Insights: The C&J Blog

We offer clients educational insights that help them make sense of the current market & economic environment.  Each monthly investment letter is written by our investment analyst and contains candid insight and perspective that facilitates a clearer and deeper understanding of our views.  Alongside our monthly investment letters, we also maintain a blog that touches on a variety of topics relating to financial planning and investing.  If there is a question or topic on your mind that you’d like for us to discuss in a future investment letter, feel free to let us know at ssmith@cjwealth.com.

A Not So Simple Discussion on SIMPLE IRAs

Small Business IRAs

SIMPLE IRAs are popular retirement vehicles for small businesses. They are relatively cheap to adopt and are easy to understand and administer. However, that doesn’t mean problems do not arise. Routinely, we see issues involving ineligible plan sponsors, missed contributions, and late deposits. If you are thinking about adopting a SIMPLE IRA for your small business, it is essential that you understand the rules.

Establishing a SIMPLE IRA is simple enough. You execute a written agreement with a custodian that can either be a prototype plan, a Form 5304-SIMPLE, or a Form 5305-SIMPLE. You could also use an individually designed plan that meets the tax code requirements, but that is rare. Each eligible employee should receive a Summary Plan Description that not only complies with the IRS rules, but meets the Department of Labor standards under the Employee Retirement Income Security Act.

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Combining Inherited IRAs and their RMDs

combine IRAsIRA owners can clearly combine the accounts they own and they can combine the required minimum distributions (RMDs) from multiple IRAs and take them from any one or combination of their IRAs. The rules for combining Inherited IRAs and RMDs are more complex.

An IRA owner cannot combine IRAs they own with IRAs that they have inherited, unless the inherited IRA came from their current spouse. IRAs that are inherited from the same person can be combined, as long as the RMD calculation is done in the manner for all of the inherited IRA accounts. Generally, this is easy. If Dad had two IRA accounts and you inherit half of each of those accounts because you are named on the beneficiary forms for those accounts, then you can combine them. If you keep the accounts separate, you can calculate the RMD on each account and then combine it and take all or any part of the RMD from either account as long as you take the full RMD.

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Tips on Claiming Social Security

Claiming Social SecurityWhen it’s time to consider signing up for Social Security, turn to your financial advisor for advice and recommendations. Social Security is challenging with numerous complex rules that are confusing. Recent changes have added to the difficulty in how to correctly interpret the law’s meanings and how choices can impact you long-term. Often, those who are relying on Social Security Administration (SSA) assistance, find their recommendations are not the best choices for their unique situation. Read on for  tips on claiming Social Security.

The Social Security Administration has received criticism. The U.S. Senate Special Committee on Aging urged the SSA to improve the recommendations it provides to individuals. Their concern was based on a U.S. Government Accountability Office (GAO) report that emphasized inconsistencies in the recommendations that the SSA and its claims personnel were giving to people applying for benefits.

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IRA Recharacterization Deadline is October 15

October 15 is the Deadline to Recharacterize 2017 IRA Contributions and Conversions

IRA RecharacterizationIRA recharacterization is a tax-free transfer of funds from one kind of IRA to another. If you converted a traditional IRA to a Roth IRA and now are reconsidering, recharacterization allows you to undo the transaction and move the funds back to a traditional IRA. You can also recharacterize a tax-year traditional IRA contribution from a traditional IRA to a Roth IRA or vice versa. The Tax Cuts and Jobs Act does away with recharacterization for conversions done in 2018 and later, but the IRS has made it clear that 2017 conversions can still be recharacterized. Don’t miss out on this last chance to take advantage of one of the rare opportunities for a “do-over” in the tax code.

You may consider recharacterizing your 2017 conversion for many reasons. You might be having second thoughts about the tax bill. Tax reform has resulted in lower tax rates in 2018 for many taxpayers. Maybe you converted in 2017 when your rates were higher and now you would like a “do-over” at lower 2018 rates. You have the option of recharacterizing your 2017 conversion.

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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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