Avoiding 72(t) Mistakes in 5 Easy Steps

72(t) paymentsWhat are 72(t) payments?

72(t) payments are a series of substantially equal periodic payments made from an IRA that can be used to avoid the 10% penalty for early distributions. Payments must last the greater of 5 years or until the IRA owner reaches age 59½. When using a 72(t) schedule, a number of changes are prohibited. If these changes occur, the 10% penalty (and interest) is applied retroactively to all distributions made prior to age 59½.

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Use Your Tax Refund to Fund an IRA

What does the basic process entail?

Tax refundAn income tax refund can be directly deposited to an IRA up to the annual contribution limit. The contribution limit is $5,500 ($6,500 for individuals age 50 or older) for 2016 and 2017. It can also be split among multiple accounts.

— Determine the tax refund amount.  Once you know how big your refund will be, decide how much, if any, you would like to contribute to your IRA or Roth IRA up to the maximum annual contribution allowed.

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“See-Through” Trusts

See Through TrustsClients often ask if they should leave their IRA to their trust. This can be a complicated question. Trusts can be complex and retirement accounts are not like other assets. IRAs are subject to a very rigid set of rules under the tax code. Seek help from an advisor that is very familiar with all the rules in this area, especially the requirements for a trust to be a qualified see-through trust. Meeting these requirements is the only way the valuable “stretch” advantage can be used by trust beneficiaries.

Trusts Offer Control

Naming a trust as an IRA beneficiary requires extra steps that will cost clients both time and money. An attorney will need to be consulted to draft the trust. Clients will want to be sure that the attorney they choose has extensive knowledge of the very specific area of the law where retirement plans and trusts intersect.

For some, this extra effort will be worth it. Naming a trust as the beneficiary of an IRA gives the IRA owner a high level of control over his or her retirement assets after death. This is why a trust can be a good strategy in second marriage situations, when young children are involved, or when intended beneficiaries cannot manage their finances well.

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Avoiding 60-Day Rollover Mistakes

What is a 60-day rollover?60-Day Rollover money

A 60-day rollover is the distribution of funds from a qualifying retirement account payable to the account owner who then has 60 days to redeposit the funds into another qualifying retirement account.

1.  Do trustee-to-trustee transfers instead.  The best way to avoid making a 60-day rollover mistake is to avoid 60-day rollovers!  Transfer your funds directly to another retirement account.  Not only does a direct transfer avoid any 60-day time problems, but if the rollover is coming from a 401(k) or other qualified plan, it will also avoid the mandatory 20% withholding requirement.

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Avoiding Charitable IRA Beneficiary Mistakes in 5 Easy Steps

Can IRAs be used to benefit a charity?

Avoiding Charitable IRA Beneficiary MistakesIRAs can be a great source of funds to provide a benefit for a favorite charity, but using these funds can create several traps that must be avoided to maximize benefits to both the charity and other IRA beneficiaries.

1. Name the charity directly on your beneficiary form. The money will go directly to the charity, avoiding both the time and expense of probate. Additionally, the distribution to the charity will not be considered income to the estate of the deceased IRA owner.

2.  Set up separate accounts. Consider transferring the portion you intend to leave to charity into a separate IRA account. If other beneficiaries inherit the same IRA as a charity and the charity’s portion is not “cashed out” or split within the IRS prescribed time frames, the stretch IRA for the living beneficiaries will be lost.

3. Reverse your bequests. If you have made provisions for certain charities under your will and also have retirement plans, an effective tax strategy would be to reverse the bequests with non-retirement assets. This way, the charity receives the same amount that you were going to leave them in your will, but your heirs will end up with more, because the money they will inherit will not be subject to income tax, as the retirement plan would be.

4. Don’t convert assets you plan to leave to a charity. Many charitable organizations and religious groups are structured tax-exempt organizations. When an IRA is left to one of these charities, the charity does not have to pay income tax on the distribution as other beneficiaries would. As a result, if you intend to leave your IRA to charity, converting it to a Roth IRA is generally not a wise move. Why pay income tax on the conversion when the money will be going to the charity tax free anyway?

5. Beware of naming a charity as a trust beneficiary. A charity is known as a “non-designated beneficiary,” because it does not have a life expectancy. In general, trusts are also non-designated beneficiaries. Certain trusts, known as see-through (or look-through) trusts allow for post-death distributions to be stretched based on the trust beneficiary with the shortest remaining life expectancy. Since a charity has no life expectancy, if it is named as a beneficiary of a trust that is also inheriting an IRA, it can eliminate the stretch for the remaining trust beneficiaries.

Calculating the Pro-Rata Rule in 5 Easy Steps

What is the pro-rata rule?

Calculating the Pro-Rata Rule The pro-rata rule is the formula used to determine how much of a distribution is taxable when the account owner holds both after-tax and pre-tax dollars in their IRA(s). For the purposes of the pro-rata rule, the IRS looks at all your SEP, SIMPLE, and Traditional IRAs as if they were one. Even if you have been making after-tax contributions to a separate account for years, and there have been no earnings, you cannot isolate your after-tax amounts and must take your other IRAs into consideration.

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Avoiding the 10% IRA Penalty

What is the 10% IRA penalty?

Tax PenaltyA 10% IRA early distribution penalty applies to taxable distributions made before age 59 ½.  Distributions made after age 59 ½ are not subject to the 10% early distribution penalty.

Exceptions: Exceptions apply for withdrawals from company retirement plans for individuals who separate from service at age 55 or older, and for withdrawals from governmental defined contribution and defined benefit plans for public safety officials who separate from service at age 50 or older. For SIMPLE IRAs, the penalty is 25% for the first two years in the plan, then reverts back to the 10% penalty in following years.

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5 Points to Know About Qualified Charitable Distributions

You Must Be Age 70 ½

Photo by photostock familyIRA owners who are age 70 ½ and over are eligible to do a Qualifiied Charitable Distribution (QCD). This is more complicated than it might sound. A QCD is only allowed if the distribution is made on or after the date you actually attain age 70 ½. It is not sufficient that you will attain that age later in the year.

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Top IRA Rulings of 2015

Here are two of last year’s top rulings

Top IRA Rulings of 20152015 produced numerous new laws, IRS actions, and court decisions that affected IRAs and other retirement accounts. Here are two of the top rulings of 2015: The New Age 50 Exception & Social Security Strategies Eliminated

Distributions from retirement plans before age 59½ typically trigger a 10% penalty, but there are some exceptions to that age requirement. For instance, participants in employer-sponsored qualified plans avoid this penalty if they separate from service during or after the year in which they reach age 55.

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5 Things You Can NOT Do With Your IRA

Article Credits: Copyright Ed Slott and Company 2014 | By Beverly DeVeny, IRA Technical Expert

IRA Nest EggThe “I” in IRA stands for individual. Here are 5 things you 100% can never do with your IRA.

1.  If you are married, you cannot treat the IRA as a joint asset – even if you live in a community property state. Contributions must be made on an individual basis. Spouses cannot add their contribution amounts together and then allocate the contribution between their respective IRAs.

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