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Forward September's IRA Updates to a Friend

 In This Update:
  • Back to School! Using an IRA to Cover College Expenses
  • Ruling to Remember: Another Rollover Gone Bad
  • Q of Month: When to Pay Roth Conversion Taxes

 Resources  Expert Professional





?? Question of The Month: Paying Roth Conversion Taxes

Q: If I were to convert a rollover IRA this year to a Roth IRA when would the taxes be due and what kind of payment plans are available? I heard the taxes could be paid over two years time.

A: For all Roth conversions in 2010, and only 2010, you have the following options:

  1. Add the conversion, pre-tax dollars, to your 2010 income and pay the income tax due on your 2010 Form 1040.
  2. If you decide not to include that income in 2010, then you can add half the conversion amount to your 2011 income and the other half to your 2012 income.

Keep in mind that if you have both pre-tax and after-tax dollars in your IRA, you must pro-rate the converted amount between pre-tax and after-tax dollars. All IRAs, including SEP and SIMPLE IRAs, even the ones you are NOT converting, must be considered.





The September issue of Ed Slott's IRA Advisor Newsletter provides a guide that details how much an individual can contribute per retirement account each year.

This guide provides information on maximizing contributions to multiple retirement plans, helping individuals understand the potential opportunities to shelter more of their earnings from income tax.


Inside Ed Slott's IRA Advisor Newsletter

Guest IRA Expert
Denise Appleby

A User's Guide for the Retirement Contributions Chart

  • 2010 IRA/Roth IRA Contribution Limits
  • 2010 Employer Plan Limits
    -Working for One Employer
    -Working for More than One Employer
  • 403(b) Exception
  • Be Aware of Salary Deferral Limitations
  • Multiple Businesses May Not Mean Multiple Employers
  • Ideal Clientele for Doubling Up Employer Contributions
  • Effect on Contributions to Other

Retirement Plans SIMPLE IRA October 1st Deadline

  • What "Establishing" the SIMPLE IRA Plan Entails

Reference Chart
2010 Limitations When Individuals Own or Participate in Multiple Retirement Plans

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

September Key Focus

Using IRAs to Cover College Expenses

It's time for college students to head back to school. But how are you going to pay for this next year of college? Some people will be able to write the check. But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills. What if it isn't enough? Can you use your retirement savings to help pay the bill?

First of all, consider whether you should use your retirement assets. Are you putting your retirement at jeopardy to give your student a chance to have a good life? Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement. The message is to look for all possible sources of cash before you consider using your retirement funds.

If you are over the age of 59 1/2, you have access to your retirement funds without penalty. You will have to pay income tax on any distributions you take, but the retirement funds are now available for you to use as you wish.

A problem exists if you are under age 59 1/2 and are subject to the 10% early distribution penalty. Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception. The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse. You can apply the exception to the unreimbursed payment of tuition, books, fees, supplies and required equipment - in other words, the expenses minus any financial aid. Room and board are qualified expenses if the student is enrolled on at least a half-time basis. The expenses must be paid in the same year that a distribution is taken from the IRA.

So good luck to all those students returning to college this fall. And good luck to those that are footing the bill. Use your retirement assets only as a last resort and don't pay the early distribution penalty if you qualify for this exception!


Ruling to Remember

Private Letter Ruling 201033040

An individual we will call "Joe" maintained IRA B in the form of Certificate of Deposit X, which was a 36-month certificate with a fixed interest rate. "Joe" maintains a 60-month Certificate of Deposit in another IRA at the same financial institution.

Three days following the maturity date of Certificate of Deposit X, "Joe" went to the financial institution with his spouse and requested that a portion of his distribution be distributed to him as follows: 10 percent of the amount withheld for Federal income tax purposes; another amount transferred to a regular savings account "Joe" held jointly with his spouse; and the remainder of the requested amount distributed to him by check. "Joe" was looking for the best interest rate possible to invest the remainder of his account. He was informed the best interest rate offered at the financial institution at that time was in the Christmas Club.

The new amount, which we will call Amount A, remained in "Joe's" Christmas Club Account until Date 2, which was more than 60 days after the distribution from the IRA. On that date, Amount A was transferred from "Joe's" Christmas Club Account to his regular savings account. "Joe" maintained he did not realize that Amount A was not in an IRA until he noticed a substantial increase in his regular savings account, and he contacted the manager of the financial instituion right away.

A letter from the financial institution addressed to the IRS confirmed that on Date 1, an individual misunderstood "Joe's" intent to roll over Amount A and/or committed errors, resulting in Amount A being deposited into a non-IRA product.

The IRS agreed with the request and waived the 60-day rollover requirement, granting a period of 60 days from the ruling to contribute Amount A into a rollover IRA.

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