Articles tagged with: Required minimum distributions

An Inherited IRA

Here are some things to consider when you receive IRA assets.

Be sure you understand your options. When the owner of an IRA passes away, his or her heirs must be aware of the rules and regulations affecting Inherited IRAs. Ignorance can lead straight toward a tax disaster.

Please note that this is simply an overview. Rather than use this article as a guide, use it as a prelude before you talk to a financial services professional well-versed in IRA rules and regulations. Inherited IRA rules are remarkably complex, and that conversation is essential.

First, make sure you have actually inherited the IRA. Your spouse, parent or grandparent may have left their traditional or Roth IRA to you in a will, but that doesn’t mean you have inherited it. In all but rare cases, an IRA beneficiary designation form takes precedence over a bequest made in a will or living trust. (The same applies to annuities and life insurance policies.)1

Your first task is to find the beneficiary form. The financial firm serving as the custodian of the IRA assets should have a copy on file if you cannot locate one (although this is not a given).

What if I’m not the beneficiary named on the form? The IRA assets are destined to go to whoever the primary beneficiary is. One or more contingent beneficiaries are also usually named; if the primary beneficiary is now deceased, then the contingent beneficiaries will inherit the IRA assets.2

What if no beneficiary is named on the form? Then the financial firm supervising the IRA will choose a beneficiary according to its rules and/or IRS guidelines. It may decide that the decedent’s estate will be the beneficiary of the IRA, which is often the poorest outcome in terms of taxation.2

Spousal heirs who inherit a Roth or traditional IRA have options. Here they are, stated as straightforwardly as their complexities allow.

You can have the assets rolled over into your own IRA. This way, you can withdraw those inherited assets based upon your own life expectancy. If you transfer the inherited assets into a traditional IRA you already own, you don’t have to take Required Minimum Distributions from those assets until age 70½. If you transfer the inherited assets into a Roth IRA you already own, you don’t have to take RMDs from those assets at all. (Inherited Roth IRA assets can only be rolled over into Roth IRAs; inherited traditional IRA assets can only be rolled over into traditional IRAs.) Only spouses have this rollover option.3,4

You can transfer the assets into a new Inherited IRA in your name. If your spouse was older than 70½ when he or she died, then you must start taking RMDs from the Inherited IRA by December 31 of the year after the year of your spouse’s death (or pay penalties to the IRS). If your spouse passed before age 70½, you might be able to postpone RMDs until the date when your spouse would have turned 70½.3

You can create an Inherited IRA to house the assets, and then roll over the assets from the Inherited IRA into a new Roth IRA in your name. Yes, you will pay taxes on the Roth conversion. The upside is that the assets will go into a Roth IRA, paving the way for no RMDs, potentially lifelong contributions and tax-free withdrawals.3,4

You can “disclaim” all or some of the inherited assets. If you don’t want or need the money from an Inherited IRA, here is another option. By doing this, the disclaimed inheritance can go to the contingent (or successor) beneficiary named on the beneficiary form. Spousal IRA heirs sometimes do this with the goal of reducing income and estate taxes.3

What choices do non-spousal heirs have? Before discussing that, it is worth noting that non-spousal heirs often get little or no guidance when it comes to Inherited IRAs. Too often, the financial firm overseeing the IRA just asks, “What do you want to do?” Often the IRA heir doesn’t know what to do.

First, ask the financial firm overseeing the IRA to help you retitle it as an Inherited IRA. This has to be done by September 30 of the year following the year in which the original IRA owner passed away. Usually the new title for the Inherited IRA is something like “Mary Jones IRA (Deceased 8/25/2015) for the benefit of Thomas Jones, beneficiary.” This retitling tells the IRS that this is now an Inherited IRA (for which you may name a beneficiary).5,6

This retitling is a key first step to a direct rollover of the Inherited IRA assets – a transfer of those assets from the financial firm the original IRA was held with to the financial firm your investments are held with. If you are a non-spousal IRA heir, this direct rollover (also called a direct IRA-to-IRA transfer) is very important. It gives the funds a chance to have further tax-advantaged growth.

Non-spousal heirs have a basic either-or choice when it comes to withdrawals from Inherited IRAs. They can either take lump-sum withdrawals or Required Minimum Distributions (RMDs).

Usually, your poorest option is a lump-sum withdrawal. If you touch the money at any point – that is, if the IRA custodian cuts you a check for the Inherited IRA assets and you deposit it in a bank account or IRA you have – that is not a direct rollover. That is an indirect rollover, and the entire amount withdrawn is treated as taxable income by the IRS. (An exception: if you cash out an Inherited Roth IRA, it is not a taxable event if the Roth IRA has existed for five or more years.) A direct rollover – in which only the custodian brokerages touch the money as they transfer it from one IRA to another – is not a taxable event.5,6

Taking RMDs is usually the better option. A beneficiary can arrange RMDs from an Inherited IRA, with the following variations:

Does the Inherited IRA contain assets originally held in a traditional IRA? If so, the beneficiary must schedule RMDs over his or her life expectancy if the owner of that original, traditional IRA died after age 70½. If the original IRA owner passed away before age 70½, a beneficiary can either take RMDs based his or her life expectancy or by the 5-year method (whereby the entire Inherited IRA balance is depleted incrementally in five years).6

Does the Inherited IRA contain assets originally held in a Roth IRA? If so, the beneficiary can schedule RMDs over his or her life expectancy or by the aforementioned 5-year method. The age at which the original IRA owner died is irrelevant.6

Generally speaking, the RMDs must start by the end of the year following the year in which the original IRA owner passed away. If you don’t start taking these required withdrawals by December 31 of the following year, you will pay a penalty. Taking smaller withdrawals allows some of the IRA assets to stay invested with tax deferral, and it spreads the income tax liability on the Inherited IRA money over a multi-year period.3

What other things should IRA heirs know? Well, here are three important notes in closing.

Non-spousal heirs cannot contribute to an Inherited IRA. Spousal heirs who elect not to treat an Inherited IRA as their own or roll it over to their own retirement account also lose the ability to contribute to an Inherited IRA.7

You may be eligible for a tax deduction related to Inherited IRA income distribution(s). Income from an Inherited IRA is what the IRS terms “income in respect of a decedent.” This means you can take an income tax deduction for the portion of the estate tax attributable to the Inherited IRA (this is detailed in IRS Publication 590).5

If multiple beneficiaries are inheriting the IRA, you may be able to split the IRA up. Some IRA custodians allow division of Inherited IRA assets among multiple beneficiaries.5

So if you inherit an IRA, study the rules. The more informed you are and the more guidance you have, the better the potential outcome.

Mike Moffitt may be reached at ph#641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – bankrate.com/finance/retirement/ira-beneficiary-form-mistakes-to-avoid-1.aspx [9/24/14]

2 – irahelp.com/slottreport/there-no-beneficiary-retirement-account-now-what [1/9/14]

3 – fidelity.com/retirement-ira/inherited-ira/learn-about-your-choices [10/7/15]

4 – news.morningstar.com/articlenet/article.aspx?id=716642 [10/7/15]

5 – retirementwatch.com/IRASample1.cfm [10/7/15]

6 – fool.com/investing/general/2015/09/28/the-inherited-ira-its-a-great-gift-but-learn-the-r.aspx [9/28/15]

7 – finance.zacks.com/can-contribute-inherited-ira-5545.html [10/7/15]

 

2015 IRA Deadlines Are Approaching

Here is what you need to know. 

Financially, many of us associate April with taxes – but we should also associate April with important IRA deadlines.

*April 1 is the absolute deadline to take your first Required Mandatory Distribution (RMD) from your traditional IRA(s).

*April 15 is the deadline for making annual contributions to a traditional or Roth IRA.1

Let’s discuss the contribution deadline first, and then the deadline for that first RMD (which affects only those IRA owners who turned 70½ last year).

The earlier you make your annual IRA contribution, the better. You can make a yearly Roth or traditional IRA contribution anytime between January 1 of the current year and April 15 of the next year. So the contribution window for 2014 is January 1, 2014- April 15, 2015. You can make your IRA contribution for 2015 anytime from January 1, 2015-April 15, 2016.2

You have more than 15 months to make your IRA contribution for a given year, but why wait? Savvy IRA owners contribute as early as they can to give those dollars more months to grow and compound. (After all, who wants less time to amass retirement savings?)

You cut your income tax bill by contributing to a deductible traditional IRA. That’s because you are funding it with after-tax dollars. To get the full tax deduction for your 2015 traditional IRA contribution, you have to meet one or more of these financial conditions:

*You aren’t eligible to participate in a workplace retirement plan.

*You are eligible to participate in a workplace retirement plan, but you are a single filer or head of household with modified adjusted gross income of $61,000 or less. (Or if you file jointly with your spouse, your combined MAGI is $98,000 or less.)

*You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible and your combined 2015 gross income is $183,000 or less.3

If you are the original owner of a traditional IRA, by law you must stop contributing to it starting in the year you turn 70½. If you are the initial owner of a Roth IRA, you can contribute to it as long as you live provided you have taxable compensation and MAGI below a certain level (see below).1,3

If you are making a 2014 IRA contribution in early 2015, be aware of this fact. You must tell the investment company hosting the IRA account what year the contribution is for. If you fail to indicate the tax year that the contribution applies to, the custodian firm may make a default assumption that the contribution is for the current year (and note exactly that to the IRS).4

So, write “2015 IRA contribution” or “2014 IRA contribution” as applicable in the memo area of your check, plainly and simply. Be sure to write your account number on the check. Should you make your contribution electronically, double-check that these details are communicated.

How much can you put into an IRA this year? You can contribute up to $5,500 to a Roth or traditional IRA for the 2015 tax year, $6,500 if you will be 50 or older this year. (The same applies for the 2014 tax year). If you have multiple IRAs, you can contribute up to a total of $5,500/$6,500 across the various accounts. Should you make an IRA contribution exceeding these limits, you will not be rewarded for it: you will have until the following April 15 to correct the contribution with the help of an IRS form, and if you don’t, the amount of the excess contribution will be taxed at 6% each year the correction is avoided.1,4

If you earn a lot of money, your maximum contribution to a Roth IRA may be reduced because of MAGI phase-outs, which kick in as follows.3

2014 Tax Year                                                                2015 Tax Year

Single/head of household: $114,000 – $129,000          Single/head of household: $116,000 – $131,000

Married filing jointly: $181,000 – $191,000                   Married filing jointly: $183,000 – $193,000

Married filing separately: $0 – $10,000                        Married filing jointly: $0 – $10,000

If your MAGI falls within the applicable phase-out range, you may make a partial contribution.3

A last-chance RMD deadline rolls around on April 1. If you turned 70½ in 2014, the IRS gave you a choice: you could a) take your first Required Minimum Distribution from your traditional IRA before December 31, 2014, or b) postpone it until as late as April 1, 2015.1

If you chose b), you will have to take two RMDs this year – one by April 1, 2014 and another by December 31, 2014. (For subsequent years, your annual RMD deadline will be December 31.) The investment firm hosting your IRA should have already notified you of this consequence, and the RMD amount(s) – in fact, they have probably calculated the RMD(s) for you.5

Original owners of Roth IRAs will never face this issue – they are not required to take RMDs.1

Michael Moffitt may be reached at ph# 641-782-5577  or email mikem@cfgiowa.com

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [11/3/14]

2 – dailyfinance.com/2014/12/06/time-running-out-end-year-retirement-planning/ [12/6/14]

3 – asppa.org/News/Browse-Topics/Sales-Marketing/Article/ArticleID/3594 [10/23/14]

4 – investopedia.com/articles/retirement/05/021505.asp [1/21/15]

5 – schwab.com/public/schwab/nn/articles/IRA-Tax-Traps [6/6/14]

 

 

 

 

 

 

 

Fall Financial Reminders

The year is coming to a close. Have you thought about these financial ideas yet?

As every calendar year ends, the window slowly closes on a set of financial opportunities. Here are several you might want to explore before 2015 arrives.

Don’t forget that IRA RMD. If you own one or more traditional IRAs, you have to take your annual required minimum distribution (RMD) from one or more of those IRAs by December 31. If you are being asked to take your very first RMD, you actually have until April 15, 2015 to take it – but your 2015 income taxes may be substantially greater as a result. (Note: original owners of Roth IRAs never have to take RMDs from those accounts.)1

Did you recently inherit an IRA? If you have and you weren’t married to the person who started that IRA, you must take the first RMD from that IRA by December 31 of the year after the death of that original IRA owner. You have to do it whether the account is a traditional IRA or a Roth IRA.1

Here’s another thing you might want to do with that newly inherited IRA before New Year’s Eve, though: you might want to divide it into multiple inherited IRAs, thereby promoting a lengthier payout schedule for younger inheritors of those assets. Otherwise, any co-beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.1

Can you max out your contribution to your workplace retirement plan? Your employer likely sponsors a 401(k) or 403(b) plan, and you have until December 31 to boost your 2014 contribution. This year, the contribution limit on both plans is $17,500 for those under 50, $23,000 for those 50 and older.2,3

Can you do the same with your IRA? Again, December 31 is your deadline for tax year 2014. This year, the traditional and Roth IRA contribution limit is $5,500 for those under 50, $6,500 for those 50 and older. High earners may face a lower Roth IRA contribution ceiling per their adjusted gross income level – above $129,000 AGI, an individual filing as single or head of household can’t make a Roth contribution for 2014, and neither can joint filers with AGI exceeding $191,000.3

Ever looked into a Solo(k) or a SEP plan? If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one-person 401(k), the so-called Solo(k). You don’t have to be exclusively self-employed to set one of these up – you can work full-time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.2

Contributions to SEPs and Solo(k)s are tax-deductible. December 31 is the deadline to set one up for 2014, and if you meet that deadline, you can make your contributions for 2014 as late as April 15, 2015 (or October 15, 2015 with a federal extension). You can contribute up to $52,000 to SEP for 2014, $57,500 if you are 50 or older. For a Solo(k), the same limits apply but they break down to $17,500 + up to 20% of your net self-employment income and $23,000 + 20% net self-employment income if you are 50 or older. If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo(k) contributions can’t be greater than the aforementioned $17,500/$23,000 limits – but even so, you can still pour up to 20% of your net self-employment income into a Solo(k).1,2

Do you need to file IRS Form 706? A sad occasion leads to this – the death of a spouse. Form 706, which should be filed no later than nine months after his or her passing, notifies the IRS that some or all of a decedent’s estate tax exemption is being carried over to the surviving spouse per the portability allowance. If your spouse passed in 2011, 2012, or 2013, the IRS is allowing you until December 31, 2014 to file the pertinent Form 706, which will transfer that estate planning portability to your estate if your spouse was a U.S. citizen or resident.1

Are you feeling generous? You may want to donate appreciated securities to charity before the year ends (you may take a deduction amounting to their current market value at the time of the donation, and you can use it to counterbalance up to 30% of your AGI). Or, you may want to gift a child, relative or friend and take advantage of the annual gift tax exclusion. An individual can gift up to $14,000 this year to as many other individuals as he or she desires; a couple may jointly gift up to $28,000 to as many individuals as you wish. Whether you choose to gift singly or jointly, you’ve probably got a long way to go before using up the current $5.34 million/$10.68 million lifetime exemption. Wealthy grandparents often fund 529 plans this way, so it is worth noting that December 31 is the 529 funding deadline for the 2014 tax year.1

Mike Moffitt may be reached at ph# (641) 782-5577 or mikem@cfgiowa.com.
website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – forbes.com/sites/deborahljacobs/2014/10/08/eight-key-financial-deadlines-to-keep-in-mind-this-fall/ [10/8/14]
2 – tinyurl.com/kjzzbw4 [10/9/14]
3 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [10/31/13]

That First RMD from Your IRA

What you need to know.

When you reach age 70½, the IRS instructs you to start making withdrawals from your Traditional IRA(s). These IRA withdrawals are also called Required Minimum Distributions (RMDs). You will make them annually from now on.1

If you fail to take your annual RMD or take out less than what is required, the IRS will notice. You will not only owe income taxes on the amount not withdrawn, you will owe 50% more. (The 50% penalty can be waived if you can show the IRS that the shortfall resulted from a “reasonable error” instead of negligence.)1

Many IRA owners have questions about the options and rules related to their initial RMDs, so let’s answer a few.

How does the IRS define age 70½? Its definition is pretty straightforward. If your 70th birthday occurs in the first half of a year, you turn 70½ within that calendar year. If your 70th birthday occurs in the second half of a year, you turn 70½ during the subsequent calendar year.2

Your initial RMD has to be taken by April 1 of the year after you turn 70½. All the RMDs you take in subsequent years must be taken by December 31 of each year.3

So, if you turned 70 during the first six months of 2014, you will be 70½ by the end of 2014 and you must take your first RMD by April 1, 2015. If you turn 70 in the second half of 2014, then you will be 70½ in 2015 and you don’t need to take that initial RMD until April 1, 2016.2

Is waiting until April 1 of the following year to take my first RMD a bad idea? The IRS allows you three extra months to take your first RMD, but it isn’t necessarily doing you a favor. Your initial RMD is taxable in the year it is taken. If you postpone it into the following year, then the taxable portions of both your first RMD and your second RMD must be reported as income on your federal tax return for that following year.2

An example: James and his wife Stephanie file jointly, and they earn $73,800 in 2014 (the upper limit of the 15% federal tax bracket). James turns 70½ in 2014, but he decides to put off his first RMD until April 1, 2015. Bad idea: this means that he will have to take two RMDs before 2015 ends. So his taxable income jumps in 2015 as a result of the dual RMDs, and it pushes them into a higher tax bracket for 2015. The lesson: if you will be 70½ by the time 2014 ends, take your initial RMD by the end of 2014 – it might save you thousands in taxes to do so.4

How do I calculate my first RMD? IRS Publication 590 is your resource. You calculate it using IRS life expectancy tables and your IRA balance on December 31 of the previous year. For that matter, if you Google “how to calculate your RMD” you will see links to RMD worksheets at irs.gov and free RMD calculators provided by the Financial Industry Regulatory Authority (FINRA), Kiplinger, Bankrate and others.2,5

If your spouse is at least 10 years younger than you and happens to be designated as the sole beneficiary for one or more IRAs you own, you should refer to Publication 590 instead of a calculator; the calculator may tell you that the RMD is larger than it actually is.6

If you have your IRA with one of the big investment firms, it might calculate your RMD for you and offer to route the amount into another account that you specify. Unless you state otherwise, it will withhold taxes on the amount of the RMD as required by law and give you and the IRS a 1099-R form recording the income distribution.2,5

When I take my RMD, do I have to withdraw the whole amount? No. You can also take it in smaller, successive withdrawals. Your IRA custodian may be able to schedule them for you.3

What if I have multiple traditional IRAs?
You then figure out your total RMD by adding up the total of all of your traditional IRA balances on December 31 of the prior year. This total is the basis for the RMD calculation. You can take your RMD from a single IRA or multiple IRAs.1

What if I have a Roth IRA? If you are the original owner of that Roth IRA, you don’t have to take any RMDs. Only inherited Roth IRAs require RMDs.2

It doesn’t pay to wait. At the end of 2013, Fidelity Investments found that 14% of IRA owners required to take their first RMD hadn’t yet done so – they were putting it off until early 2014. Another 40% had withdrawn less than the required amount by December 31. Avoid their behaviors, if you can: when it comes to your initial RMD, procrastination can invite higher-than-normal taxes and a risk of forgetting the deadline.2

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com.
website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions [7/3/14]
2 – tinyurl.com/ktabwnv [3/30/14]
3 – schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/withdrawals_and_distributions/age_70_and_a_half_and_over [9/11/14]
4 – bankrate.com/finance/taxes/tax-brackets.aspx [9/11/14]
5 – google.com/search?q=how+to+calculate+your+RMD&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a&channel=sb [9/11/14]
6 – kiplinger.com/tool/retirement/T032-S000-minimum-ira-distribution-calculator-what-is-my-min/ [1/14]