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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Jan 20

Understanding Your Options When Inheriting An IRA From A Non-Spouse

This article, written by our own Adam Bergman, appeared on Forbes.com

Unfortunately, the Internal Revenue Service (“IRS”) does not allow you to keep retirement funds in your account indefinitely. The required minimum distribution rules (“RMD”) were created in order to guarantee the flow of IRA funds into the federal income tax system as well as to encourage IRA owners to use their retirement funds during their retirement.

One generally has to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when reaching the age 70½ or as the beneficiary recipient of an inherited IRA. Of interest, Roth IRAs do not require withdrawals until after the death of the owner.

There are a number of distribution options available to a designated IRA beneficiary, generally dependent on whether the deceased IRA owner’s sole primary beneficiary is a spouse, and whether the deceased IRA owner has reach 70 1/2, the age for RMDs. Remember, a living IRA owner is not required to take an RMD until the IRA owner reaches the age of 70 1/2.

If an IRA holders dies and designates a non-spouse, such as a parent, child, sibling, friend, etc. as the primary beneficiary of his or her IRA, the non-spouse beneficiary will typically only have two options for taking RMDs with respect to the inherited IRA: (i) the life expectancy rule and (ii) the five-year rule.

Understanding Your Options When Inheriting An IRA From A Non-SpouseThe IRS allows a non-spouse beneficiary to use the life expectancy rules to calculate the IRA required distributions after the deceased IRA holder’s death. The IRA distributions must begin to be taken no later than December 31 of the year after the death of the deceased IRA holder’s death. There are no additional opportunities for delaying IRA distributions for non-spouse beneficiaries. If distributions are made under the life expectancy rule to a designated beneficiary non-spouse, the applicable distribution period for the calendar year immediately after the year of the IRA owner’s death is the beneficiary’s remaining life expectancy as of his or her birthday during that year and the applicable period is reduced by one for each subsequent distribution calendar year. Unlike in the case of a spouse beneficiary, which is required to use the life expectancy of the deceased IRA owner for purposes of calculating the annual RMD amount, a non-spouse beneficiary is required to use his or her life expectancy when calculating the annual required distribution amounts. For example, if Jane is designated as sole beneficiary of an IRA of her mother, who died during 2015, her first distribution calendar year is 2016. If Jane turned 60 years old during that year, the applicable distribution period would be based on the life expectancy of a 60-year-old. Conversely, the non-spouse beneficiary has the option to select a five-year distribution rule, which would required the non-spouse beneficiary to take the entire amount of the inherited IRA as a distribution over a five year period. Of note, a non-spouse IRA beneficiary does not have the option to convert the traditional inherited IRA to a Roth IRA.

The IRA custodian (the financial institution) is required to submit reports to the IRS and to the IRA owner regarding RMDs. If an RMD is required to be taken from an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the IRA custodian that held the IRA as of December 31 of the prior year must provide a statement to the IRA owner to report the due date of the RMD and, in most cases, the amount that is due. The IRA custodian is required to send this report to the IRA owner by January 31 of the year for which the RMD is required.

The RMD rules and options for a non-spouse beneficiary can bring to bear some financial and tax implications.  Therefore, it is important that one consults a tax professional or financial advisor for further guidance.

For more information about options when inheriting an IRA, please contact an IRA Expert @ 800.472.0646.

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Apr 24

RMDs and Real Estate in an IRA

Here’s an article from OregonLive.com that speaks about RMDs and Real Estate in Self-Directed IRAs:

Recently I wrote two columns about the Social Security tax torpedo. It’s a wrinkle in the tax code that surprises some middle-income seniors with a higher tax bill when they take their first Required Minimum Distribution from their IRA.

Those columns prompted this question from John: If you took your regular IRA and made it a self-directed IRA and invested that into real estate, how could the government make you take out an RMD – a required minimum distribution – when you turned 70-and-a-half? I don’t know how they could do that, make you sell part of that real estate and take it out?

My answer: Sure the government can. Holding real estate inside an IRA can cause all sorts of problems if one an investor is not careful, said Ed Slott, who publishes a report on IRAs.

First, a self-directed IRA is still a traditional IRA, subject to RMDs, Slott said. If the owner doesn’t take RMDs, he or she faces a 50 percent penalty on the amount not withdrawn.

“In addition, if all of the IRA funds are invested in real estate (or some other illiquid asset), and there is no other cash available in any other IRA to take the RMDs, … a piece of the real estate would have to be distributed to satisfy the RMD,” Slott said via e-mail. “That also means having at least annual valuations that the IRA has to pay for.”

IRA also owners also face new IRS reporting requirements for hard-to-value assets, mainly to make sure they’re not undervalued, he said. These disclosures are optional this year but will be required in 2015. Finally, if the IRA owner uses the property personally, the IRS could rule it a prohibited transaction.

“This is the worst of all IRA penalties,” Slott said, “since the entire IRA becomes taxable as if you withdrew every cent.”

A better option for real estate exposure: Invest your IRA money in a publicly traded Real Estate Investment Trust, or REIT.

Or just suck it up. Take your RMDs and pay the requisite taxes. The government let you defer taxes on earnings for many years. Now, it wants its money. And there’s not much you can do about it.

If you have any questions, or would like more information about Self Directed IRAs, please contact the IRA Financial Group @ 800.472.0646!

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Dec 09

End of Year Planning – Don’t Forget Your IRA RMD!

For those of you who have a tax-deferred retirement plan, such as an IRA or 401(k), you must start taking required minimum distributions or RMDs once you reach age 70 1/2 (and every year thereafter).  If you have failed to take one yet for this year, you have until December 31 to do so.

Why the need for an RMD?  When you contribute to a traditional plan, you do not pay taxes on the amount contributed.  The IRS wants it’s cut, so they force you to start withdrawing from these plans whether you need to or not.  The amount is different for everybody and is based on your account balance(s) and your age/life expectancy.

End of Year Planning - Don't Forget Your IRA RMD!As mentioned, once you turn 70 1/2 you must start withdrawing from your IRA.  However, if you reached that age this year, you can defer your first RMD until April 1, 2015.  If you do so, you will need to take two withdrawals next year, one for 2014 and one for 2015.  Further, if you took your first RMD this past April, you still need to take your second one before the end of the year.

What if you miss an RMD or do not take the full amount?  The penalty is severe!  You will be hit with a 50% penalty on the amount you failed to distribute.  This is in addition to the taxes that should’ve been paid on the amount.  You will continue to be penalized until you take the proper amount.

If you have multiple accounts, you must figure out the RMD for each account.  Be sure you’re not forgetting an account or you might be short on your distribution.  While an RMD is calculated for every IRA you own, your RMD does not have to be taken from each one.  You can take it from one account (usually an under-performing one) or you can spread your distribution from any or all of them.

If you have a non-spousal Inherited IRA and the previous owner had already begun taking his or her RMDs, you must continue to take them as well.  The only difference is the amount is based on your life expectancy so the amount will be much lower.

Lastly, RMDs must be taken from all traditional plans, such as SEP and SIMPLE IRAs as well as Self-Directed IRAs.  The exception is Roth IRAs.  These accounts were funded with after-tax money, therefore you are not forced to withdraw money for tax purposes.

In conclusion, if you or someone you know has hit their 70’s, make sure to follow the rules for RMDs or the penalty will be costly.  For more information about IRAs, please contact a retirement expert from the IRA Financial Group @ 800.472.0646.

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Jul 15

Why You Should Invest in a Roth IRA

For those of you who don’t know, especially young savers, a Roth IRA is a retirement plan option that is funded with already-taxed money.  There’s no immediate tax break as with traditional plans, but all qualified withdrawals are tax-free (both contributions AND earnings).  There are several reasons why you should consider a Roth IRA in your retirement savings.

First and foremost are the tax implications.  Whether you’re a young person just getting started in the workplace or someone who thinks the federal tax rate is going to be a lot higher when you retire, a Roth is perfect for you.  By paying the taxes now at a lower rate, you protect yourself from a bigger hit later on in life.

Why should you invest in a Roth IRAWhether you’re a high earner, plan to work well into the retirement years or want to leave your assets to your children or other loved ones, a Roth will benefit you greatly because there are no required minimum distributions or RMDs.  The IRS requires you to take RMDs from a traditional IRA once you reach age 70 1/2.  These plans are tax-deferred and the IRS wants its cut sooner rather than later.  The Roth option allows you to contribute to save well past 70 years old.

Another great feature of a Roth IRA conversion is the ability to re-characterize.  If you convert traditional funds to a Roth IRA, you have the ability to undo this conversion if your investments under-perform.  During the original conversion, you would owe tax on any funds you move.  If you decide to undo this, you do not have to pay those taxes and your traditional plan will continue to grow tax-deferred.

When you lose a spouse, finances are not on the top of your mind.  At some point though, you should take into consideration the tax implications of being a widow(er).  Married couples who file jointly have more favorable tax rates than do single filers.  Take advantage of this by converting to a Roth as soon as possible.

One last reason is geographic.  Certain states such as Florida and Texas do not hit you with income tax.  If you plan on moving (or retiring) to a different state, such as New York or Hawaii, which has high taxes, it’s best to contribute to a Roth before you move.

To be properly prepared for retirement, you should not only be diversified within your plan, but also with the plans themselves.  Contributing to a Roth IRA will do that for you.  Having funds that are tax-free during your retirement years is the way to diversify your accounts.  If you have any questions about whether a Roth IRA is right for you, contact one of the IRA experts at the IRA Financial Group @ 800.472.0646 or visit our website today!

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Jun 17

Rules for Your SIMPLE IRA in 2014

If you are a small business owner and do not have a retirement plan in place, one option you may consider is the SIMPLE IRA – the Savings Incentive Match PLan for Employees.  It’s an inexpensive and, well, simple plan to manage and administer.  Here are the rules for a SIMPLE IRA.

You are eligible for a SIMPLE IRA is you are a self-employed individual or a small business owner with less than 100 employees.  Like most retirement plan options, they offer tax-deductible contributions, tax-deferred earnings and a wide arrange of investment opportunities.  It doesn’t matter if you have a partnership, a corporation or a sole proprietorship, you can open a SIMPLE plan.  A SIMPLE IRA is a salary deferral plan that has both employer and employee contributions.  The employee can decide how much he/she wishes to contribute and can adjust the amount during the election period annually.  As the employer, you must also make contributions.

A SIMPLE IRA is a great retirement plan for small businessesOne of the major benefits of the SIMPLE IRA is the ability to save your business thousands of dollars in taxes each year.  Further, you might be eligible for a tax credit during the first three years of the plan for costs in setting it up.  You have until October 1, 2014 to start a SIMPLE IRA for your business this year.

As an employee, you may contribute up to $12,000 in pre-tax money for 2014.  That number increases to $14,500 if you are age 50 or older.  As the employer, you have two options for contributing.  First, you can match your employees’ contribution dollar for dollar up to 3% of the participants annual salary.  Secondly, you may choose to contribute 2% of every eligible employee’s yearly compensation.  Note that for 2014, the maximum amount used to figure out compensation is $260,000.  All contributions are 100% vested no matter the employee’s tenure.

To be eligible to participate in the plan, an employee must have $5,000 in earned income in any two previous years and be expected to earn at least that during the current year.  Part-timers must be included, however, union employees may be excluded.

Withdrawals work pretty much like a traditional IRA.  You make take a distribution from your SIMPLE IRA, but if you are under age 59 1/2, you’ll be subject to a 10% early withdrawal fee unless you meet the hardship withdrawal criteria.  If you withdraw within the first two years of the SIMPLE start date, that penalty jumps to a whopping 25%!  As with traditional plans, once you reach age 70 1/2, you must start taking required minimum distributions.  The amount you must withdraw is based on your plan assets and your life expectancy.  Withdrawals are taxed during the year in which you take them.  Because of this, take note of your tax bracket as a large withdrawal might bump you up (which you do not want!).  Lastly, loans are not permitted from a SIMPLE IRA.

In conclusion, if you are self-employed or own a small business, a SIMPLE IRA might be worth considering.  The tax experts at the IRA Financial Group can help determine if this is the right plan for you or if your needs are better suited with a different plan.  Give them a call @ 800.472.0646 to learn all about the SIMPLE IRA and all the investment options they offer.

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Mar 28

Deadline Approaching to Take RMDs from Your IRA

As most of you know, Tax Day, April 15, is quickly approaching, but there’s a key date before then that might be more important for many of you.  April 1 is the deadline for those that need to take their first required minimum distribution (RMD) from your IRA.  Here we will give you the basics of the RMD and what you need to do.

You have until April 1 to take your first required minimum distributionYou can tell from the name, that an RMD is a distribution (or withdrawal) that you must take from your retirement account.  Traditional plans are tax-deferred meaning you funded the account with pre-tax money and taxes are deferred until you start taking distributions.  As usual, the government wants its cut so you are forced to withdraw funds (which are taxed) whether you need them or not.

The starting age for RMDs is 70 1/2.  Once you reach that age (and every year after), you must start withdrawing from your account.  The next logical question is what account(s) do you need to withdraw from.  The IRAs that are affected are traditional plans, SEP IRAs and SIMPLE IRAs.  If you only have a Roth IRA, don’t worry, you don’t need to take RMDs since you’ve already paid the taxes on any money you contributed to the plan.  Also, if you have a traditional 401(k) or 403(b) plan through work, you must take RMDs from those as well.  The only exception is if you’re still working at age 70 1/2 and funding the plan.

When is the deadline for taking your RMDs each year?  Typically, you have until December 31 to fulfill your requirement.  However, for your first withdrawal, you have a little more time: April 1 of the year after you turn 70 1/2.  Therefore, if you turned 70 1/2 in 2013 and have not taken your RMD, you must do so by April 1, 2014 (not April 15!).  Further, if you waited to take your first distribution until now, you must take two distributions for the year: the one from last year plus the one for this year.

How much are you required to take?  This is not a set amount and is different for everyone.  To figure out your RMD, you need to take your prior year-end account balance(s) and divide that by the life expectancy factor outlined in IRS Publication 590.  You must calculate and distribute the correct amount each year.  (It’s best to consult with a tax expert to make sure you are paying the right amount.)  For example, if you are 70 years of age (which is a life expectancy factor of 17.0) with $100,000 in a traditional IRA, your RMD would be $5,882 ($100,000/17.0).  Note that this is the minimum amount; you may take more than that if you wish.

What if you have multiple IRAs?  If you have more than one IRA, you must contribute the RMD for each account, but you do not have to withdraw from each of them.  You may choose to distribute your entire RMD from one account.  This way you can choose to take funds from under-performing accounts rather than those that are doing well.

Failure to take your full RMD by the deadline will result in a stiff penalty.  Any amount that should have been withdrawn but was not will be subject to a 50% penalty.  This penalty will continue until it’s remedied.  Obviously, missing the deadline entirely will result in the penalty, but also if you make a calculating error and take too little, you’ll also be hit with the penalty.

Like any other IRA distribution, RMDs are taxed at ordinary income tax rates.  Therefore, it might be better to withdraw more money when your tax rate is lower.  For example, you take a year off to travel but plan on returning to the workforce later on.

If you have any questions about required minimum distributions or IRAs in general, please contact one of the IRA experts @ the IRA Financial Group @ 800.472.0646 for more information!

Aug 31

IRA Mistakes You Should Avoid

Retirement plans have tons of rules and regulations that you must adhere to.  If you don’t, you may be losing out on a ton of savings.  Don’t get caught up by something that you can easily avoid.  Here are just a few examples of mistakes that can trip you up.

Don’t put all your savings into tax-deferred plans.  Take advantage of a Roth IRA to have tax-free withdrawals. Granted, you may be in a lower tax bracket when you retire, but taxes are always on the rise so you might end up paying more in taxes down the road.

Don’t forget to update your beneficiaries.  Things change from the time you set up your retirement plan until you actually retire.  These include marriage, a birth of a child and the passing of a loved one.  Make sure the person you want to inherit your plan really does.

Don’t assume a nonworking spouse can’t contribute.  He or she may not have earned income, but as long as his or her spouse does, he or she may contribute to an IRA.

Don’t take the wrong required minimum distribution.  Once you reach age 70 1/2, the IRS requires you to take minimum distributions.  If you fail to take the right amount, you face a 50% penalty.

These are just some of the common mistakes to avoid, to see more, visit foxbusiness.com.  Better yet, get in touch with one of the tax experts at the IRA Financial Group today.