Dec 20

When Do I need to take My Required Minimum Distributions (RMD) From My IRA?

The terms of an independent retirement account or annuity must include several minimum distribution rules, which Congress imposed to ensure that IRAs are primarily used as retirement savings media, not as vehicles to build wealth for transmission to heirs. As discussed below, these rules provide separately for distributions to IRA owners and distributions to beneficiaries after the death of an IRA owner. An IRA owner is an individual who establishes and contributes to an IRA for the benefit of himself or herself and his or her beneficiaries.

When Do I need to take My Required Minimum Distributions (RMD) From My IRA?Minimum distributions to IRA owners

An IRA must, by its terms, require the account or annuity to be fully distributed not later than April 1 of the year following the calendar year during which the IRA owner attains age 70 and 1/2 or be distributed by annual or more frequent payments over a period beginning by that date and continuing not longer than for the owner’s life, the lives of the owner and his or her beneficiary, or a period not longer than the life expectancy of the owner or the owner and beneficiary. April 1 of the year following the calendar year during which the owner reaches age 70 and 1/2 is the required beginning date.

How are minimum distribution requirements satisfied in the case of multiple Traditional IRAs?

Minimum distributions must be determined separately for each IRA. If an individual is owner of more than one IRA, however, the sum of the minimum distributions from all of them may be satisfied by distributions from any of them. This aggregation rule generally applies only to IRA owners. It does not allow an IRA held as beneficiary to be combined with other IRAs, whether held as owner or as beneficiary. However, two or more IRAs held as beneficiary of the same decedent may be aggregated if minimum distributions are being determined under the same life expectancy rule. IRA distributions cannot satisfy distributions under Internal Revenue Code Section 403(b) contracts and vice versa. Also, distributions from Roth IRAs cannot satisfy minimum distribution obligations under a traditional IRA or an Internal Revenue Code Section 403(b) contract.

What do I need to report when making a minimum IRA distribution?

Trustees, custodians, and issuers of IRAs (trustees) must make reports on minimum distributions to IRA owners and the IRS. If a minimum IRA distribution is required for a calendar year as of the beginning of which the IRA owner (or a surviving spouse who has elected to be treated as owner) is alive, the trustee holding the IRA as of December 31 of the preceding year must provide a statement to the owner by January 31 of the distribution year. The statement must indicate that a minimum distribution is required for the year, state the date by which the distribution must be made, and either state the amount of the distribution (calculated assuming that the sole beneficiary of the IRA is not a spouse more than 10 years younger than the IRA owner) or offer to compute the amount. The statement must also inform the owner that this information will be provided to the IRS. A trustee must also file Form 5498 (IRA Contribution Information) with the IRS for each calendar year for which a minimum distribution is required. This form need not state the amount of the minimum distribution.

No reporting to beneficiaries or the IRS is required with respect to IRAs of deceased owners. Also, although the minimum distribution rules for IRAs generally apply to Internal Revenue Code Section 403(b) contracts, no reporting is required with respect to such a contract, whether the employee is living or dead.

Please contact one of our IRA Experts at 800-472-0646 for more information.

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Aug 24

New Podcast – IRA Hardship Distributions

IRA Financial Group’s Adam Bergman discusses how you can take a hardship distribution withdrawal from your IRA and what taxes and penalties may or may not apply.

 

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Mar 14

Changes to IRS Form 5498 with Regards to Your Self-Directed IRA

For Tax Year 2015 and beyond on IRS Form 5498, the IRS now requires IRA custodians to separately specify transactions which involve certain Self-Directed IRA investments

The information on Form 5498 is submitted to the Internal Revenue Service by the trustee (IRA custodian) of your individual retirement arrangement (IRA) to report contributions, including any catch-up contributions, required minimum distributions (RMDs), and the fair market value (FMV) of the account.

The IRS Form 5498 gives the market value of all assets and cash held within the client account for the previous year and is used for tax reporting.  The IRA custodian will forward IRS Form 5498 to the IRS electronically by May 31 of the current year for the previous year.

Changes to IRS Form 5498 with Regards to Your Self-Directed IRAFor Tax Year 2015 and beyond, the IRS now requires IRA custodians to separately specify transactions which involve certain types of investments with no readily available fair market value that are held inside a tax deferred retirement account. These investments have no readily available fair market value and include, but are not limited to, non-publicly traded stock, private partnerships or LLC interests, real estate, options, and other hard-to-value investments.  The IRS updated the IRS Form 5498 to include new Boxes 15a and 15b. The fair market value of investments in the IRA will be reported in Box 15a. Box 15b will be used to categorize the types of investments listed in Box 15a through the use of the following category code(s):

A – Stock or other ownership interest in a corporation that is not readily tradable on an established US or foreign securities market.

B – Short- or long-term debt obligation that is not traded on an established securities market.

C – Ownership interest in a limited liability company or similar entity (unless the entity is traded on an established securities market).

D – Real estate.

E – Ownership interest in a partnership, trust, or similar entity (unless the entity is traded on an established securities market).

F – Option contract or similar product that is not offered for trade on an established US or foreign option exchange.

G – Other asset that does not have a readily available fair market value.

H – More than two types of assets (listed in A through G) that are held in the IRA.

The IRS has indicated that these reporting change are a result of the IRS trying to get a better handle on the type of IRA assets that are being purchased with IRA funds and get a better handle on what percentage of IRA assets should be considered ‘hard-to-value’ assets.  The IRS has some concern that certain IRA assets’ fair market values are not being reported accurately. The fair market value of an IRA asset is very important to the IRS because that is what a tax would be imposed on when distributions are taken by the IRA holder.  With the total IRA assets valued at close to $8 trillion dollars as of 2016, making sure IRA holders are paying their fair share of taxes on their IRA distributions are vital.

For more information on the IRS Form 5498 changes and its impact on your Self-Directed IRA, please contact a self-directed IRA specialist at 800-472-0646.

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Sep 02

What Rights Does the Surviving Spouse as Sole Beneficiary of a Traditional IRA Have After the Death of a Spouse?

A surviving spouse who is sole beneficiary of an IRA and has an “unlimited right to withdraw” from it may, at any time after the owner’s death, elect to treat the IRA as though he or she were its owner, rather than its beneficiary. The election may only be made if the spouse is the only beneficiary of the IRA and is not available if a trust is a beneficiary, even if the surviving spouse is sole beneficiary of the trust. It may, however, be made by a surviving spouse who rolls over into an IRA a distribution from a qualified plan of a deceased spouse’s employer or former employer.

What Rights Does the Surviving Spouse as Sole Beneficiary of a Traditional IRA Have After the Death of a Spouse?Minimum distributions to an electing surviving spouse are determined under the rules for IRA owners, not the rules for beneficiaries, except that the election may not cause there to be a minimum distribution for the year of the owner’s death if the owner died before his or her required beginning date. For example, if a surviving spouse is 72 years old when a 68-year-old owner dies, no distribution is required for the year of death, even if the spouse makes the election, even though the spouse’s required beginning date occurred before that year. An electing spouse is treated as IRA owner “for all purposes under the Internal Revenue Code,” including the premature withdrawal penalty imposed by Internal Revenue Code Section 72(t) , which generally applies to distributions to owners before age 59 1/2 but does not apply to distributions to beneficiaries.

Please contact one of our IRA Experts at 800-472-0646 for more information.

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Jul 18

IRA Financial Group Introduces the Self-Directed IRA 72(t) Election Strategy for Receiving Penalty Free IRA Distributions

IRC 72(t) election strategy is being used by self-directed IRA investors seeking to take IRA distributions prior to age 59 1/2 without penalty

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) plan solutions introduces the Self-Directed IRA 72(t) election strategy for IRA investors looking to receive IRA distributions prior to the age of 59 1/2 without paying a 10% early distribution penalty. Individual Retirement Accounts (“IRAs”) were intended by the IRS to be long-term savings vehicles to fund your retirement. To discourage early withdrawals, the federal government generally imposes an additional tax of 10% on withdrawals made before age 59 1/2 in addition to any income tax owed on these distributions.

According to Adam Bergman, a partner with the IRA Financial Group, the federal government has recognized that individuals may need to tap their retirement funds before age 591/2 and, in certain limited instances, permit premature withdrawals without the 10% tax penalty, such as (i) Disability or death of the IRA owner, (ii) Payment of certain medical expenses that exceed 7.5% of your Adjusted Gross Income, (iii) Payment of health insurance premiums if you’ve been unemployed for at least 12 weeks, (iv) Payment of qualified higher education expenses, (v) Purchase of a first home (There is a $10,000 lifetime limit on these withdrawals.), (vi)Payment of IRS tax levies, and (vii) Series of Substantially Equal Periodic Payments. The series of “substantially equal periodic payments” are commonly referred to as 72(t) distributions. Under this provision, you can take regular withdrawals from your IRA before age 591/2 under one of three distribution methods approved by the IRS without incurring the 10% early distribution penalty.

IRA Financial Group Introduces the Self-Directed IRA 72(t) Election Strategy for Receiving Penalty Free IRA DistributionsThe primary advantage of using a Self Directed IRA to make investments is that all income and gains associated with the IRA investment grow tax-deferred. “We have seen a strong interest in self-directed IRA investors under the age of 59 1/2 looking to use the 72(t) election take IRA distributions over a period of years and escape the 10% early distribution penalty.” Stated Mr. Bergman. “The IRC 72(t) election strategy is certainly more beneficial for individuals under the age of 59 1/2 looking to take penalty free self-directed IRA distributions.” Stated Mr. Bergman.

IRA Financial Group is the market’s leading provider of “checkbook control” Self Directed IRA and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without tax and for one low flat fee.

The IRA Financial Trust Company, a self-directed IRA custodian, was founded by Adam Bergman, a partner with the IRA Financial Group.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646. To learn more about establishing a self-directed IRA account with the IRA Financial Trust Company please visit http://www.irafinancialtrust.com or call 800-472-1043.

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Jan 26

Do You Pay Tax on a Traditional to Roth IRA Rollover?

Yes. A distribution rolled over to a Roth IRA from a traditional IRA, qualified plan, tax-deferred annuity, or eligible deferred compensation plan is included in gross income (although not adjusted gross income for purposes of the $100,000 ceiling). A traditional IRA can be converted into a Roth IRA, but the conversion is treated as a distribution from the traditional IRA and a rollover contribution to the Roth IRA.

Starting in 2010, everyone qualifies to convert to a Roth IRA. As with any rollover, you will want to arrange a direct rollover from the plan to the Roth IRA to avoid mandatory income tax withholding and not worry about the 60-day window which the transfer must be completed.

Do You Pay Tax on a Traditional to Roth IRA Rollover?A rollover or conversion from a traditional IRA to a Roth IRA is usually advantageous for taxpayers who can pay the resulting tax from other funds. Assume A, who is taxed at 30 percent at all relevant times, converts a traditional IRA containing $100,000 into a Roth IRA and pays the resulting $30,000 tax from other funds. Before the conversion, each dollar of income accumulated in the IRA faced a 30 percent tax on distribution, but the conversion eliminates this prospect. A accomplishes this by effectively investing an additional $30,000, after taxes, in the IRA, but this $30,000 will itself produce earnings within the IRA on which A will never be taxed. The conversion thus has the effect of a $30,000 nondeductible contribution to the Roth IRA, free of the usual annual ceiling on IRA contributions. The conversion is also advantageous if the taxpayer is taxed at a lesser rate for the year of the conversion than is expected in the year or years of ultimate distribution (e.g., because of losses or other large deductions in the year of the rollover or conversion).

If an amount “properly allocable” to a traditional-to-Roth rollover is distributed during the year of the rollover or any of the succeeding four years, the early distribution penalty tax of Internal Revenue Code Section 72(t) applies as if the entire distribution (or, if less, the gross income recognized at the time of the rollover) were included in gross income. The deemed gross income is taxed under Internal Revenue Code Section 72(t) unless the distribution is made after the owner of the IRA attains age 59 1/2 , becomes disabled, or dies or some other exception from the penalty applies.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Oct 09

Are any amounts withheld by the custodian on payment of a distribution from a Traditional IRA?

Internal Revenue Code Section 3405 usually requires the payor of a distribution or payment under an IRA to withhold tax. Withholding from a periodic payment is computed as if the payment were of wages. A flat 10 percent is usually withheld from non-periodic distributions. Liability for the withholding tax lies with the payor. However, no withholding is required from any portion of a distribution that, “it is reasonable to believe,” is not gross income (e.g., a return of a nondeductible contributions). Moreover, a payee may elect to have no withholding under Internal Revenue Code Section 3405, and payors must notify individual payees of their right so to elect. The election may be made even if the payee expects to owe tax on the distribution or payment, but a payor is required to file an information return reporting the distribution or payment to the IRS whether or not the election is made.

Are any amounts withheld by the custodian on payment of a distribution from a Traditional IRA?Please contact one of our IRA Experts at 800-472-0646 for more information.

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Jul 24

What reporting requirements exist for Traditional IRA holders?

What reporting requirements exist for Traditional IRA holders?Individuals maintaining IRAs and surviving beneficiaries under IRAs must usually file an annual information return on Form 5329. Also, an individual maintaining an IRA must make an information filing for each year in which a nondeductible IRA contribution is made or a distribution is received from an IRA. The filing, which must be included with the individual’s return for the year, must disclose (1) the amounts of the nondeductible contributions for the year, (2) the distributions received from IRAs during the year, (3) the aggregate balance in all of the taxpayer’s IRAs as of year-end, and (4) other information the Treasury might require by regulation. A $50 penalty is assessed for failing without reasonable cause to file the information return. Moreover, because nondeductible contributions are recoverable tax free on distribution, a penalty of $100 is imposed if these contributions are overstated in the return and the taxpayer cannot show reasonable cause for the overstatement.

Please contact one of our IRA Experts at 800-472-0646 for more information.

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Jan 30

How are distributions from a Traditional IRA taxed?

Distributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible contributions, not all of the distributions will be taxable.

In order to enforce the policy that IRAs be used for retirement savings, not for pre-retirement uses or for building an estate to pass on to heirs, the rules prohibit or strongly discourage both distributions before retirement age and distribution schemes that would leave most of an IRA undistributed at the end of the taxpayer’s life expectancy.

Internal Revenue Code Section 72(t) imposes a tax equal to 10 percent of certain early distributions from IRAs (exclusive of portions considered a return of nondeductible contributions). The tax, which is payable in addition to the regular income tax on the distribution, applies to all IRA distributions but the following:

  • Distributions to an IRA contributor after age 59 1/2 or on account of his or her disability.
  • A series of substantially equal periodic payments, regardless of the taxpayer’s age when they begin, if the payments are made annually or more frequently and continue for the life or lives of the taxpayer or the taxpayer and a beneficiary.
  • Distributions to the estate or beneficiary of an IRA contributor after the contributor’s death.
  • A distribution “on account of” an IRS levy.
  • Distributions to alternate payees under qualified domestic relations orders (QDROs).
  • Distributions not exceeding the deduction allowed to the taxpayer for the year for medical expenses (generally, the amount by which expenses for medical care for the taxpayer, spouse, and dependents exceeds 7.5 percent of adjusted gross income).
  • Distributions after the owner’s “separation from employment” not exceeding amounts he or she pays for health insurance, provided (1) the individual receives unemployment compensation for at least 12 consecutive weeks, (2) unemployment compensation is received during the year of the distributions or the preceding year, and (3) the distributions occur before the owner has been reemployed for more than 60 days.
  • Distributions not in excess of the owner’s “qualified higher education expenses” for the taxable year.
  • “Qualified first-time homebuyer distributions.”

Please contact one of our IRA Experts at 800-472-0646 for more information.

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Nov 06

Tapping Your IRA to Buy Your First Home

The real estate market has gotten better recently, however it’s still an excellent time to buy your first house.  If you can’t quite afford the down payment, tapping your traditional IRA may be a good idea.  Act now before it’s too late!

In most cases, withdrawing from your IRA before you reach age 59 1/2 comes with a 10% early withdrawal penalty.  However, rule changes from the 1997 Taxpayer Relief Act allows for certain penalty-free distributions.  One of those provisions was for purchasing, building or rebuilding a first home.  Therefore, if you qualify, you may not have to spend too much out of pocket on your first home.

You can use an IRA to buy your first houseDon’t think you qualify since you’ve already owned a home?  Think again!  As long as you haven’t had a financial interest in a home in the past two years, you qualify as a first time home buyer.  So if you sold your last home on December 1, 2011 and haven’t had a stake in another house, you will qualify for the withdrawal on December 1, 2013.  You may also take out the money for certain family members’ first time house including your spouse, children and grandchildren.

So what can you use this money for?  The technical phrase is “qualified acquisition costs” of a house.  These include the costs of buying, building or rebuilding a home.  In addition to financing, settlement and closing costs of the home.  Note that the $10,000 limit you can borrow from your IRA is over the course of your entire life.  If you use $5,000 now on a down payment, you will only have $5,000 left to use down the road.  This includes any funds used for a family member’s home as well.

Just because the money you use is penalty-free, you will still owe taxes on the amount withdrawn.  Traditional IRAs are tax-deferred, meaning you fund them with pre-tax money but must pay the taxes when you withdraw the money.  Depending on your tax bracket at the time of withdrawal, this could be a hefty sum of money.  Be sure to plan accordingly.

It’s a little different if you have a Roth IRA, since they are funded with after-tax money.  Money withdrawn from the account is taken in a specific order: contributions, conversions and earnings.  Generally, earning are tax-free, but you need to be age 59 1/2.  Therefore, any earnings before that time that are withdrawn will be taxed.  If you take out $5,000 towards your new home and $1,000 of it is earnings, you’ll own taxes on that $1,000.

A few last notes to consider:  You have 120 days from the time you withdraw the money from your IRA to use it on your new home.  If you fail to do so (say the purchase falls through) it will be treated as a non-qualified distribution and you will be hit with the 10% penalty.  Further, any money you withdraw is considered taxable income which could bump you into a higher tax bracket.  Lastly, the money withdrawn from the IRA will no longer be earning for you.  You’ll lose out on the benefits of compounded tax-deferred growth.  It’s best to speak with a qualified financial advisor before withdrawing from any retirement account.

The tax experts at the IRA Financial Group can walk you through every step and help you understand the ramifications of such a move.  If you have any questions or want a consultation, please contact them at 800-472-1646 now!  Like us on Facebook & Follow us on Twitter!