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.

Continue reading >>>

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.

Continue reading

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.

Continue reading

“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.

Continue reading

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.

Continue reading

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.

Continue reading

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.

Continue reading

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.

Continue reading