How Your Inherited IRA is Taxed

Couple inherited IRA Have you inherited an IRA? What type of IRA is it? Your answer will matter a lot when it comes to your tax bill. Inheriting a traditional IRA will have very different tax consequences than inheriting a Roth IRA.

Consider the following example. Let’s say Tom named his three children as beneficiaries of his three-million-dollar traditional IRA. He never made any nondeductible contributions. When his children take distributions from the traditional inherited IRA those distributions will be fully taxable, but not subject to penalty. What if Tom converted his traditional IRA to a Roth IRA more than five years ago? All distributions from the Roth IRA paid to his children would be tax and penalty free. That is a very different result.

Traditional IRA

If you were named the beneficiary of a traditional IRA, you will most likely face income tax consequences. This is because most funds in traditional IRAs are tax-deferred but not tax-free. Uncle Sam will eventually want his share. Distributions to beneficiaries will be taxable to the beneficiaries in the year taken. You can minimize the tax impact by using the stretch and taking distributions over the longest period of time the rules allow.

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5 Retirement Strategies for Younger Workers

retirement strategies for younger workersNo one can argue that the millennial generation faces big challenges when it comes to savings. Younger workers are dealing with record setting student loan debt, high housing costs and stagnant wage growth. It’s hard to save for retirement when you are worried about the next month’s rent. Here are five retirement strategies for younger workers.

1.  Start Small

If you are just getting a foot in the workplace then there is nothing wrong with starting small. Time is something that you have on your side. Starting early can make all the difference, even with a very small amount of money.

For twenty-somethings, just starting out in the work place and looking to pay the rent, enjoy life and still save for retirement, there are options out there. Even a small salary deferral to a 401(k) or contribution to an IRA is worth considering. It is a small step in the right direction and it gets you into the saving habit early!

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7 Things Your IRA Custodian Won’t Tell You

IRA custodianIt is important to know what your IRA custodian will tell you and what they will not or cannot tell you. The I in IRA stands for individual and many times it is up to the individual to know things or keep track of them.

  1. 60-Day Rollovers – An IRA custodian will not remind you that an individual can only do one 60-day IRA-to-IRA or Roth IRA-to-Roth IRA rollover in a 12-month period. They may not even tell you that you have 60 days to complete a rollover. IRS has ruled that while a custodian might be held liable for erroneous information, they have no obligation to give the individual any information on rollovers. A distribution that is eligible for rollover is one where the check from the IRA or Roth IRA custodian is made payable to the account owner who then has 60 days to recontribute the funds to either the same or a different IRA/Roth IRA. This type of transaction can only be done once in a 12-month period. IRAs and Roth IRAs are aggregated for the once-per-year rule.

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Calculating Social Security Benefits

Calculating Social Security Benefits are a function
of three primary factors.

How Many Years Have You Worked?Calculating Social Security Benefits

The Social Security Administration uses 35 years of earning history

▶ If you worked more than 35 years – it uses the highest 35 years of salary

▶ If you worked less than 35 years – it still uses 35 years of salary (the years you didn’t work count as $0) This rule impacts far more women than men.

Why? Many women took significant time away from work to raise one or more of their children. 

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What’s your IRA worth?

What's your IRA Worth?IRA owners often want to invest in assets other than the usual stocks, bonds, cash, and mutual funds. The tax code does allow for IRAs to invest in most anything except for collectibles, life insurance, and S-corporation stock. So what do those “other assets” make your IRA worth?

If you invest $1,000 in a publicly traded stock it’s simple to determine the value of the investment at any time. You can look it up on your computer, smart phone, or tablet. But investing in real estate, promissory notes, a start-up business, a master limited partnership, an LLC, or any other investment option, it’s not easy to determine its investment value. Typically, the IRA custodian carries the investment on its books as the amount you originally invested. The value doesn’t change from year to year.

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6 Key Tips to Follow As You Juggle Your Own Retirement Planning

Juggling retirement planningContributions for Retirement Planning: If you are working, have an employer plan available, and there is an employer match, make sure you are contributing enough to the plan to reach that maximum match level. Don’t forget to make your own IRA or Roth IRA contributions as well. Your participation in the employer plan has no effect on your ability to make those contributions. It could, however, affect the deductibility of your IRA contributions.

Roth IRA Planning: You really want to contribute to a Roth IRA, but (and it’s a big BUT) you exceed the income limits to qualify. You can utilize a strategy called the Back-Door Roth IRA to move funds into a Roth IRA, where they can grow tax-free into retirement.

Don’t forget about Roth conversions for yourself. You can use a strategy called “filling the brackets.” You convert smaller amounts each year to keep yourself from going into a higher tax bracket. When it comes time to do the tax return, maybe some numbers have changed and you converted too much. No problem! You have until October 15 to recharacterize all or part of your Roth conversion. You “undo” it and do not owe income tax on the amount you recharacterize.

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Five Considerations When Researching Retirement Questions on the Internet

The internet is a great place to do research on most any topic. You have to be cautious that the information you find is current and accurate. Here are five things to consider when researching retirement questions.

 

Check the Dateresearching retirement questions

The tax code and rules change often. Check the date of the article to see when it was written. What was true three years or five years ago may not still be relevant. Often, brackets or income limits are adjusted for inflation each year. Those numbers need to be checked to see if they are the most recent limits.

 

Check out the Website

Is the website reputable? Who controls the content on the website? Are they creditable? Are they unbiased or are they selling a product or strategy? Do a search on the company to see if you come up with reviews. Look for unbiased information.

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Is a Roth conversion right for you?

Roth ConversionAre you considering a Roth conversion, but you’re unsure whether or not it’s the right move for you? A Roth IRA provides a great way to help reduce the taxes you’ll pay during retirement, but it can also increase your income during the year that you convert, which could bump you into a higher tax bracket.

When you convert funds to a Roth IRA, your pre-tax funds will be included in your income in the year of the conversion. This will increase your income for the year of the conversion, which may impact deductions, credits, exemptions, phase-outs AMT (alternative minimum tax), the taxation of your Social Security benefits and more.

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Once-Per-Year IRA Rollover Scenarios

What’s Ok and What’s NOT Ok  with an IRA Rollover

IRA Rollover - ok or not okThe once-per-year IRA rollover rule sounds easy to understand. You may only do one IRA-to-IRA (or Roth IRA-to-Roth IRA rollover) per year (365 days). However, there are many ways it can go wrong. Consider the following two scenarios. One involves multiple distributions and the other involves multiple rollover deposits. One is ok and the other is not.

One Distribution and Multiple Rollover Deposits – That’s Ok!

If you take one distribution from your IRA, you may split the funds and roll them over to multiple IRAs. The rollovers could be done on different days and that would not be a problem. This works for purposes of the once-per-year rollover rule because only one distribution is received even though there is more than one rollover deposit.

Example: Sophie receives a $100,000 distribution from her IRA on June 15. On June 20, Sophie rolls over $75,000 to her IRA. On June 25, she decides to roll over the remaining $25,000 to another IRA. This is not a violation of the once-per year rollover rule because Sophie received only one distribution even though she did two rollovers on two different dates.

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Six Options for Retirement Plan Funds

Retirement plan fundsKnow all options available for your company retirement plan funds.

Accepting a new job or transitioning into retirement can be both exciting and overwhelming. Figuring out how to handle your current employer’s retirement plan funds may not be at the top of your priority list, but with several options to consider, it’s crucial that you take the time to think through your next financial move.

6 Options for a distribution from a company plan

  1. Rollover to an IRA
  2. Convert to a Roth IRA
  3. Direct Transfer to an Inherited IRA or Inherited Roth IRA (Only for employer plan beneficiaries)
  4. Lump sum distribution
  5. Leave it in the current plan
  6. Convert from plan assets to a plan Roth account (in-plan Roth conversion)

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