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Ed Slott's Free IRA Update
November 2008
Volume 1, Number 11
In This Issue
  Focus on - Year-End Reminders
  Question of the Month
  News, Rulings and Other Updates
  Retirement Planning Tip
  Ed Slott's IRA Advisor - November Issue
  Building an "A" List Practice in a "D" List Economy
November Focus - Year-End Reminders
December is a busy month for many individuals as they try to get certain transactions and tasks completed before the end of the year. Unfortunately, retirement-plan related transactions are often overlooked resulting in missed opportunities, and in some cases excise tax being owed to the IRS. Update your calendar and set reminders so as to avoid such excise tax problems and take advantage of available opportunities to:
Withdraw Required Minimum Distribution Amounts
Individuals who are at least age 70 ½ this year must withdraw required minimum distribution (RMD) amounts from their traditional IRAs and employer sponsored plans by December 31. For any individual  taking a first RMD amount as a result of attaining age 70 ½ this year or as a result of retiring from an employer that offers a 403(b), 457(b), 401(k) or other qualified plan, the deadline is extended to April 1 of the next year.
Individuals who inherited retirement accounts before the beginning of this year and are required to make withdrawals under the life-expectancy method must withdraw their RMD for this year by December 31.
Failure to meet the withdrawal deadline will result in an excess accumulation penalty of 50% of the RMD shortfall being owed to the IRS. To prevent this from occurring, individuals should contact their IRA custodians and plan administrators to make arrangements to have the amounts withdrawn from the retirement accounts by the applicable deadline.
Complete Roth Conversions
Eligible individuals who want to convert their non-Roth IRAs and qualified plan accounts to Roth IRAs must do so by December 31. While a Roth conversion is a two step process which involves (step-1) the distribution of the assets from the non-Roth IRA or qualified plan and (step 2) the rollover as a Roth
conversion deposit to the Roth IRA, only the first step is required to be completed by December 31. Therefore, if the conversion is being done from an account at one firm to an account at another firm, the individual needs only to make sure that the assets leave the delivering account by December 31.
A Roth conversion can be done as a direct conversion meaning it is done directly between two accounts at the same financial institution, or made payable to the receiving financial institution for the benefit of the Roth IRA. It can also be done as an indirect conversion where the assets are paid to the individual and deposited to the Roth IRA within 60-days of receipt. A word of caution though - if the assets are distributed from a qualified plan-such as a 401(k) plan,  a 403(b) account or a 457(b) account and are paid to the individual instead of being processed directly to the Roth IRA, the payer will be required to withhold at least 20% for federal tax (that 20% is treated as a distribution to the individual). As a result, the individual will need to make up for the withheld amount out of pocket in order to convert the entire withdrawal amount, or convert only the net amount received. It is therefore better to have the Roth conversion done as a direct conversion as it results in a 100% conversion and it requires no out of pocket make-up for withheld amounts.
Caution: Don't Do a Reconversion before the eligibility date
If you completed a Roth conversion earlier this year and recharacterized any portion of the       conversion, the recharacterized amount cannot be reconverted until the later of (1) January 1 of the year following the year in which the conversion was done or (2) 30-days after the recharacterization was completed. If you break this rule, the reconversion will be invalid.
Establish Separate Accounting for Inherited Accounts
If there are multiple beneficiaries who inherited a retirement account last year and the life-expectancy method is used to determine distribution amounts, then separate accounts must be established for each beneficiary by December 31 of this year. If this is not done, then the life expectancy of the oldest beneficiary is used. This can create a disadvantage for younger beneficiaries, as they would be required to withdraw larger amounts than if they were able to use their own life expectancies.
Withdraw SEPP (72(t)) Amounts
Individuals who are taking distributions under a substantially equal periodic payment (SEPP or 72(t)) program will need to ensure that the required amount is distributed by the end of the year. Unlike an RMD where the individual can withdraw more than the RMD amount if desired, the SEPP distribution must be no more and no less than the calculated amount.  Missing the deadline could mean that the entire SEPP program is disqualified, resulting in retroactive penalties being assessed on all distributions made prior to age 59 ½. In addition, the individual may owe interest on the penalty amounts.
Submit Requests Early
Many financial institutions establish deadlines by which these requests must be received in order to guarantee that they will be processed by the end of the year. In some cases, these deadlines are as early as December 1. As such, individuals should submit requests as early as possible and follow-up to ensure that their requests are processed. Follow-ups should be conducted no less than 1 week before year-end, so as to allow some time for processing any requests that may have been overlooked.
Detailed information on required minimum distributions from IRAs, Roth conversions and separate accounting is available in IRS Publication 590, available at www.irs.gov.
Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of what the newsletter includes, you can preview past issues before subscribing.

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Question of the Month
Question:  I liquidated the assets in my IRA and withdrew the entire balance in cash. I plan to use the cash to buy gold and rollover the gold to my IRA within 60-days of the date that I received the cash. My financial advisor does not think that this can be done, but I have been told otherwise. What is the correct answer?
Answer: Your financial advisor is correct. When doing an IRA to IRA rollover, the same property distributed from one IRA is exactly what has to be rolled over. Therefore, if you receive cash and rollover gold, the rollover will be deemed an ineligible rollover. As a result of the ineligible rollover, you will owe taxes on any taxable portion of the distribution, and you will be required to remove the rollover from your IRA as a return-of-excess contribution. Should you fail to remove the ineligible rollover by your tax filing deadline, including extensions, you will owe the IRS a 6% excise tax for every year it remains in your IRA.
In the future, if you want to hold gold in your IRA, contact your IRA custodian and have them purchase the gold within the IRA - just like you would if you wanted to buy mutual funds or stocks in your IRA. .

News, Rulings and Other Updates

News, Rulings and Other Updates
-         The IRS has announced the 2009 limits for retirement plans.  The following chart includes some of these new limits.
2009 Limit
IRA Contributions
IRA catch-up contributions
Salary deferral to 401(k) and 403(b) plans
Catch-up contributions to 401(k) and 403(b) plans
457(b) contributions
Catch-up contributions to 457(b) plans
Salary deferral to SIMPLE IRAs
Salary deferral to SIMPLE 401(k)s
Catch-up contributions to SIMPLE IRAs
Catch-up contributions to SIMPLE 401(k)s
Maximum contributions to an individual's account under an employer sponsored plan
Maximum compensation that can be used to compute contributions to employer plans
Qualified Charitable Distribution Extended
H.R. 1424-The Emergency Economic Stabilization Act of 2008 (EESA-2008), which was signed into law on October 3, 2008, includes a provision to extend the qualified charitable distribution (QCD) provision. The QCD provision allows owners and beneficiaries of traditional IRAs, Roth IRAs and certain SEPs and SIMPLE IRAs to make tax free withdrawals that can satisfy RMD requirements, if the amount is paid directly from the IRA to an eligible charity. The limit remains at $100,000 per person, per year.

November's Retirement Planning Tip:
Choose your retirement over paying for college
It is tempting to finance a child's education now and worry about retirement later. But as many baby boomers are now finding out, there is no financial aid for retirement. Whereas college students can get grants, if eligible, and student loans which can be repaid when they leave college, providing for retirement is solely the retiree's responsibility. Consequently, if the amounts they have saved in their retirement nest egg, combined with       any pension and social security income is insufficient to cover their living expenses, retirees find themselves facing some very serious financial and other burdens in their retirement years. For parents who can afford to pay for college and save for retirement, this may not be an issue. However for those who can't afford to do both, it might be necessary, after serious consideration, to make some difficult choices.

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


The November 2008 issue of Ed Slott's IRA Advisor is now available online. The areas covered include the following:
  • Turn Market Turmoil into IRA Tax Breaks
    The so-called Bailout Bill, known as the Emergency Economic Stabilization Act (EESA) of 2008 contains some little-noticed tax provisions, including the retroactive extension of the IRA charitable rollover.

    The market decline presents many other year-end planning strategies that can be implemented to benefit your clients. We highlight several of these including Roth IRA conversions and recharacterizations, net unrealized appreciation (NUA), required minimum distributions, 72(t) planning moves and estate tax relief.

    Take advantage of these opportunities to "bail out" your clients, NOW, before year-end, when they need help the most.
  • Feature Article: Charitable IRA Rollovers are Back!
    • Background on Giving IRA Funds to Charity
-         The Problem
-         The Solution
-         Meeting the QCD Requirements
-         Market Decline Brings New Charitable Planning Challenges
    • Recap of the Qualified Charitable Distribution Rules
  • Turn Market Turmoil into IRA Tax Breaks
  • Year-End Roth IRA Strategies
  • Roth Recharacterizations and Reconversions
  • Conversion Tax Trap
  • NUA Opportunities When Stock Values Decline
  • Use Stock Losses to Offset NUA Gains
  • Year-End RMD Planning
  • No RMD Relief for Lower IRA Values
  • 72(t) Adjustment for Lower Values
  • Alternate Valuation Estate Tax Break
  • Advisor Action Plan
Be sure to review the November issue and post your questions on our message board at http://www.irahelp.com/phpBB/index.php?area=, where some of the leading experts in the retirement field gather to discuss technical issues.

To view current and past issues of the IRA Advisor, click the link below to access our "Subscribers Only" section of our website:
http://irahelp.com/newsletter.php?area=a (for America Online users)

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.

Building an "A" List Practice in a "D" List Economy
Rod Zeeb, President, The Heritage Institute
In the current market and economy, fortunes will be made and lost. We have dealt with upheavals larger than this in our history, and during those times, some people failed, while others - particularly those who were prepared and who prepared their families - thrived! 
In the midst of all of the chaos, a rare opportunity exists for you to prosper by retaining your "A" clients and receiving introductions from them.  In part, that is because in markets like these, clients want action.  They want to do something - anything.  Some are selling.  Smart investors are finding great buys (i.e., Warren Buffett).  And others are firing their advisors to feel better.  Studies conclude that you will retain your "A" clients - and receive introductions from them - if you build deeper client relationships that go beyond the numbers. Deeper client relationships = client loyalty, and they foster both more business and more introductions from those clients.
 If you are the advisor that helps them through this difficult time, their loyalty to you will increase.
You know how important it is to differentiate yourself from our competition.  Right now, no one is going to differentiate themselves based on market performance.  But you can differentiate yourself based on client relationships and helping your clients prepare and protect their families.
My associate Perry Cochell and I have confirmed the results of the relationships studies in over two decades of experience working with clients at all income levels, from average incomes to billion dollar estates. If you have a deep relationship with a client, they will be loyal, bring you more business, and introduce you to more people.  Or, stated another way,       deeper client relationships result in making more money working with fewer people, and making a bigger difference in their lives.
Studies confirm the importance of relationship
In 1995, a Harvard study determined that 'satisfied' clients defect.  Only 'completely satisfied' clients are loyal.  In 2004, Russ Alan Prince surveyed clients and determined that, on average, your clients have 8 core values.  If the client perceives you know all 8 of their core values, they will entrust 100% of their assets with you and make 4.1 introductions.  If they perceive you know 5 of their core values, they will entrust 72% of their assets with you and make 1.7 introductions.  And, if they perceive you only know 2 of their core values, they will entrust 50% of their assets with you, but not make any introductions. 
Then, in 2005, a study by Allianz found that leaving a legacy was far more important to clients than leaving an inheritance, and that 77% of both "boomers" and their parents rated "values and life lessons" as the most important legacy they could receive or leave.  Only 10% of boomers said that financial assets or real estate were important as an inheritance.       The study concluded that money is a 'minor' component of legacy to parents and their heirs. "Many people wrongly assume that the most important issue among families is money and wealth transfer -- it's not," said Ken Dychtwald, a gerontologist, and designer of the survey. "What we found was the memories, the stories, the values were 10 times more important to people than the money." 
Still, many financial professionals approach the client's situation from a purely financial perspective. "What is your net worth?" "How much money do you want to pass on to your children?" and "How should we plan to minimize your estate taxes?"  Are those questions important in the context of the services the client needs?  Of course.  They always will be important. However, context is everything in building deep, meaningful relationships with clients, the kind that can help them to achieve the success that they really want for themselves and generations of their heirs.  If we have learned anything from studies and experience, it is that planning for the future of the client's money is not the same as planning for the future of their family.  And, when people define real success in the context       of what they want for their children, grandchildren and generations to come, money is just about the last thing they mention.
Two kinds of inheritance
We receive and pass on two kinds of inheritance, not one.  The first, the financial inheritance, is the one with which we are most familiar.  It is the one around which advisors have built their practices for centuries.  But, the studies tell us (as hard-earned experience tells those of us who have been at this business for a few years) that there is a second, more important inheritance that we also receive and pass on.  That is the emotional inheritance, the sum total of the values, stories, life lessons, and family traditions to which the Allianz study refers.
Emotional inheritances are different for every person, and unique to every family, but, they can be discovered, shared and folded into planning.   We know that passing values and life lessons to future generations is the key to success for families who have kept their family and fortunes together for generations.  It has been the key for centuries
9 out of 10 plans fail.  They always have.
You have probably seen or heard about the studies that conclude that 90% of the time family fortunes are lost by the end of the 3rd generation.  And, this is not new.  Since ancient times, the majority of inheritance plans have failed. Two thousand years ago a Chinese scholar penned the adage: "fu bu guo san dai," or "Wealth never survives three generations."  In thirteenth century England they said "Clogs to clogs in three generations," and in nineteenth century America the expressions became "From shirtsleeves to shirtsleeves in three generations." And, over 200 years ago, Adam Smith - of "specialization and division of labor" fame - summed it up in "The Wealth of Nations" when he said:  "Riches, inspite of the most violent regulations of law to prevent their dissipation, very seldom remain long in the same family."  Many cultures. Thousands of years of history.  One common tradition of failure.
Which raises the obvious questions: 
  • If 90% of families fail to keep the family and its fortune together for more than 3 generations, what do the other 10% do differently? And,
  • What would it mean to your relationship with your clients (and your practice) if you could help your clients be part of the 10% who succeed?
The difference for the 10% is not in their financial or estate planning.  The difference is that they have a 3rd element to their planning, described by Jay Hughes and others as heritage planning.  They prepare their family for their inheritance. In our own situation, we studied what has worked in successful families for centuries and put it into what we call The Heritage Process™; a 6-step process that advisors use to guide their clients through heritage planning.  This process allows them to build deep relationships (the kind the experts talk about) with their clients, and provide what they want most, which in turn increases the advisor's client retention, increases the business they receive from their existing clients, and increases the number of quality introductions they receive from those       clients.  
Where Heritage Planning Fits
In the early 1980's, nearly all estate planning was done with Wills. (Which by the way, had not changed substantially in form or purpose since the year 1540, when King Henry VIII of England codified estate planning and inheritance custom into the system that would be used for nearly 400 years!)   Trusts were generally believed to be applicable only to very large and complicated estates.  In the mid-1980's, Bob Esperti and Renno Peterson formed the National Network of Estate Planning Attorneys with a goal to "Change how America Plans" to use Living Trusts and avoid probates in even modest estates.  When I joined that group in the late 1980's, there were less than 90 members.  Within 10 years, the Network had grown to over 1,500 members, and Living Trusts were becoming the norm in all estate plans.
Now, with the increasing recognition of the importance of better relationships between advisor and client, and bolstered by numerous studies and practical experience validating the 90% inheritance failure rate, it is clear that there are not 2, but 3 elements to successful planning:
  • Financial Planning, which prepares and protects the assets for the client;
  • Estate Planning which prepares the assets for the client's family; and
  • Heritage Planning, which prepares the client's family to receive their inheritance.
All are vital to successful planning.  You and your clients have probably done a great job of financial and estate planning.  But, have you helped your clients prepare their families for the inheritance they will receive as a result of the financial and estate planning you have done?
A powerful question
Here is a wonderful idea for a client conversation.  Ask them, "if you could look 50 years into the future and see a gathering of your family, what would you like to see going on, and what would you like to hear them talking about?"   Most people know what they would like to see: healthy, independent, successful individuals for whom family unity and a common vision are paramount values. (As you can imagine, it's also easy for them to envision what they wouldn't want to see-family strife, individuals struggling with divorce, addiction, business failure, etc.)
Once they have answered the question, ask, "So, where in the planning documents that you have done to date have you made provisions for those outcomes?"  Expect a moment of silence.  The fact is, most people (90%, according to the studies!) have made no such provision as part of their planning. I would argue, therefore, that the better you are at financial and estate planning, the more important it is that you help prepare your client's inheritors for the inheritance they will receive.  As the Allianz study points out, this is the most important outcome that people want from their planning. It is also what has helped the 'successful' 10% keep family and fortune together across generations, including through war, depressions and every other kind of economic and political upheaval-including times so rough that today's market and economy rollercoaster looks tame by comparison.  
Providing your clients with the 3rd element of planning has nothing to do with rates of returns or the latest, greatest flavor-of-the-month product, tool, or strategy.  It is about building relationships with those you want to work with.  By adding this 3rd element to your planning - the element of preparing the inheritors for their inheritance - you are giving your clients and their inheritors what they most want.
Rod Zeeb is the President, CEO and Co-Founder of The Heritage Institute, and Co-Author of the book, Beating the Midas Curse.
To learn more about The Heritage Process, read about our introductory course, - "Clients Forever" - on our website (www.theheritageinstitute.com).    Or call or email us, and we will explore with you whether our training is right for you.
The Heritage Institute, 7724 SE Aspen Summit Drive, Suite 202,
Portland, OR 97266

Ed Slott and Company-100 Merrick Road, 200 East, Rockville Centre, NY 11570
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