Ed Slott's Fre IRA Update



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Ed Slott’s Free IRA Update

February  2008

Volume 1, Number 2

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




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 Box 7: This is especially important if the 10% early distribution penalty should not apply, and the payer indicates that it applies (or vice-versa).  In such cases, affected IRA owners may either request corrected 1099-Rs, or make the correction on their tax returns by filing IRS Form 5329.

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.



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.



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



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:

  • Feature Article: Update on Non-Spouse Direct Rollovers Under PPA 2006

-         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


  • 2008 Brings in New Roth Conversion Opportunities
  • Caution: IRS Rules that Wash Sale Rules Apply to IRAs ; IRS Revenue Ruling 2008-5 December 21, 2007
  • Don’t Let Roth IRA Planning Wait Until 2010; by  Guest IRA Expert: Lester Detterbeck, CPA/PFS, MBA, CFPR, CFA:


If you do not already subscribe to Ed Slott’s IRA Advisor Newsletter, you may do so by clicking here and providing the required information, or by calling 800-663-1340. Each issue is 8 full pages of must-have tax information. Individuals who subscribe to the online version of the Ed Slott’s IRA Advisor Newsletter, receive access to back issues at no additional cost.



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