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Ed Slott's Free IRA Update

Volume 1, Number 3

In This Issue

·         RMDs - It's Not too Early

·         Question of the Month

·         News, Rulings and Other Updates

·         Tips for the IRA Season

·         Ed Slott's IRA Advisor - March issue




March - A Month to Prevent IRA Madness

'March' - a fitting theme for this month's issue as many of your clients will likely have had time to assess their financial performance of the past year, allowing you to give them the guidance they need to 'march on'. According to the media, 2007 was not a good year for many Americans on the financial front, but you can help your clients overcome that experience and/or prevent similar experiences for 2008 by providing them with helpful and effective financial planning advice.


In addition to the damage-control and rebuilding efforts you may take with clients' retirement portfolios, consider reassessing decisions made for Roth IRA conversions and IRA contributions and decide whether it makes sense to recharacterize those transactions. For instance, if a client completed a 2007 Roth IRA conversion valued at $100,000, and those converted assets are now valued at $50,000, it makes good financial sense to recharacterize that conversion. Why pay taxes on $100,000 when it's now worth only $50,000?


RMDs - It's Not too Early

Required minimum distributions (RMDs) for 2008 are not required to be distributed from retirement accounts until December 31, 2008. But it's not too early to start planning as many individuals miss their RMD deadline because they wait until the last possible moment to submit their distribution requests. In many cases, RMD amounts are left in the retirement account for most of the year in order to allow the amount to continue earning tax-deferred (or tax-free in the case of a Roth IRA) growth. But the growth may be meaningless if the RMD amount is not withdrawn by the deadline, resulting in the retirement account owner or beneficiary owing the IRS an excess accumulation penalty of 50% of the RMD shortfall. Help your clients to enjoy the tax-deferred growth on those assets as long as possible and still ensure RMD deadlines are met by providing them with the following tips:


·         Check the RMD notification received from the IRA custodian. IRA custodians are required to provide an RMD notification to IRA owners by January 31, providing they held the IRA as of December 31 of last year. This notification is required to include a reminder that an RMD is due for this year, and either the calculated RMD amount or an offer to calculate the RMD amount upon request. This notification and calculation requirement does not apply to inherited IRAs, but it does not hurt to ask the custodian if they will perform the calculation for those accounts also.

·         For participants in qualified plans, 403(b) accounts and 457(b) plans, check with the plan administrator or trustee for assistance with determining the RMD amounts for the year, when RMDs can be requested, and the procedure for requesting RMDs.

·         Inquire about the availability of 'automatic' or 'scheduled' distributions, and the operational and documentation requirements for setting up such distributions. This would allow the retirement account owner to provide instructions for distributing RMD amounts on a future date. For instance, instructions could be provided now to distribute the RMD amount in November giving you sufficient time to correct any errors before year end. Alternately, instructions could be provided to split the RMD amount into quarterly or monthly payments (or any other available frequency) and automatically pay those amounts on the pre-established dates.


Setting up automatic instructions is one way to allow the assets to continue earning tax-deferred growth, while ensuring that RMD amounts are distributed by the applicable deadline. Of course, this works only if there is sufficient cash available to satisfy the RMD amount on the date it is scheduled to be paid from the account. Therefore, for accounts with no cash balance, reminders will need to be put in place to ensure assets are liquidated to cover the RMD amount. Alternately, the RMD can be distributed in-kind.


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Question of the Month

Q: My client wants to set up a substantially equal periodic payment (SEPP), also known as a 72(t) payment, from his IRA. However, his account balance will result in SEPP amounts that are much more than what he needs and we are concerned that this would result in a premature depletion of his IRA balance. Is there a solution that would allow him to withdraw less that the SEPP amounts we calculated and still avoid the 10% early distribution penalty?


A: Yes. The solution is to split his IRA balance into two IRAs, with the amount needed to produce the desired SEPP amount held in one of the IRAs. To determine the balance needed, use the reverse 72(t) calculator at http://www.72t.net/Sepp/Irc72tReverseCalculator.aspx.   When splitting the IRA, be sure to move the assets as a trustee-to-trustee transfer so as to eliminate the possibility of causing errors that can occur with a distribution & rollover.


Segregating the amount earmarked for the SEPP into a separate IRA provides a two-fold benefit:

·         It allows your client to take only the amount he needs under the SEPP program, and

·         It leaves the other IRA available to access if he needs to make additional withdrawals on an ad-hoc basis. Making withdrawals from the other IRA will not affect the SEPP program.


If he uses the annuitization or amortization method to calculate his SEPP, he has the option of switching to the RMD method at a later date if he decides that he needs to lower the amount he receives under the SEPP and/or his IRA is in danger of being prematurely depleted under the amortization or annuitization method.



News, Rulings and Other Updates

§         PLR 200807026 - The IRS allowed a surviving spouse, who was the beneficiary of a trust, to complete a rollover

Fact Highlights: The IRA owner designated a trust as the beneficiary of his IRA.  His surviving spouse became the sole trustee of the trust upon his death and was given the right to revoke the trust. The IRS ruled that the spouse could rollover the inherited amount to her 'own' (non-inherited) IRA within 60 days of receipt. 


§         PLR 200807025 – Estate was beneficiary of the IRA, and the surviving spouse of the IRA owner was allowed to complete a rollover

Fact Highlights: The IRA owner did not designate a beneficiary for his IRA and, under State law, his estate became the beneficiary of his IRA.  He died testate and under his last Will and testament left the residue of his estate - which included his IRA - to a trust. As a result of the provisions of the trust, his surviving spouse was allowed to rollover a portion of the inherited IRA to her 'own' IRA.


§         PLR 200804027 – Extension of 60-day rollover period granted - Financial advisor error

Fact Highlights: Following the advice of his financial advisor, the IRA owner took a distribution from his IRA and moved the amount to a non-IRA account. His financial advisor did not inform him of the rollover rules. After subsequently meeting with another financial advisor, he learned (from his new financial advisor) that the amount would be taxable, and lose its tax deferred status since it was not rolled-over within 60 days. The IRS ruled that the failure to complete the rollover was due to an 'error' made by his financial advisor and granted him an extension of the 60-day rollover period.


Read each PLR for a detailed explanation of the facts, and the IRS' explanation for the decision that was made in each case. Reminder: A PLR cannot be cited as precedence or legal reference.



More Tips for the IRA Season


If it is determined that certain IRA transactions that were completed for 2007 were not in the client's best (financial) interest, they can be undone. However, they must be undone properly in order to produce the desired effect:

·         Removing excess contributions: Excess IRA contributions occur for several reasons. These include clients with multiple IRAs who sometimes find that they contribute more than the allowed amount for the year, clients who find out that they do not have sufficient eligible income to fund an IRA, or in the case of a Roth IRA, their incomes exceed the applicable limits. These transactions can be corrected without penalties if the client removes the excess amounts as 'return of excess' distributions. These distributions must be accompanied by any net income attributable (NIA) to the excess contribution.

·         Recharacterizing Roth IRA conversions: If it is determined that a 2007 Roth IRA conversion was not a good financial decision, it can be undone by recharacterizing the conversion. Similar to excess IRA contributions, the recharacterization must include any NIA.

·         Recharacterizing IRA contributions: Clients can change the 'flavor' of an IRA contribution by moving it from one IRA to another. For instance, a client can change a traditional IRA contribution to a Roth IRA contribution by recharacterizing the contribution along with any NIA.


'Return of excess' distributions and recharacterizations can be completed by the client's tax filing deadline, including applicable extensions. For individuals who file their return on time, the extension is up to October 15 of this year. However, if it is clear that a recharacterization or 'return of excess' will be done, it is practical to complete it before the tax return is filed, otherwise an amended return must be filed.



Highlights from Ed Slott's IRA Advisor Newsletter - March 2008 Issue


The March 2008 issue of Ed Slott's IRA Advisor is now available online. This issue includes tips on avoiding IRA mistakes, Ed Slott's handy "2008 Retirement Plan Contribution Limits" chart which can be used to plan for funding retirement accounts for 2008, and the featured guest article "Protecting Retirement Benefits for an Unmarried Partner."

The following outlines the content:

5 April IRA Mistakes to Avoid

1.       Missing the IRA Contribution Deadline - No Extensions

2.       Making IRA Contributions that are Not Allowed

-         After Age 70 1/2

-         No Earnings

-         Over the Income Limits

-         Contributing Too Much

-         Ineligible Rollovers

-         Correcting Excess IRA Contributions

3.       Not Making Spousal IRA Contributions

4.       Calculating the First RMD on the Wrong Account Balance

5.       Failing to Follow-up on Tax Refund Direct Deposits to IRA Accounts


2008 Retirement Plan Contribution Limits


Protecting Retirement Benefits for an Unmarried Partner, by Guest IRA Expert

Robert Russell, CSFP: Russell & Company Fairborn, Ohio


Click the link below to access our "Subscribers Only" section of our website:



http://irahelp.com/newsletter.php?area=a  (for America Online users)


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