DEADLINE FOR MAKING 2020 IRA CONTRIBUTIONS EXTENDED TO MAY 17

The IRS has clarified the recent extension of the filing, and paying, deadline from April 15 to May 17.

In “IRS extends additional tax deadlines for individuals to May 17”, which explains IRS Notice 2021-21, we are told -

“In extending the deadline to file Form 1040 series returns to May 17, the IRS is automatically postponing to the same date the time for individuals to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs).”

TTFN

FROM THE EMAIL BOX

A married couple who is a few months from retirement, long-time friends and 1040 clients, recently met with a new Financial Advisor and emailed me for my advice on issues that had been discussed.  Here are the issues they identified and my responses.

 

1) Donor Advised Funds – Earmark an amount for immediate income tax deduction and donate to our usual 501C3 organizations with payments out of this fund.

 

Answer:  This is a good tax planning option when you are unable to itemize but relatively “close to the edge”.  It will allow you to perhaps itemize every other year.  Remember that the tax benefit of any charitable contribution is based on the extent your total itemized deductions exceeds the Standard Deduction amount for your filing status.  See here for an explanation of Donor Advised Funds -.  FYI, you can also contribute stock to a Donor Advised Fund (see answer to Question #2).

 

2) Donating Stock – Take current stock holdings and donate to charitable organizations for a tax write off.

 

Answer: This is also a good option, providing a tax benefit if you can itemize.  However, even if you cannot itemize this option does save capital gains taxes.  See here for an explanation of the rules for donating stock to a charity

 

3) IRA Beneficiary – We were told that money passed to beneficiary from an IRA is now made taxed over 10 years.

 

Answer:  Thanks to the SECURE Act, starting in 2020, for IRAs passing to a “non-spouse” beneficiary, the entire amount of the account balance must be distributed to the beneficiary (or beneficiaries) by the end of the 10^th year following the year after the account owner’s passing.  There are 3 exceptions –

 

* the beneficiary is a minor child of the account owner,

* the beneficiary is not more than 10 years younger than the account owner, or

* the beneficiary is disabled or chronically ill as defined by the Internal Revenue Code

 

See the topic “Definition of Disabled or Chronically Ill” here.

 

4) ROTH IRA – Our Financial Advisor suggested we begin converting IRA money from our current Standard IRA accounts into Roth IRAs. 

 

Answer:  The amount you convert will be taxed in the year of the conversion, except for any recapture of “basis” (non-deductible contributions).  Converting a portion of traditional IRAs to a ROTH annually over a period of years is a good idea, with the goal of keeping the annual cost of the conversion within a low marginal tax bracket.

 

5) 401(k) Beneficiary – The Advisor also suggested listing beneficiaries on our 401(k) accounts because this has nothing to do with the will and takes the process outside of probate.

 

Answer:  The named beneficiary or beneficiaries on a 401(k), IRA, or other retirement savings account automatically gets the money in the account directly from the account trustee on your passing.  It has nothing to do with your will or probate.  It is a good idea to name beneficiaries on your retirement savings accounts, and review the beneficiary designations every few years. 

 

6) Savings Bonds – We recently reviewed our inventory of US Savings Bonds and the interest was quite high.  We would appreciate your thoughts on liquidating bonds based on most recent purchases vs older bond purchases to reduce taxes.

 

Answer:  The first consideration in choosing which bonds to cash-in first is whether or not the bonds are still accruing interest.  As with the ROTH conversions, the liquidation of bonds still earning interest can be done over a period of years, cashing in older bonds first and keeping the interest reported each year within a low marginal tax bracket.  FYI, savings bond interest is never taxed on the state return. 

 

TTFN

A NEW ADDITION TO MY DOLLAR STORE!

I have made a new addition to my DOLLAR STORE - “Everybody Ought To Have An IRA”.

In his classic Broadway musical, A FUNNY THING HAPPENED etc. Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I don’t disagree.  I also believe that everybody ought to have an IRA.

This report is basically almost everything you always wanted to know about contributing to an IRA account but didn’t know who to ask.  It discusses the basics of an IRA, including the changes made by the SECURE Act, the traditional IRA and the ROTH IRA, the “backdoor” IRA, and opening a ROTH IRA for your child.  And it includes a worksheet to keep track of your IRA contributions.

As with everything else in my DOLLAR store the cost is only $1.00, sent as a pdf email attachment.  A print version sent via postal mail is also available for $2.00.

Send your check or money order for $1.00 or $2.00, payable to TAXES AND ACCOUNTING, INC, and your email or postal address to –

TAXES AND ACCOUNTING, INC

IRA REPORT

POST OFFICE BOX A

HAWLEY PA 18428

TTFN

EVERYBODY OUGHT TO HAVE AN IRA

In his classic Broadway musical comedy A FUNNY THING HAPPENED ON THE WAY TO THE FORUM. Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I agree.

I also believe that everybody ought to have an IRA.

Everybody with earned income, regardless of age, level of income or wealth or coverage under an employer plan, should have an IRA as a form of secured savings.  This is because of the multiple benefits of an IRA account – the tax deferred, or tax free, accumulation of income, the possible tax deduction it can provide, and the fact that IRAs are, in most cases, protected from general creditors to whom you may owe outstanding debts and during bankruptcy procedures. 

You should, of course, first take as much advantage as possible within your budget of your employer’s 401(k), 403(b), 457, or whatever retirement plan, hopefully to the maximum annual allowable contribution. 

There are two types of IRAs – the “traditional” IRA and the ROTH IRA.  If you can have a ROTH IRA you should have a ROTH IRA and use it as your current savings account.

The maximum amount you can contribute to a ROTH IRA, a traditional IRA or a combination of ROTH and traditional accounts for 2018 is $5,500.   If you are age 50 or older you can contribute an additional $1,000.  A non-working spouse can open and contribute to an IRA, up to the maximum, as long as the other spouse has earned income. The combined contributions of working and non-working spouses are limited to the working spouse’s earned income.

Contributions to a ROTH IRA are never deductible on your federal or state income tax returns.  But earnings on money held in a ROTH IRA account can eventually be totally tax free to both you and your beneficiaries.

Here is what you need to know about a ROTH IRA -

* You can contribute to a Roth IRA at any age as long as you have earned income from a job or self-employment.   You do not have to stop making contributions at age 70½ if you still have earned income.

* The amount of your allowable contribution to a ROTH IRA is phased out and eventually eliminated based on your Adjusted Gross Income (AGI).  The AGI phase-out range for taxpayers making contributions to a ROTH IRA for 2018 is -

$120,000 - $135,000 = Single and Head of Household

$189,000 - $199,000 = Married Filing Joint and Qualifying Widow(er)

$0 - $10,000 = Married Filing Separate

* You can withdraw your contributions at any time without taxes or penalty.  All withdrawals are considered to come from contributions first.

* You must hold the Roth account for at least five years and be at least 59½ before you can withdraw earnings tax-free and penalty-free.  The 5-year period begins on the first day you make your first ROTH contribution.

* You never have to take any withdrawals from a ROTH IRA in your lifetime.  There are no annual required minimum distributions beginning at age 70½.

As long as you never touch the accumulated earnings on your ROTH IRA investment, and withdraw only your contributions, you can take money from this account at any time over the years without any tax cost.  And your accumulated earnings will grow to a nice retirement nest egg, or legacy for your beneficiaries, if invested wisely.

You have contributed $10,000 to a ROTH IRA, which has accumulated earnings of $2,000.  You need $5,000, or as much as $10,000, to pay for an extraordinary medical bill, or for needed home repairs, or to pay for your child’s college education.  You can take the $5,000 - $10,000 from your ROTH IRA account without any tax consequences.

Contributions to a “traditional” IRA may provide a current tax deduction.  If all of your traditional IRA contributions have been fully deductible then all subsequent withdrawals are fully taxable[R1] .  The amount you can deduct may be phased-out based on your “Modified” Adjusted Gross Income (MAGI) if you are an active participant in an employer-sponsored retirement plan such as a 401(k), a 403(b) or an SEP.    

Your “Modified” AGI for purposes of the deduction phase-out begins with “regular” AGI and adds back the-

• foreign income and housing exclusions and deduction,

• savings bond interest exclusion for higher education costs,

• adoption assistance benefits exclusion, and

• deduction for student loan interest.

For 2018, the amount of a contribution to a traditional IRA that can be claimed as a deduction on the tax return of a taxpayer who is an active participant in an employer retirement plan is phased out if Adjusted Gross Income (AGI) is -

• $ 63,000 - $73,000 for Single and Head of Household

• $101,000 - $121,000 for Married Filing Joint and Qualifying Widow(er)

• $0 - $10,000 for Married Filing Separate

The deduction on a joint return for a spouse that is not an active participant in an employer plan, but who is married to one who is, phases out at AGI of $189,000 to $199,000.  

If your deduction is limited or totally phased out you can still contribute the maximum amount to an IRA account.  Part of the contribution will be “non-deductible”.  Non-deductible contributions create a “basis” in your IRA investments and part of your future withdrawals will be partially tax free as a “return of basis”.

You can also use IRAs to save for education, as well as excessive medical expenses and buying a home.  Exclusions to the premature withdrawal penalty exist for these types of expenses.

As far as reporting the activity within an IRA account – as I explained in a 2009 post – "What Happens In An IRA Stays In The IRA".   

Younger employees just starting out should definitely opt for the ROTH IRA.  Here are two suggestions for funding IRA contributions if you are starting your first full-time job –

(1) If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your contribution. 

(2) Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Beginning with the first week of January put $10, $20, or $50 in this “bank” each week.  On January 2nd of the following year take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for that tax year.  Continue this practice for subsequent years.

Here is another good idea – If your son or daughter has a summer or after-school job you should consider opening up a ROTH IRA account for him or her.  Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to the $5,500 maximum. If your son earns $2,400 for the summer you can contribute $2,400 to a ROTH IRA for him. If he earns $6,000 you can contribute $5,500.

There is nothing in the Tax Code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.  You can use your own money to fund the IRA contribution and let your child keep his earnings.

You can use a ROTH IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a ROTH IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a ROTH, match it and put in another $2,500 (assuming her total earnings for the year is at least $5,000).

If you put the maximum into a ROTH each year for your 16-year-old from 2018 through 2023, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.  One caveat - there exists a potential problem with opening an IRA account for a child. Once the child reaches the “age of majority,” usually 18, he or she will have full access to all the funds and can “take the money and run.”

One last thing - the earlier in the year you contribute to your, or your children's, ROTH IRA, the more money you will accumulate tax-free at retirement.  So, if not already done, make your 2018 ROTH IRA contribution today, and make your 2019 contribution on January 2^nd of 2019.

If you have questions about the Act will affect your specific situation I suggest you consult your, or a, tax professional.  You can begin your search for a tax professional at "Find A Tax Professional".

TTFN

BASED ON A TRUE STORY

This actually happened on a 2017 Form 1040 I prepared this past tax filing season.

Here’s the story.

The client taxpayers, a married couple, received an advance premium credit for 2017 that was applied to reduce the monthly health insurance premium bill for a policy purchased via the Obamacare “Marketplace”. 

Based on the initial calculation of the 2017 Adjusted Gross Income the taxpayers received $1,600+ in excess advance premium credit.  The household MAGI was exactly 200% of the appropriate poverty level amount, so the maximum payback of excess credit the taxpayers owed to the IRA was $1,500.

I advised the taxpayers to make a $1,000 contribution to a traditional IRA for 2017 before April 17th, which would be fully deductible on their 2017 Form 1040.

The $1,000 deductible contribution saved the taxpayers $100 in federal income tax (their net taxable income had put them in the 10% bracket).

The $1,000 deductible contribution reduced the 2017 household MAGI so that it was now 194% of the poverty level, making the maximum payback of the advance premium credit $600.

The $1,000 IRA contribution was eligible for a 50% Retirement Savings Credit of $500.

A $1,000 deductible contribution to an IRA saved the taxpayers $1,500!  

They saved $100 in federal income tax due to reduced net taxable income, reduced the payback of excess advance premium credit by $900 ($1,500 - $600) and received a $500 credit toward the $600 credit payback.  $100 + $900 + $500 = $1,500.

The $1,000 IRA contribution effectively cost them nothing to make and provided an immediate 50% return on investment.

The moral of the story - it can really pay to use an experienced and knowledgeable independent tax professional to prepare your tax returns.

TTFN

A LITTLE THIS-A, A LITTLE THAT-A

+ I owe an apology to McDonald’s, Burger King, Wendy’s, Taco Bell, etc. for using them in a description of Henry and Richard and other commercial tax return mills of that ilk.

I have always said that H+R et al “charge gourmet restaurant prices for fast food service”.  Basically, I am observing that Henry and Richard, and the others, ain’t cheap, or even reasonable, and the fees are certainly not commensurate with the service.  But comparing the service at tax preparation chains to that received at fast food chains is not fair – nor true.

Prior to being diagnosed with diabetes I was a frequent patron of McDonald’s, Burger King and Wendy’s.  For the most part, I found the service provided by these chains to be most definitely “appropriate”.  And, again for the most part, I most certainly received value for my money. 

Those who use tax preparation chains will NOT be able to say the same thing when describing their experience.

And I must point out that nobody at McDonalds, Burger King or Wendy’s tried to force me to buy fries or onion rings that I neither wanted nor needed.

So, more appropriately, H&R et al “charge gourmet restaurant prices for service that is inferior to the service you get at a fast food chain.”

Of course, to be fair, I must always include in my assessment of tax preparation chains the following statement –

It may actually be possible that the best tax preparer, at the best price, for your particular situation is an H+R Block, or other chain, employee.  But this is only because of the individual education, experience, ability, temperament, and other factors that are specific to that individual preparer or perhaps that unique and specific franchisee.

Hey, it is better to be safe than sorry.  Bottom line - don’t use Henry and Richard or another chain to have your 2017 income tax returns prepared.  If you are looking to find a tax pro you can start here.

+ Hey fellow tax pros – did you see Monday’s post at THE TAX PROFESSIONAL?

+ This past Sunday was the first payroll I processed for a business client using the new tax withholding tables that were revised to reflect the changes of the GOP Tax Act.  I was curious to see if employees were actually getting any more money in their paychecks.

The gross payroll – total wages paid - for 20 employees for the 2-week pay period was up about $3,600 from the January 8^th payroll, but the federal income tax withholding was $1,050 less.  So, there actually was more money in the paychecks.

However, the pay checks of the two highest paid employees, including the millionaire owner of the business, with the same gross income for the two payroll periods being compared, were increased by over $750 due to reduced federal income tax withholding.  Obviously, the increases in the paychecks of the lower paid employees were small.

I do worry, being cynical, that the withholding tables are a bit too “generous” to try to prove that serial liar Donald T Rump was telling the truth for once when he said workers would see increased paychecks thanks to the Act.  I expect that, while individual paychecks will be slightly higher, 2018 tax return refunds may be lower, or balances due higher, especially for employees who live in New Jersey, as the employees of the above client do.

I am not alone in my concerns.  In “Democrats raise concerns about IRS withholding tables” at TAXPRO TODAY Michael Cohn tells us (highlights are mine) -

“The ranking Democrats on the tax-writing House Ways and Means Committee and Senate Finance Committee are worried the Internal Revenue Service might succumb to political pressure by releasing withholding tables this year that cause employers to withhold too little in federal taxes from their employees’ paychecks to make it appear the tax cuts are larger than they really are, with the result that taxpayers will end up owing more money on their taxes next year.”

+ Speaking of business clients and the GOP Tax Act, also this past week-end a business client, a family owned “regular” (non-S) corporation with 2 shareholders that usually has net taxable income of under $50,000, asked if its tax will be reduced under the new tax law.

When the lower corporate tax rate was originally discussed I had thought the entire rate scale would be reduced. I think I had read somewhere that those currently paying 15%, based on net taxable income, would pay 8% under “tax reform”. However, everything I have read says the income tax rate in the Act is a flat 21% tax rate on net taxable income for all “regular” (non-S) corporations.

So smaller closely held corporations, with net taxable income of $50,000 or less, who previously paid 15% in federal income tax will actually see a 6% tax increase, and, because the sliding scale of tax rates is gone, those with $75,000 or less in taxable income will see a 2+% increase.

Once again true small business gets screwed!

+ FYI - some guidance from the IRS on one of the changes in the GOP Tax Act.

The weekday daily “Checkpoint Newsstand” email newsletter tells us what it learned from the “Frequently Asked Questions” (FAQs) posted to the IRS website -

“The FAQs clarify that a Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by Oct. 15, 2018. A Roth IRA conversion made on or after Jan. 1, 2018, cannot be recharacterized.”

+ The last word - As with any post, your appropriate comments, and not “praise” that is really only trying to promote your site or product, are always welcomed.  I also want to know if you find any tax law inaccuracies, or typos or other clerical FUs, in the post.

TTFN

IF YOU CAN HAVE A ROTH IRA YOU SHOULD HAVE A ROTH IRA

If you are able to make contributions to a ROTH IRA you should use a ROTH IRA account as your current savings account.

Contributions to a ROTH IRA are never deductible on your federal or state income tax returns.  But earnings on money held in a ROTH IRA account can eventually be totally tax free to both you and your beneficiaries.

Here is what you need to know about a ROTH IRA -

* The maximum amount you can contribute to a ROTH IRA, a traditional IRA or a combination of ROTH and IRA accounts for 2018 is $5,500.   If you are age 50 or older you can contribute an additional $1,000.

* You can contribute to a Roth IRA at any age as long as you have earned income from a job or from self-employment.   You do not have to stop making contributions at age 70½ if you still have earned income.

* The amount of your allowable contribution to a ROTH IRA is phased out and eventually eliminated based on your Adjusted Gross Income (AGI).  The AGI phase-out range for taxpayers making contributions to a ROTH IRA for 2018 is -

$120,000 - $135,000 = Single and Head of Household

$189,000 - $199,000 = Married Filing Joint and Qualifying Widow(er)

$0 - $10,000 = Married Filing Separate

* You can withdraw your contributions at any time without taxes or penalty.  All withdrawals are considered to come from contributions first. 

* You must hold the Roth account for at least five years and be at least 59½ before you can withdraw earnings tax-free and penalty-free.  The 5-year period begins on the first day you make your first ROTH contribution.

* You never have to take any withdrawals from a ROTH IRA in your lifetime.  There are no annual required minimum distributions beginning at age 70½.

As long as you never touch the accumulated earnings on your ROTH IRA investment, and withdraw only your contributions, you can take money from this account at any time over the years without any tax cost.  And your accumulated earnings will grow to a nice retirement nest egg, or legacy for your beneficiaries, if invested wisely.

You have contributed $10,000 to a ROTH IRA over the past couple of years, which has accumulated earnings of $2,000.  You need $5,000, or as much as $10,000, to pay for an extraordinary medical bill, or for needed home repairs, or to pay for your child’s college education.  You can take the $5,000 - $10,000 from your ROTH IRA account without any tax consequences.

Here is another good idea – If your son or daughter has a summer job you should consider opening up a Roth IRA account for him or her.

To qualify for an IRA your child must have earned income — wages or net earnings from self-employment.  Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to the $5,500 maximum. If your son earns $2,400 for the summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,500 you can contribute $5,500.

There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.  You can use your own money to fund the IRA contribution and let your child keep his earnings.

You can use a Roth IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a Roth IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a Roth, match it and put in another $2,500.

If you put the maximum into a Roth each year for your 16-year-old from 2018 through 2023, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.

One caveat - there exists a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”

One last thing - the earlier in the year you contribute to your, or your children's, ROTH IRA, the more money you will accumulate tax-free at retirement.  So make your 2017 (if not already done) and 2018 ROTH IRA contribution today.

TTFN

DON'T TOUCH THAT 401(K)!

Over the years I have seen many clients who have, without first consulting me, taken money from their 401(k) plans, while still employed, to assist in paying for excessive medical expenses, college tuition, or a downpayment on a home.

This is a very expensive way to get money.  A loan shark might be cheaper!

Money taken from a 401(k) plan will be fully taxed on a federal and state level and, if you are under age 59 ½ when you take the money, as has been the case in most of what I have seen among clients, you will also be subject to the 10% premature withdrawal penalty.

In most cases 40% or more of the amount taken from the account will be eaten up by federal and state taxes and penalties!  So if you take $10,000 from your 401(k) you will end up in pocket with less than $6,000.

It is similar with premature withdrawals from a traditional IRA, but with an IRA you might have a “basis” in your traditional IRA investment based on non-deductible contributions so the entire amount of the withdrawal may not be taxable.  With a ROTH IRA you can withdraw your contributions at any time without tax or penalty.

There are a limited number of exceptions that could allow you to avoid the 10% premature withdrawal penalty – but you would still need to pay federal and state income tax on the withdrawal.  Some exceptions apply to withdrawals from both 401(k) plans and traditional IRA accounts, and some apply only to premature IRA distributions.

You can avoid the 10% penalty if you take money out of a 401(k) plan, or a traditional IRA, “to the extent unreimbursed medical expenses exceed 10% (or 7½% if the lower threshold is reinstated) of AGI”.  So you can avoid the penalty on the amount of medical expenses that would be deductible on Schedule A.

If you take $10,000 from your 401(k) to pay for an excessive medical bill not fully covered by insurance (this would NOT include elective cosmetic surgery) and when you sit down to prepare your tax return you determine that your total allowable medical expenses for the year are $20,000 and your AGI is $110,000, you can avoid the 10% penalty on $9,000 of the withdrawal ($20,000 – $11,000 = $9,000).  You would still pay $100 in premature withdrawal penalty.

But in most cases of client 401(k) distributions the money has been used either to pay for college or for a downpayment on a house.  Money taken directly from a 401(k) plan for these purposes will be subject to the full 10% penalty.

However money taken from an IRA account and used for either of these two purposes is exempt from the penalty.  In the case of a downpayment on a home, the exemption is limited to $10,000 withdrawn and only applies for “first-time” home purchases (no home ownership in prior two years). 

According to the IRS, expenses that qualify under the college exception include –

“ . . . tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.  In addition, if the student is at least a half-time student, room and board are qualified education expenses.”

The amount of expenses allowed must be reduced by any tax-free educational assistance.

So if you want to invade your 401(k) plan for college expenses or a home downpayment first check with the plan to see if you can have the amount of the withdrawal transferred (rolled over) trustee to trustee from the employer plan directly to your traditional IRA account.  Or take the distribution from the 401(k) and immediately rollover the amount yourself into the IRA account.  When that has been done take the amount of the transfer as a distribution from the IRA account and use the IRA money to make the college or home purchase payments. 

Instead of taking an actual withdrawal from your 401(k) you may be able to take a loan from the account.  Taking a loan from a 401(k) plan is not a taxable event.  However be aware that you must pay the money back to the plan, perhaps with some interest, before you leave the company.  If your employment is terminated you must pay back any outstanding 401(k) plan loan balance within a short period of time or the unpaid balance will be treated as a distribution, subject to income tax and penalty at that time.

The best advice I can give you is do not take the money from your 401(k) plan, or second best that if you are thinking about taking money from your 401(k) plan to pay for anything talk to your tax professional first!  If my clients had come to me they would have saved a lot of money.

TTFN

 

 

 

 

 

 

 

 

 

 

 

GOOD NEWS FROM THE IRS

Some good news from the IRS!

 

Taxpayers under age 59½ have 60 days from the date you receive a distribution from an IRA account to rollover the monies to a new IRA account and avoid the 10% premature withdrawal penalty.  In the past the IRS has chosen not to apply the penalty in certain special situations where the late rollover was the result of trustee error or other circumstances beyond the control of the taxpayer. 

 

The IRS recently issued Revenue Procedure 2016-47, which provides for a new “self-certification” procedure designed to help recipients of retirement plan distributions who, due to one or more specified reasons, inadvertently miss the 60-day time limit for properly rolling these amounts into another IRA. The new self-certification procedure allows these taxpayers to claim eligibility for a waiver of the 60-day rollover requirement that can be relied upon by a plan administrator or IRA trustee in accepting and reporting receipt of the rollover contribution.

 

There are 11 situations that qualify for the waiver.  They are –

 

1. The financial institution receiving the contribution or making the distribution to which the contribution relates made an error.

 

2. The distribution check was misplaced and never cashed.

 

3. The distribution was deposited into an account that the taxpayer mistakenly thought was an eligible retirement plan.

 

4. The taxpayer’s principal residence was severely damaged.

 

5. A member of the taxpayer’s family died.

 

6. The taxpayer or a member of the taxpayer’s family was seriously ill.

 

7. The taxpayer was incarcerated.

 

8. Restrictions were imposed by a foreign country.

 

9. The Post Office made an error.

 

10. The distribution was made on account of a levy under Sec. 6331, the proceeds of which have been returned to the taxpayer.

 

11. The party making the distribution delayed providing information that the receiving plan or IRS required to complete the rollover despite the taxpayer's reasonable efforts to obtain it.

 

I am currently in the process of writing a comprehensive guide on retirement savings.  I will let you know when it is completed.

 

TTFN

 

 

 

 

 

AN INTERESTING QUESTION

Jana M. Luttenegger Weiler of the Davis Brown Law Firm reminds us “No RMDs to Charity for IRAs in 2015 (yet)” at JD SUPRA BUSINESS ADVISOR.

Jana explains –

“In prior years, starting in 2006, Congress established a QCD {Qualified Charitable Distribution – rdf}, allowing IRA owners to directly transfer up to $100,000 from their IRA to a charity, tax-free, as part (or all) of their RMD for the year. A QCD is not taxed to the account holder as income, meaning less tax for the account owner, and a higher donation to the charity. The QCD expired at the end of 2007, but in most years since, Congress has extended the provision, typically one year at a time, but it has not yet been extended for 2015.”

If this “tax extender” is in effect for 2015, a QCD would be applied to the amount of one’s RMD – you could even use the entire RMD as a QCD – but, as Jana told us, it is not included in the gross income of the donor, as a normal RMD would be.  So it does not increase AGI, and therefore does not potentially increase taxable Social Security or Railroad Retirement benefits or reduce the multitude of deductions and credits that are reduced or phased out as AGI rises.  The donor is not allowed to claim a charitable deduction for the amount of the QCD – but that is understandable and does not “hurt” the donor taxwise.

What happens if the idiots in Congress do not extend this worthwhile tax benefit?  The result would be that the full amount of the RMD, whether or not transferred to a qualifying charity, would be included in gross income, increasing AGI, and the donor would be allowed to claim a charitable deduction for the amount of the transfer.  While not the optimal outcome, it is not a bad one. 

So the question is - Should donors age 70 ½ and over just do a QCD now anyway, and gamble that the idiots in Congress will once again eventually extend all of the tax extenders at the last minute? 

My answer would be “yes”.  By waiting too long you may miss out on the opportunity, and there is really nothing to lose by taking this action.

Obviously this assumes that the donor wants to make the charitable contribution, and would do so anyway, perhaps out of liquid cash, whether or not the tax benefit existed.

Fellow tax professionals – do you agree or disagree?

TTFN