-
Focus
on - Penalties
can
Kill Your IRA
-
News,
Rulings and Other Updates
-
Retirement
Planning Tip
-
Ed
Slott's IRA Advisor - June
Issue
Expert
Professional
Assistance
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June Focus: Penalties Can Kill Your
IRA
Most
IRA
owners focus on the closing balance on their account
statements to see whether their IRA had losses or gains.
However, there are non-stock-market-related transactions which
can result in significant losses to IRA assets and many of
these are often overlooked. In this issue, we will focus on a
few transactions that could potentially erode the balance
and/or result in the loss of tax-deferred
(tax-free in the case of a Roth
IRA) benefits for your IRA.
- Taking
Early Distributions
Distributions
that occur before you reach the age of 59
½ will result in a 10% early
distribution penalty (additional tax), unless an exception
applies. This often seems like a non-issue for someone who is
in need of the funds, but becomes important when it is time to
pay the penalty. Remember that an early distribution of
$10,000 would result in a penalty of $1,000. For an individual
who does not have non-IRA funds to pay the penalty and any tax
that may be owed, additional distributions might need to be
made to cover those amounts. For more on this, see our May 2009
Issue.
- Missing
Your RMD Deadline
Individuals
who are at least age 70
½ during the year must take a required
minimum distribution (RMD) from their traditional, SEP
& SIMPLE IRAs, qualified
plan accounts, 403(b) accounts and 457(b) accounts. The
RMD can be deferred until retirement for qualified
plan accounts, 403(b) accounts and 457(b) accounts, if the
individual continues to work with the plan
sponsor past age 70 ½, the individual is not a 5%
owner, and the plan allows for the deferment. The RMD
requirement also applies to beneficiaries of the
aforementioned accounts as well as Roth IRA beneficiaries.
Failure to take the full RMD by the deadline will result in an
excess
accumulation penalty of 50% of the shortfall being owed to
the IRS.
Note:
RMDs are waived for defined contribution plans and IRAs for
2009. For details on this provision, see the January
2009 issue of the IRA Advisor .
- Making
Contributions Over the Limit
The
maximum contribution that can be made to an IRA is the lesser
of 100% of the IRA owner's taxable compensation or $5,000
($6,000 for individuals who are at least age 50 by the end of
the year).* Individuals who make contributions in excess of
this limit must remove the excess amount by their tax filing
deadline, including applicable extensions. Failure to do so
will result in a penalty of 6%
of the excess amount being owed to the IRS for every year
that it remains in the IRA.
*
This figure applies to 2009 and may change for future
years.
- Prohibited
Transactions in an IRA
If
your IRA engages in any prohibited
transaction, such as investing in collectibles,
the balance- or a portion of it- being pledged as security for
a loan, or if you take a loan from the IRA, it could
jeopardize the qualified status of the IRA. In such cases the
IRA is treated as if it was distributed to you on January 1 of
the year in which the prohibited transaction occurred. You
would be required to pay any tax that would be due on the
distribution, plus an additional 10% early distribution
penalty if you were under age 59 ½.
If
you are unsure of the tax and penalty consequences of taking
distributions from your IRA, you may want to contact an Ed Slott Elite
IRA Advisor.
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:
I maintain a SIMPLE IRA for my employees and two
of them reached age 70 ½ last year. My CPA says that I can no
longer make contributions to the SIMPLE on behalf of these
employees; neither can they make salary deferral contributions
because of their age. I decided to check with another CPA who
disagrees with the position taken by my CPA. Who is
correct?
Answer:
The second response that you received is correct. There is no
age limit on SIMPLE IRA contributions. As such, these
employees must be allowed to participate in the SIMPLE and
receive any contributions for which they are eligible. Failure
to include them in the plan could result in some serious
compliance issues for your company and may affect the
qualified status of contributions made for other
employees.
News,
Rulings and Other Updates
In
a recent court ruling that has left experts on series
of substantially equal periodic payments (SOSEPPs)
scratching their heads, the US Tax Court issued a summary
opinion, in which they decided that an individual who is
taking a SOSEPP can also take a distribution for qualified
education expenses from the same account. One such expert is
the IRS, which took this matter to court and
lost.
The
opinion of many SOSEPP experts is that Revenue Ruling 2002-62
and the other (very) limited official guidance available on
SOSEPPs strongly suggests that no additional distributions can
be taken from an IRA or other retirement account from which a
SOSEPP is being made. As a result, financial professionals
often encourage retirement account owners to take additional
distributions from other accounts if needed. But for those who
do not have other accounts from which to take distributions,
this often presents a seemingly insurmountable dilemma. If the
tax court's position is correct, this dilemma no longer exist
for amounts needed for certain other 10% penalty
exceptions.
Most
SOSEPP experts caution that retirement account
owners should not assume that this is a blanket rule. Not only
because summary opinions cannot be cited as precedence or
legal reference, but that there is no guarantee that this
position would be consistent for other such cases. For a
lively discussion on this matter and a link to the summary
opinion, click
here to see the discussion and join in if you can.
June's Retirement Planning Tip:
Still Fund Your 401(k)
Many
401(k) participants have either reduced the percentage of
their contributions or completely terminated the funding of
their 401(k) accounts because of consistent losses in market
value for each statement period. We understand that this can
be disheartening, but reducing or stopping your contributions
may not be the best approach to take. The negative effects of
failing to fund your 401(k) are many, ranging from not having
a retirement nest egg, to missing out on the free money you
would receive if your employer makes matching
contributions.
Before
you decide to discontinue funding your 401(k), talk to a
financial advisor who is knowledgeable in the area of employer
plans and discuss your options. Remember, the new money that
you put in your 401(k) does not have to be immediately
invested in mutual funds or other investments. Instead, it can
remain in a money market or cash account offered by the plan
until you and your financial advisor determine which of the
plan's investment options is the best one for you.
Furthermore, if you are eligible to make non-hardship
in-service withdrawals; you may be able to rollover the amount
to your IRA, and by doing so you would likely be able to
choose from a broader range of
investments.
Highlights from Ed Slott's IRA Advisor
Newsletter - June 2009 Issue
Feature
Article
NUA
- Now is the Time!
�
Net
Unrealized Appreciation (NUA) Basics
- NUA
Example
- Surprising
NUA Opportunities
- Start
the NUA Process Early in the Year
- Clients
Who May Qualify for NUA
- Ex-employees
- Employees
- Beneficiaries
- Finding
the Cost of the Shares
- Time
for a Tax Pro
- Lump-Sum
Distribution Details
- NUA
Follow-Up
- Trading
Down to Build Future NUA
- Advisor
Action Plan
Guest
IRA Expert
Eric
Wikstrom, CPA, CFP®
Integrated
Wealth Strategies, LLC
Mercer
Island, Washington
Dealing
With the Unrelated Business Income Tax
(UBIT)
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