure of the
purpose of a report they receive for their IRA, the report must be
shared with the tax-preparer, who should be able to determine its
relevance to the individual’s tax return. Look for more tips in
next month’s issue |
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Highlights
from Ed Slott’s IRA Advisor Newsletter- February 2008 Issue The February 2008 issue
of Ed Slott's IRA Advisor is now available online. This issue
highlights new tax and IRA rules that are effective for 2008, including
the latest on the non-spouse direct rollover rules under the Pension
Protection Act, and information about how you can help your clients
start planning now to maximize the benefits of building tax free
retirement accounts through Roth IRAs and Roth 401(k)s. The following topics are
discussed:
-
Timeline of
the Non-Spouse Direct Rollover Provision -
Mandatory
or Voluntary? -
The
Non-Spouse Rollover Provision Under PPA 2006 -
IRS Website
Posting is Still There -
Non-Spouse
Rollover Timing and Transfer Rules -
Effect on
Spouse Beneficiaries -
Spouses Who
Remain a Beneficiary -
Do the IRA
Rollover
If you
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Each issue is 8 full pages of must-have tax information.
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Slott’s IRA Advisor Newsletter, receive access to
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Ed
Slott and Company- |