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Ed
Slott's Free IRA Update |
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Volume
1, Number 3 |
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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 · Ed Slott's IRA Advisor Newsletter |
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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? |
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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growth may be meaningless if the RMD amount is not withdrawn by the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. |
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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. |
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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. |
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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 Click the link below to
access our "Subscribers Only" section of our website: http://irahelp.com/newsletter.php?area=a (for 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
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to back issues at no additional cost. |
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