The 5-Year Rules for Roth IRA’s

Roth IRAsWe constantly see questions regarding the distribution rules for Roth IRAs. Personally, I’ve always thought that the failure to understand these rules prevents many from truly appreciating the benefits of these accounts. Traditional IRAs are easy. Unless we are talking about nondeductible contributions, the money is deductible when contributed and taxable upon withdrawal. There’s also the early distribution penalty that could apply depending on the circumstances.

Roth IRAs have a couple of different rules, including two separate 5-year rules. The easiest way to understand these rules is to remember that a Roth IRA consists of two parts: (1) contributions/conversions and (2) investment gains/losses. This is important because contributions can always be withdrawn at any time, tax and penalty free. The earnings, however, are potentially taxable and could be hit with the early distribution penalty.

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Fixing a Missed 60-Day Rollover Deadline

5 Easy steps to fix a missed 60-day rollover deadline with Self-Certification.

IRA Money Roll-overIf I miss the 60-day deadline for completing an IRA rollover, is there any way to save the rollover amount from tax?

Failing to complete a 60-day rollover on time can cause the rollover amount to be taxed as income and perhaps subject to a 10% early withdrawal penalty. However, the deadline may have been missed due to reasons that are not the taxpayer’s fault. For such cases, the IRS has created an easy, low-cost way to fix late rollover errors. Revenue Procedure 2016-47 enables individuals to self-certify that they are eligible for a waiver of the 60-day deadline and complete a late rollover.

1. Double check the status of every rollover you attempt. Don’t assume one has been completed just because you did your part. Mistakes happen. You can’t correct a mistake you don’t know about, and a delay hurts your case with the IRS.

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Be Sure Your IRA Beneficiaries are Designated Beneficiaries

Understanding the difference between IRA & Designated Beneficiaries

Family on BeachIRAs have beneficiaries and “designated beneficiaries,” and it is important to know the difference. If you wish your heirs to have the opportunity to take full advantage of “stretch” IRAs, and to avoid other possibly costly mistakes, be sure your heirs are designated beneficiaries. Here’s the difference and why it matters.

Basics

The beneficiary that inherits an IRA can be an individual or a legal entity such as a charity or an estate.  But a designated beneficiary must be a living person ‘with a pulse’ who is named on the beneficiary form of the IRA.

The major advantages of a designated beneficiary are:

Distributions from inherited IRAs can be stretched over a designated beneficiary’s lifetime, possibly allowing decades of tax-favored investment returns to be earned in the IRA.

The IRA passes directly to a designated beneficiary, escaping complications like probate.

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7 Ways an Excess IRA Contribution Can Happen to You

Excess IRA ContributionsNot all contributions to IRAs belong there. When a contribution is not permitted in an IRA, it is an excess contribution and needs to be fixed. Some excess contributions are easy to understand. Others may be a bit trickier to grasp. Here are 7 ways an excess IRA contribution can happen to you:

1. Blowing Past the Annual Limit

If you contribute more than the annual limit to an IRA for the year that will be an excess contribution. For 2018, the limit is $5,500 for those under age 50 and $6,500 for those who are age 50 or over. This may seem like an easy rule to follow. You may wonder who is go spouse’s taxable compensation to fund your IRA, you may not use a multitude of different income sources including social security, rental income and investment income. You may have a high income, but not be eligible to fund an IRA. If you go ahead anyway, the result is an excess IRA contribution.

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Can You Contribute to a Roth IRA?

Roth IRA contributionNot everyone is eligible to make an annual Roth IRA contribution. We have seen several cases recently of individuals who contributed for many years until they discovered they were not eligible to make any Roth IRA contributions. Here is what you need to know.

First, you must have earned income in order to make a Roth IRA contribution. That means you must perform some type service to have earned income. Passive sources of income generally do not count. As a result, Social Security and payments from any type of retirement plan are not earned income. Rental income is generally not earned income. Investment income and interest income also do not qualify. Disability income will not qualify.

Many people think that if they have after-tax income they can put it into a Roth IRA. This is not true. Gains on the sale of a home or from investments cannot be contributed to an IRA just because they are after-tax funds.

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10 Things to Know Before Moving Your IRA

Moving an IRAChange can be good. Is your IRA ready for a change? Maybe you are looking for a new type of investment or maybe a new IRA custodian. To change it up with your IRA, you may need to move your IRA funds. Here are 10 things you should know before moving an IRA.

1. The best way to move your money from one IRA to another is to do a trustee-to-trustee transfer. Your funds will not be distributed to you, instead they will move directly from your old IRA to the new IRA of your choice. Usually this can be done by requesting a transfer. Your current custodian will then send your IRA funds to your new IRA custodian.

2. A check made payable to a new IRA custodian for the benefit of your IRA but sent to you counts as transfer. Because the check is not made payable to you, you never have receipt of the funds. That is why it is still considered a direct transfer.

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Catlett Earns the CFP® Certification

Cassandra CatlettCassandra Catlett, Financial Planning Coordinator with C&J Wealth Advisors, has earned the designation of CERTIFIED FINANCIAL PLANNER™ (CFP®). The CFP® certification is awarded by the Certified Financial Planner Board of Standards (CFP Board) in accordance with their certification requirements.

The CFP® marks identify those individuals who have met the rigorous experience and ethical requirements of the CFP Board, have successfully completed financial planning coursework, and have passed the CFP® Certification Examination covering the following areas: the financial planning process, risk management, investments, tax planning and management, retirement and employee benefits and estate planning. CFP® professionals agree to meet ongoing continuing education requirements and to uphold CFP Boards’ Code of Ethics and Professional Responsibility, Rules of Conduct and Financial Planning Practice Standards.

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7 Mistakes to Avoid with Inherited IRAs

family inherited IRAAn inherited IRA can be a great thing for the beneficiaries. It is almost like winning the lottery or the Reader’s Digest sweepstakes. You get income for life, or do you? It is all too easy to miss out on this opportunity. The following apply to beneficiaries who are named on the beneficiary form. Beneficiaries who inherit through an estate or trust have different rules.

1.  Relying on the IRA Custodian – The company that is holding your inherited IRA will let you know what the best option is for you, right? Wrong. They are not required to give you any information. In fact, their only obligation is to issue the appropriate tax reporting for transactions that are made on the account, and many times they don’t even get that right.

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The IRA Aggregation Rule

IRA Aggregation RuleEasing RMDs, Complicating Roth Conversions

When you own multiple IRAs and take an IRA distribution, the IRS treats all your non-Roth IRAs as one. This helps you when you reach age 70 ½ and must begin taking annual required minimum distribution (RMDs). Instead of taking a separate RMD from each IRA, you can take the total RMD for all of them from any one of the IRAs, or from across them in any way you wish.

How: The IRS requires you to compute your RMD from each traditional IRA, SEP IRA and SIMPLE IRA, and total them. You can then take the total RMD from any or all of those IRAs in any proportion you wish.

The resulting flexibility in taking RMDs may prove a big benefit.

  • If one IRA holds illiquid investments, such as real estate or large certificates of deposit, the RMD on its balance can be taken from another IRA.
  • If IRAs hold different kinds of investments, you can take RMDs from one over the other to rebalance investment holdings annually, or gradually liquidate one investment while keeping the other intact.
  • If multiple IRAs have different beneficiaries, you can allocate RMDs among them to adjust the amounts that will be left to different beneficiaries as their circumstances and your intentions change.

Knowing this, if you are younger than age 70 1/2, you can plan your IRA investment holdings now to take advantage of this flexibility in the future when RMDs begin.

More Aggregating

* Roth IRAs are aggregated as well, but since they are not subject to RMDs generally this doesn’t matter.

* 403(b) plan accounts are aggregated.

* Inherited IRAs may be aggregated, but only when they were received from the same owner and are being distributed using the same life expectancy. Moreover, Roth and non-Roth IRAs cannot be aggregated.

Aggregation does not apply to employer-sponsored plans such as 401(k) and Keogh plans. Each such plan must have its RMDs calculated separately. And the IRAs of spouses are not aggregated.

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