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 firstname.lastname@example.org.
Not 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.
Not 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.
Change 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.
Cassandra 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.
An 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.
Easing 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.
* 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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Suppose you unexpectedly incur a major liability, from a lawsuit or some other unforeseen cause. Will the funds in your IRA be safe from your creditors? Maybe … or maybe not. Here are the rules:
Federal Law Protection
If you own an IRA that you’ve funded yourself with annual IRA contributions, then its complete value very likely will be protected from creditor claims if you are forced into bankruptcy.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2018 protects $1,283,025 of IRA funds from creditors in bankruptcy by exempting that amount from the bankruptcy estate that is within creditors’ reach. This dollar amount is adjusted every three years for inflation and will be re-set next in 2019.
In addition, employer-sponsored SEP IRAs and SIMPLE IRAs are fully protected in bankruptcy. This matches the protection given to other employer-sponsored retirement plans, such as 401(k)s.
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A Health Savings Account is a tax-advantaged medical savings account that helps people pay for qualified out-of-pocket medical expenses. What are the withdrawal rules for HSAs? Are there special considerations that must be taken into account.
1. Withdrawals can be taken at any time. There is no holding period like with Roth IRAs. The entire withdrawal (including any earnings) is tax-free as long as there is a corresponding qualified medical expense. The medical expense must be incurred by either the owner or his or her spouse or dependents. Additionally, the medical expense does not need to occur in the same taxable years as the withdrawal. Instead, the medical expense must simply occur before the withdrawal is made.
What 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.
Don’t Make These Three IRA Investing Mistakes
1. Late Investments
If you waited until the last minute in 2018 to make an IRA contribution for 2017, you missed earning up to 15 months of pre-tax investment returns on your contribution.
Avoid the mistake by making your IRA contribution for 2018 now. This will provide an additional year’s worth of pre-tax investment returns that you will receive pre-tax compounding for potentially decades to come, until they are finally distributed. And you’ll get these extra returns for every year that you make your contribution early, rather than late.
Don’t sweat a mistake! If it later turns out that you are ineligible to make the contribution, you can fix the error without penalty up to October 15th of the year after the year for which the contribution was made. Excess contributions can be withdrawn, and eligible IRA or Roth IRA contributions can be recharacterized as being made to a traditional IRA, and vice versa.