IRA

IRS Announces Increases to 2018 Retirement Plan Dollar Limits

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The IRS announced the 2018 cost-of-living adjustments to retirement plan limits.  The following plan limits are increased effective January 1, 2018:

  • Employee Contributions to 401(k) and 403(b) Plans: the contribution limit is increased from $18,000 to $18,500.
  • Defined Contribution Plans: the limit on annual additions to a participant’s defined contribution account increases from $54,000 to $55,000.
  • Defined Benefit Plans: the limitation on the annual benefit under a defined benefit plan increases from $215,000 to $220,000.
  • Annual Compensation Limit: the maximum amount of annual compensation that can be taken into account for various qualified plan purposes increases from $270,000 to $275,000.
  • Government Deferred Compensation Plans: the limit on deferrals under Section 457 (concerning deferred compensation plans of state and local governments and tax-exempt organizations) increases from $18,000 to $18,500.

Some limitations are not increased for 2018, including:

  • The limitation for catch-up contributions to an applicable employer plan other than a SIMPLE 401(k) plan or SIMPLE IRA for individuals age 50 and over remains unchanged at $6,000.
  • SIMPLE Plans: the maximum amount of compensation an employee may elect to defer remains at $12,500.
  • IRS and Roth IRA Limits: the deductible amount for an individual making a deductible IRA contribution remains at $5,500.  The Roth IRA limit of $5,500 remains unchanged as well.

If you have any questions on how these rules apply to give, please give us a call.

New Relief for Missing 60 Day Rollover Deadline

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60 day waiverDistributions from IRAs or qualified plans are not taxable and not subject to penalty if they are transferred to an eligible retirement plan no later than the 60th day following the day of receipt.  A similar rule applies to 403(a) annuity plans, 403(b) tax sheltered annuities, and 457 government plans.

If the rollover is not made within 60 days of receipt, the amount distributed will be subject to income tax and will be subject to a 10% early withdrawal penalty.  Unfortunately, mistakes happen and taxpayers sometimes miss the 60 day deadline to complete the rollover.

Relief Available for Missing the 60 Day Rollover Deadline

The IRS may waive the 60 day requirement where the failure to waive the 60 day requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the taxpayer.

New guidance from the IRS provides relief for taxpayers who have a good reason for missing the 60 day deadline.  The guidance allows the taxpayer to make a written certification to a plan administrator or IRA custodian that the taxpayer meets the requirements for the IRS to waive the 60 day rule.  The IRA custodian or plan administrator may rely on the written certification and treat the rollover as if it was made within the 60 day period.  However, the certification is subject to audit by the IRS.

The requirements of the self certification are:

  1. the IRS must not have denied a previous waiver request with respect to a rollover of all or part of the distribution to which the contribution relates
  2. the taxpayer must have missed the 60 day deadline because of the taxpayer’s inability to complete a rollover due to one or more of the following reasons:
  • an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates
  • the distribution, having been made in the form of a check, was misplaced and never cashed
  • the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan
  • the taxpayer’s principal residence was severely damaged
  • a member of the taxpayer’s family died
  • the taxpayer or a member of the taxpayer’s family was seriously ill
  • the taxpayer was incarcerated
  • restrictions were imposed by a foreign country
  • a postal error occurred
  • the distribution was made on account of an IRS levy and the proceeds of the levy were returned to the taxpayer
  • the party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information

The contribution must be made to the plan or IRA as soon as practicable after the reason(s) listed in the preceding paragraph no longer prevent the taxpayer from making the contribution.  This requirement is automatically satisfied if the contribution is made within 30 days after the reason(s) no longer prevent the taxpayer from making the contribution.

The Self-Certification is Subject to IRS Audit

The IRS may, in audit, consider whether a taxpayer’s contribution meets the requirements for a waiver.  For example, the IRS may determine that the requirements for a waiver were not met because of a misstatement in the self-certification, the reason(s) claimed for missing the 60 day deadline did not prevent the taxpayer from completing the rollover within 60 days, or the taxpayer failed to make the contribution as soon as practicable after the reason(s) no longer prevented the taxpayer from making the contribution.  If the IRS disallows the waiver, the taxpayer will be subject to tax and penalty on the distribution.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

How IRAs Can Invest in Precious Metals

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IRA Precious MetalsWith the recent volatility in the stock market, some IRA owners may be concerned that their retirement funds are overexposed
to equity investments.  Some IRA owners are looking into precious metal investments.

IRAs Cannot Invest in Collectibles

As a general rule, the IRS throws cold water on the idea.  The IRS will treat an IRA investment in precious metals as a disallowed investment in collectibles.  As such, the transaction will be treated as an IRA distribution and will be subject to income tax and, possibly, the 10% penalty.

The Exception that Swallows the Rule

Fortunately, an exception allows IRAs to investment in certain gold, silver, and platinum coins and in gold, silver, platinum, and palladium bullion that meets purity standards.  For example, gold bars must be at least 99.5% pure and silver bars must be at least 99.9% pure.

Coins or bullion must be held by the IRA trustee or custodian rather than by the IRA owner directly.

The above rules apply equally to traditional IRAs, Roth IRAs, SEPs and SIMPLE-IRAs.

The big practical issue is finding an IRA trustee that is willing to set up a self-directed IRA and facilitate the physical transfer and storage of precious metal assets.  A precious metal IRA trustee will usually charge a one-time account fee (maybe $50), an annual account administrative or maintenance fee for sending account statements and so forth (about $150 or an amount based on asset value), and an annual storage and insurance fee (about $125 to $250 or an amount based on asset value).

Don’t Want to Arrange Storage?

For those who don’t want to deal with the issue of physical storage of precious metal coins or bullion, buying shares of an ETF that tracks the value of a particular precious metal is an option.  The IRS has held that IRAs can buy shares in precious metal ETFs that are classified as grantor investments trusts without any tax problem.

An even more indirect way to invest in precious metals through an IRA is for the IRA to invest in mining companies.  There is absolutely no tax law problem in this type of investment.

Issue When Retirement is Approaching

Traditional IRA owners must consider what happens once they reach age 70½ when minimum required distributions are required.  The IRA account must have sufficient liquidity to pay the required distribution to the IRA owner.  That said, required distributions are not required to be taken from each IRA; all that is required is for a distribution to be taken from any IRA based on the aggregate value of all IRAs.  Therefore, while the value of a precious metal IRA must be taken into account in determining the amount of the required distribution, the actual distribution can come out of an IRA that is invested in liquid assets such as CDs, money market accounts, marketable securities, etc.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

New Rules for IRA Rollovers

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There are two ways to transfer funds from one IRA into another.  You can transfer funds from one IRA trustee DIRECTLY to another IRA trustee in what is known as a trustee-to-trustee transfer.  You can also take a distribution from an IRA and, within 60 days, transfer the distributed amount into another IRA.  The IRS allows taxpayers one IRA rollover in any one year period.

Under old law, the IRS allowed one rollover per IRA in a yearUnder this rule, each IRA could be rolled over once per year.  A Tax Court case in 2014 (Bobrow) changed this rule, and now the IRS allows one IRA rollover in a year, period.  Basically, once you rollover one IRA, you cannot rollover any of your other IRAs during a year.

Example:  Wilma has three IRAs: IRA-A, IRA-B and IRA-C.  She receives a distribution of the balance of IRA-A and deposits it into a new IRA.  Two months later, she receives a distribution of the balance of IRA-B and deposits it into a new IRA.  Under old law, each IRA could be rolled over once per year and both rollovers are therefore tax free.

Under the new rule, the rollover of IRA-A will be tax free.  However, the distribution of IRA-B and transfer into a new IRA will not be tax free because Wilma already rolled over one of her IRAs in the same year.  The distribution of IRA-B will be taxable and could be subject to a 10% penalty.  In addition, contributions into IRAs are generally limited to $5,500 per year.  The transfer into the new IRA could be an excess contribution into an IRA and be subject to an additional 6% penalty.  Not good!

The IRS Issues New Guidance

The IRS recently issued additional guidance on the new rule:

The IRS will apply the new rollover rule to distributions that occur after January 1, 2015.  As a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution.

A rollover from a traditional IRA to a Roth IRA is not subject to the one-rollover-per year limitation.  However, a rollover between an individual’s Roth IRAs would bar a separate rollover within the 1 year period between the individual’s traditional IRAs, and vice versa.

The one-rollover-per-year rule does not apply to a rollover to or from a qualified plan (such as a 401k).

Importantly, the new rule does not apply to trustee-to-trustee transfers.  IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts DIRECTLY from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.   

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

When Distributions from Retirement Accounts Are Required

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Deductible contributions to IRAs and qualified plans are beneficial because they allow taxpayers to reduce their taxable income by the amount of the contributions.  The earnings within the retirement accounts are not subject to tax as long as the earnings remain in the retirement account.  However, the IRS doesn’t allow the party to last forever.  Eventually, taxpayers are subject to the minimum distribution rules that require taxpayers to withdraw funds from retirement plans and pay tax on the distributed amounts.  The rules discussed in this post apply to traditional IRAs and qualified plans.  These rules apply to Roth IRAs only after the owner’s death (i.e., the rules require beneficiaries of inherited Roth IRAs to receive minimum distributions; the original owners of Roth IRAs have no such requirement).

What Do the Minimum Required Distributions Rules Require?

Basically, these rules require the retirement account owner to distribute the balances in retirement accounts over her remaining life expectancy.  These rules require a minimum amount that must be distributed and taxed; the account owner is free to withdraw additional amounts from the retirement accounts.  Each year’s distribution is calculated independently.  No credit may be taken in the current year for prior year distributions that exceeded the required amount.

If an account owner withdraws less than the minimum required distribution, he is subject to a 50% penalty for the shortfall.

Example:  Terry’s minimum required distribution is $10,000.  She only withdraws $6,000.  She is subject to a 50% penalty on the $4,000 shortfall, which amounts to a $2,000 penalty.  Not good.

When Do Minimum Required Distributions Take Effect?

Minimum required distributions for IRAs are required starting April 1 of the year after the taxpayer reaches age 70½.  Generally, for participants of qualified plans, the minimum distribution rules take effect April 1 of the year following the year that the participant retires.  However, when the qualified plan participant owns more than 5% of the employer, the minimum required distributions are required in the year after the participant reaches age 70½ even if the participant isn’t retired.

An account owner reaches age 70½ six months after her 70th birthday.

Example:  John owns an IRA and turns 70 on January 16, 2012.  John therefore turns 70½ on July 16, 2012.  Minimum required distributions are required to be taken by April 1, 2013 (the year after he reaches age 70½).

The distribution required to be taken by April 1, 2013 is for 2012.  The distribution required for 2013 must be taken by December 31, 2013.  Therefore, if John waits until April 1, 2013 to take his first distribution, he will have to take two distributions during 2013 (one for 2012 and one for 2013).  The two distributions can bump John into a higher tax bracket, affect deductions and credits that are sensitive to income, and cause more of his Social Security income to be subject to tax.  John may be better off taking his 2012 distribution during 2012 rather than waiting until April 1, 2013.

How Is the Amount of the Minimum Required Distribution Calculated?

The simple answer is that the IRA trustee is required to report the minimum required distribution to IRA owners, or calculate it for them, by January 31 of the year the distribution is required.  However, it is the account owner’s responsibility to ensure that the calculated amount is correct.

The not so simple answer is that the minimum required distribution is calculated based on the account owner’s age at the end of the distribution year and based on the account balance at the end of the prior year.  Distributions are based on prior year balances because they are more readily determined than current year balances.

Example:  Jean turns 81 in 2012.  Her life expectancy is based on her age during 2012 (age 81).  Her life expectancy is 17.9 years.  She has two IRAs.  At December 31, 2011, IRA-1 has a balance of $100,000 and IRA-2 has a balance of $80,000.  Her minimum required distribution for 2012 for IRA-1 is $5,587 ($100,000 divided by 17.9) and her minimum required distribution for IRA-2 is $4,469 ($80,000 divided by 17.9).  The total required distributions of $10,056 can be withdrawn from one or both accounts.  

Only amounts that an individual owns as the IRA owner may be aggregated.  Amounts in IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent.

For qualified plans, minimum required distributions must be calculated and distributed for each account–aggregation is not allowed for qualified plan accounts.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

How to Avoid the 10% Penalty on Early Retirement Account Distributions

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One issue with investing money in a 401k or IRA is that you generally cannot access the funds until you reach age 59½.  If you withdraw funds from these retirement accounts before that age, you will be subject to a 10% penalty on the amount distributed.  This penalty is in addition to the federal and state income taxes you’ll pay on the distribution.

Fortunately, the IRS will waive the 10% penalty in certain circumstances.  However, even if you meet one of these exceptions, you’ll still have to pay federal and state income taxes on the distribution even if the 10% penalty is waived.

The exceptions are:

  • Distributed funds that are rolled over into an IRA or other qualified plan
  • Distributions upon death or disability of the account owner
  • Distributions that are part of a series of substantially equal periods payments over the life of the account owner or the joint lives of the participant and beneficiary
    • Translated into English: when you have a balance in a retirement account, you can calculate an annuity based on the amount in the account payable over your life expectancy (there are a few ways to calculate this annuity).  These annuity payments are exempt from the 10% penalty.  The annuity has to last through the later of:
      • When the account owner turns 59½
      • Five years after the date annuity payments began
  • Distributions after the participant’s separation from service (i.e., quitting/laid off/fired), provided the separation from service occurred during or after the year the participant reached age 55 (or age 50 for government plans to a retired police officer, firefighter, or emergency medical services provider).
    • This exception applies only to qualified plans, it does NOT apply to IRAs
  • Distributions to a former spouse under a Qualified Domestic Relations Order (QDRO)
    • Pension benefits are often divided during divorce.  To properly comply with pension plan rules, retirement accounts can only be split up pursuant to a QDRO.  Otherwise, the plan will have made a disallowed distribution to a nonparticipant.  This could jeopardize the tax-advantaged status of the pension plan.
    • Once a retirement account has been divided pursuant to a QDRO, the nonparticipant spouse can receive distributions without incurring the 10% penalty.  However, the nonparticipant spouse is still subject to the pension plan rules and isn’t entitled to any type or form of benefits that aren’t available in the plan.
    • IRAs do not require QDROs to be divided in divorce.  The division of the IRA does not cause a distribution; however, amounts withdrawn from the IRAs by either spouse will not be exempt from the 10% penalty if it is a disqualifying distribution.
  • Distributions to the extent of deductible medical expenses
    • Medical expenses are reduced by 7.5% of adjusted gross income to arrive at deductible medical expenses.  Early distributions equal to this amount can be distributed free of penalty.
  • Distributions made on account of the IRS’ levy of retirement accounts

The following exceptions apply only for IRAs:

  • Distributions equal to medical insurance premiums for workers who have received federal or state unemployment benefits for 12 consecutive weeks.  The reduction for 7.5% of adjusted gross income does not apply.
  • Distributions used to pay for qualified higher education expenses (college) for the account owner, owner’s spouse or child/grandchild.
  • Distributions up to $10,000 for first time homebuyers.
    • “First time” doesn’t literally mean “first time.”
    • First time homebuyer is defined as not having an ownership interest in a principal residence during the two year period ending on the date the new home is acquired

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
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