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 In This Update:
  • Q of the Month:
    Can I Avoid Tax on RMDs in a Tax-Free Shelter?
  • Key Focus:
    What the 2012 IRA and Tax Changes Really Mean
  • Ruling to Remember:
    How Not to Invest Your IRA in a Hedge Fund

 Resources  Expert


?? Question of the Month: Can I avoid tax on required distributions in a tax-free shelter?

Q: My wife and I are 69 and 70 years old respectively, and our 401(k) is worth $505,000 as of today. We are both retired with a monthly income of about $7,000. We have about $150,000 in life insurance. We will soon have to start taking money from the 401(k) as per the IRS rules. Where can we find information on tax-free shelters to avoid the heavy tax when we take required mimimum distributions (RMDs)?

A: There is no way to avoid the taxation on required minimum distributions of taxable amounts from the 401(k) plan. Moving the 401(k) funds to a tax-free shelter will not avoid the required distribution rules. Perhaps you should consider converting your 401(k) to a Roth IRA if you have enough money to pay the tax. There would be no required minimum distributions going forward with a Roth IRA.




Self-Directed IRAs and Fraud, 2011-2012 Estate Exemption Portability

The November issue of Ed Slott's IRA Advisor Newsletter discusses self-directed IRAs and the risk of fraud along with the 2011-2012 estate exemption portability guidance from IRS.

The Securities and Exchange Commission issued an “Investor Alert” in September 2011 warning investors to be wary of fraudulent promoters targeting self-directed IRA funds.


Inside Ed Slott's IRA Advisor Newsletter

SEC Warning Investor Alert: Self-Directed IRAs and the Risk of Fraud

  • How Fraud Promoters May Target Self-Directed IRAs
  • Tips to Avoid Fraudulent Investments in Self-Directed IRA Accounts
  • Fraud in a Self-Directed Roth IRA - A Double Blow
  • The Advisor’s Angle
  • Advisor Action Plan

7 Self-Directed IRA Issues Advisors Should Review with Clients Before They Take the Plunge

2011-2012 Estate Exemption Portability Guidance From IRS

  • IRS Notice 2011-82
  • File Form 706 to Get Portability

Guest IRA Expert
Natalie Choate, JD
Nutter McClennen & Fish LLP

Advisors To The Rescue!
Fixing IRA Mistakes

If you are not already an Ed Slott's IRA Advisor Newsletter subscriber, you can preview past issues before subscribing.

November Key Focus

What the 2012 IRA and Tax Changes Really Mean

Social Security and Supplementary Security Income (SSI) beneficiaries are receiving a cost of living adjustment (COLA) in 2012, the first time this has happened in several years. While this may sound like a good thing, it’s actually a “mixed bag” for a couple of reasons. First, Medicare premiums will also be on the rise next year, but not as much as first feared.

The U.S. Department of Health and Human Services (HHS) recently announced that the increase in Medicare Part B premiums will not be as high as originially estimated. As a result, most Social Security recipients will see a “real” increase in their spendable dollars for 2012.

Some Americans will be on the losing side of the equation thanks to the aforementioned increases. Just how do you think Social Security pays for the COLA increases?

If you spend more, you’ve got to take in more (or so you’d think) - and that’s exactly what will happen. Starting January 1, 2012 the amount of wages subject to the FICA and FUTA (the fancy terms for Social Security and Medicare taxes) will increase from $106,800 to $110,000. According to Social Security, this increase will cause roughly 10 million U.S. workers to pay higher taxes.

As if that weren’t enough on its own, the current “payroll tax holiday” is also set to expire at the end of 2011. This tax break, created under the 2010 Tax Act passed last December, lowered the employee portion of FICA (Social Security) taxes from 6.2% to 4.2% for 2011. There is some talk about extending the tax in one form or another, but at this point, that’s all speculation. So barring any changes between now and the New Year, without technically increasing taxes, workers will go from paying 4.2% of their first $106,800 in wages to FICA taxes in 2011 to paying 6.2% of their first $110,100 wages to FICA taxes in 2012.

However, there is some good news. In 2012, the elective deferral limit for plans like 401(k)s and 403(b)s will be increased from $16,500 to $17,000. That means that workers will be able to sock away an additional $500 per year on a tax deferred basis. That could be used to help save money on taxes now or help grow future tax-free retirement savings through a Roth IRA. The catch-up contribution for 401(k) and other similar plans remains at $5,500. Individuals age 50 or older by the end of 2012 can defer up to $22,500 of salary into their plan.

There are more limits that have been increased for inflation for 2012. CLICK HERE to read the The Slott Report article.

Ruling to Remember

Private Letter Ruling 201138052

A 49-year-old taxpayer we will call “Ronald” stated that he received a distribution from his IRA at Financial Institution A. He asserted that his failure to roll over the funds within the 60-day window was due to errors made by his financial advisor at Financial Institution B.

Ronald wanted to transfer amounts in his IRA at Financial Institution A to an IRA invested in a hedge fund managed by Financial Institution B. Ronald requested a normal distribution from his IRA, instructing Financial Institution A to wire funds to the hedge fund. The financial advisor instructed Ronald to label his account in the hedge fund as an IRA. Ronald was unaware that he had not properly rolled over his funds until a later date, when the financial advisor contacted him after learning of the improper rollover.

The financial advisor signed a statement under penalty of perjury that he advised Ronald to complete the rollover in the procedure outlined above. It was a mistake.

IRS waived the 60-day rollover requirement, and Ronald was granted a 60- day period to contribute the funds into a rollover IRA.

There is a very important lesson to learn for both financial advisors and IRA owners: in order to have an IRA, there must be IRA documents. There must be a beneficiary form. Simply including the word “IRA” in the account title does not make the account an IRA.

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