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May 2013 Click here to view previous issues Volume 6 Number 5

 In This Update:
  • Q of the Month:
    Will The Pro-Rata Rule Apply in My Conversion?
  • Key Focus:
    Taking The Year of Death IRA Minimum Distribution
  • Ruling to Remember:
    Using Your IRA as a Short-Term Loan




?? Question of the Month: Will The Pro-Rata Rule Apply In My Conversion?

Q: I have been doing backdoor Roth contributions for several years, but have not done my 2012 or 2013 contributions/conversions yet. I will most likely roll over a 401(k) into an IRA in 2013. If I convert a traditional IRA to a Roth now and then do the 401(k) rollover later in the year, will I need to pay pro-rata taxes on the converted amount? Essentially, are taxes calculated using my pre-tax IRA holdings at the time of the conversion (none) or at the end of the year?

A: The pro-rata rule will apply. It will take into account any funds rolled into the IRA during the year and you will pay pro-rata taxes on the converted amount.

CLICK HERE to view other questions and answers from The Slott Report Mailbag.



Plan's Big Mistake Leads to Big Tax Problems for Participant

Big mistakes in the retirement planning game will many times lead to big tax problems. In a recent Chief Counsel Advice, IRS addressed what happens when an employee received an overpayment from her employer retirement plan along with an incorrect Form 1099-R, and then relied on that information in determining how much of her distribution was eligible for rollover.

Years after completing the rollover, the taxpayer found out about the overpayment and realized that a portion of her plan distribution wasn't rollover eligible and created an excess IRA contribution. What happened next? Find out in the May issue of Ed Slott's IRA Advisor Newsletter, which also discusses correcting excess IRA contributions and includes a guest expert column on the profit from the Roth "Rule of 43."


Inside Ed Slott's IRA Advisor Newsletter

Plan's Big Mistake Leads to Big Tax Problems for Participant

  • CCA 201313025 Released March 29, 2013
  • Facts Leading to the Issuance of the Chief Counsel Advice
  • Chief Counsel's Response - From CCA 201313025
  • Key Takeaways From CCA 201313025

Correcting Excess IRA Contributions

  • Correcting Before the Deadline by Distribution
  • Correcting After the Deadline by Distribution
  • Reducing Excess Contributions by Subsequent Year Contribution Eligibility
  • Correcting Excess Contributions by Recharacterization

Guest IRA Expert
Joel A. Goodhart

BIRE Financial Services
Plymouth Meeting, PA

Profit From The Roth "Rule of 43"

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May Key Focus

Taking The Year of Death IRA Minimum Distribution

If you are the beneficiary of a deceased IRA owner, you have to begin taking required minimum distributions (RMDs). In some cases, there is an RMD you must take in the year the IRA owner dies.

The required beginning date (RBD) for the IRA owner to have started taking their RMD is April 1 after the year they turned age 70 1/2. If the IRA owner died before their RBD, there is no year of death RMD. If the IRA owner died after the RBD, there may be an RMD that you as their beneficiary have to take that year.

Basically, when the IRA owner dies on or after that April 1 RBD, he was in pay status and should have been taking RMDs. In the year that he died, first check to see if he took his/her total annual RMD amount before death. If he/she did, you don't have to take a distribution for that year. If he/she didn't, then you as the beneficiary have to take that unpaid RMD amount.

The custodian should calculate his unpaid RMD amount in the year he died based on the age he would have been that year if he hadn't died. It's very common that there is an unpaid RMD for the IRA owner's year of death for several reasons. First, he/she may have waited until the end of the year to take the full RMD amount, or maybe he/she was taking the RMD on a monthly basis. Regardless, you are responsible.

The RMD will be taxable to you as his/her IRA beneficiary in the year you receive it. It's not taxable to him/her or his/her estate. If you, as the beneficiary, don't take the unpaid year of death RMD, you are subject to a 50%, yes 5-0, penalty on the shortfall. This is an important and perhaps costly issue.

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Ruling to Remember

Private Letter Ruling 201316024

A taxpayer we will call Clint decided to do his daughter a favor. She was attempting to purchase a home that was in foreclosure. Part of the qualifi cation to buy the home was having a substantial amount of funds on deposit. Clint took an IRA distribution and deposited part of it in a non-IRA escrow account. He intended to rollover the distribution back into the IRA upon the completed purchase of his daughter's home.

However, because of the nature of the foreclosure sale, the funds were not returned to the taxpayer within the 60-day rollover window. Clint still deposited the amount in a new IRA, but received a deficiency notice from the IRS based on the distribution from the initial IRA.

Clint filed a private letter ruling asking the IRS to waive the 60-day rollover requirement with respect to his IRA distribution. The IRS' answer was a swift and authoritative NO. IRS deemed that Clint did not present any evidence to preclude him from a timely rollover of his IRA distribution back to an IRA. He in effect took a short-term loan from his IRA, and with it, assumed the risk that it might not be returned to him in a timely fashion.

Lesson to Learn:
Account owners have been doing this for years, and when the funds are not returned on time the answer from IRS is always the same - NO. You cannot use your IRA funds as a short-term, interest-free loan. The account owner must recognize the risk and be ready to face the consequences if they cannot get the funds back in time.