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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Oct 17

What are the minimum distribution requirements of an 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.

What are the minimum distribution requirements of an 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.

Note: there are no required minimum distributions for a Roth IRA

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

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May 01

Taking Advantage of the Stretch Feature of a Self-Directed Roth IRA

In addition to the significant tax benefits in using a Self-Directed Roth IRA LLC to make investments, the Roth IRA also offers a number of very exciting estate planning opportunities.

In general, a self-directed Roth IRA is an after-tax account that allows the Roth IRA holder to benefit from tax-free investment growth, so long as a Roth IRA distribution is not taken prior to a five year holding period and the Roth IRA holder is not under the age of 59½ ( a “qualified distribution”). In addition, a Roth IRA holder would not be subject to the required minimum distribution rules (“RMD”).

Taking Advantage of the Stretch Feature of a Self-Directed Roth IRAWith IRA Financial Group’s Self-Directed Roth IRA LLC Estate Planning Solution, your family could receive tax-free use of your Roth IRA funds. Converting a pre-tax IRA to a Roth IRA could be used as a very valuable estate-planning tool for estate owner’s that would be subject to the estate tax (For 2017 – estates over $5,490,000) as the Roth conversion funds would be paid out of funds subject to estate tax.

Estate Tax Basics

In general, an IRA, whether a traditional or a Roth, is included in the owner’s gross estate. You can’t avoid that. But when a traditional IRA is inherited, the beneficiary must include all distributions in gross income just as the original owner would have. The distributions are taxed at the beneficiary’s ordinary income tax rate. The beneficiary is able to stretch out the distributions over his or her life expectancy, but annual distributions are required and will be taxed. Hence, when passing a Traditional IRA to a spouse or child, the beneficiary is required to pay ordinary income tax on the IRA distribution amount, which would reduce the amount of Traditional IRA funds available to spend.

Converting a Traditional IRA to a Roth IRA – Estate Planning Benefits

In a conversion of a Traditional IRA to a Roth IRA, the IRA converted amount is as though it were taken as a distribution. So, hence, you would be subject to ordinary income taxes on the converted amount. Note: there is no restriction on the amount of IRA funds that can be converted at one time.

The first estate tax benefit of a Roth IRA conversion is that the Roth IRA holder’s estate would be reduced by the income taxes paid on the amount of the Roth IRA conversion. There are several estate planning benefits to paying tax on the Roth conversion while you are alive.

  • Turning Taxable Distributions into Tax-Free Distributions: Doing a Roth IRA conversion is in effect paying the taxes on the IRA funds for your heirs. They would have owed the taxes in the future when they were required to take a distribution from the inherited IRA. Instead, the Roth IRA holder would be paying the tax now, out of his/her taxable estate, and avoid estate and gift taxes on that amount. Thereafter, when your beneficiary would take a distribution from the inherited Roth IRA, those Roth IRA distributions would be tax-free.
  • Pay Tax & Reduce Estate Taxes: Paying the taxes now reduces the size of your estate and any estate tax bill. This isn’t a factor for estates below the taxable level, but it could be important for taxable estates.
  • Lifetime of Tax Benefits: A Roth IRA conversion can provide lifetime income tax benefits to the Roth IRA holder and it can also benefit your beneficiaries. When you maintain a traditional IRA, after age 70½ you’re required to take minimum annual distributions, which would be subject to income tax. If it turned out that you didn’t need this money for spending or living purposes, it simply increases the taxes you would be required to pay. In addition, being required to take a Traditional IRA distribution could increase your income enough to push you into a higher tax bracket, reduce itemized deductions, increase taxes on Social Security benefits, and have other effects. The older you become, the higher the required distributions and taxes become. With a Roth IRA, you or your beneficiaries could benefit from tax-free appreciation of the Roth IRA assets as well as generating tax-free income to live off.
  • Tax-Free Growth & Tax-Free Income: Once the Traditional IRA has been converted to a Roth IRA, the Roth IRA holder and his or her beneficiaries would be able to benefit from tax-free growth and income generated by the Roth IRA. In other words, the assets of the Roth IRA will be able to grow tax-free and all “qualified distributions” from the Roth IRA would be tax-free allowing the Roth IRA holder or his or her beneficiaries to live off the Roth IRA funds without ever having to pay tax on the income.
  • Take Advantage of Historical Low Tax Rates: Even though a lot has been made of the increasing Obamacare tax rates, our current income tax rates are still at historical lows. Therefore, it is conceivable that income tax rates will rise in the future especially with the high levels of debt that is being used by the Government to stimulate the economy. Doing a Roth IRA conversion now versus later could potentially be a tax savvy decision if the Roth IRA grows at a respectful rate and if tax rates increase. Having a Roth IRA to use or offer to your beneficiaries in a high tax environment will prove to be extremely tax beneficial.

The Self-Directed Roth Stretch IRA

Unlike the original Roth IRA owner, a non-spousal beneficiary of a Roth IRA is required to take minimum distributions over his or her life expectancy. Note: a spousal beneficiary of a Roth IRA is not required to take a Roth IRA distribution.

In the case of a non-spousal Roth IRA beneficiary, when the beneficiary is relatively young, there is the potential for the distributions to be less than the annual earnings of the Roth IRA, so the Roth IRA grows while the distributions are being taken. Of course, the beneficiary can take more than the minimum, even the entire Roth IRA, at any time tax-free. In other words, using a Self-Directed Roth Stretch IRA will allow an individual to transfer tax-free assets to children or other beneficiaries and allow those individuals to benefit from tax-free income while the Roth IRA contributes to grow tax-free.

To learn more about the estate tax benefits of having a Self-Directed Roth IRA LLC, please contact a tax professional at 800-472-0646.

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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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Oct 02

Some Strategies for Your Roth IRA

Here we are going to talk about ways of getting money from your traditional IRA into a Roth IRA and how to make the most of your retirement savings.  Each type of plan offers different, but equally good, tax advantages.  Traditional plans allow you to defer taxes until you start taking distributions during retirement.  On the other hand, Roth plans are funded with after-tax money, but distributions are generally tax-free once you reach age 59 1/2.  Here are some strategies you can use to make the most of your retirement savings.

One of the drawbacks of a traditional plan is required minimum distributions.  Once you reach age 70 1/2, you have to start withdrawing from the account, whether you need the money or not.  You may wonder if you can take your RMD and them convert it to a Roth IRA.  The thinking is that once you take your mandatory withdrawal, you pay the taxes on it and can convert it.  You can convert an amount from your traditional plan to a Roth account at any time, but you have the pay the taxes on the amount you convert.  The RMD is a separate event and will be taxed as ordinary income.

Converting to a Roth IRA gives you tax-free earningsWhat you can do is convert some of your traditional IRA to a Roth every year.  Since retired people are usually in a lower tax bracket, it may make sense to convert now especially if you won’t need the money yourself and will pass it on to your heir(s).  Be careful when converting however,  since you don’t want to jump to a higher tax bracket.  Right now, the upper limit of the 15% tax bracket is $70,700 for couples and $35,350 for single filers.  Since any amount taken from your IRA is considered taxable income, only take an amount that will keep you in the lower tax bracket each year.  When you pass on your Roth IRA to your beneficiaries, he or she will still need to take RMDs based on his or her life expectancy, but it will now be tax free!

Now, when you convert to a Roth from a traditional plan, when is that money available to you tax-free?  You must have owned the Roth IRA for at least five years before you can start taking tax- and penalty-free withdrawals.  Says Kimberly Reynolds, MS, “Withdrawals from a Roth IRA follow an “ordering rule” which states that any withdrawals are considered a withdrawal of contributions first; conversions second; and earnings last.”

To clarify:  First, all contributions you make to a Roth IRA can be withdrawn at any time tax-free.  You’ve already paid the taxes on any money you put into the account.  The same is true for conversions.  As stated, taxes are due on any amount you decide to convert from a traditional plan into a Roth plan.  Lastly, any earnings taken from the Roth IRA before five years have passed will be subject to income tax and a 10% penalty.  There are exceptions to this including: your at least 59 1/2 years old, distributions made to a beneficiary after your death, disability and first time home buying.

These are just a coupe of the great benefits of a Roth IRA.  It’s important to note that the longer the money is in the account, the more time it will have to grow tax-free.  For more info about the Roth IRA, please contact one of the IRA experts at the IRA Financial Group @ 800.472.0646!