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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Dec 07

Can You Have Both a Traditional IRA and Roth IRA in One Self-Directed IRA LLC?

Yes – you may have a Traditional IRA and Roth IRA account as members of your Self Directed IRA LLC.  Note: you should keep separate records for each account as the distribution and tax rules are somewhat different.

Can You Have Both a Traditional IRA and Roth IRA in One Self-Directed IRA LLC?There are advantages to having both types of accounts.  A traditional IRA is a tax-deferred account which gives you an upfront tax deduction on your contributions.  Taxes are not charged until you take distributions during retirement.  A Roth IRA is funded with after-tax dollars (no tax-deduction) but all qualified withdrawals are tax-free.  Plus, there are no required minimum distributions and you can contribute to it for as long as you have earned income.  Having both keeps your portfolio diversified.

 

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

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Dec 07

How Are RMDs Satisfied with Multiple IRAs?

Required Minimum Distributions (RMDs) 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.

How Are RMDs Satisfied with Multiple IRAs?Please contact one of our IRA Experts at 800-472-0646 for more information.

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Oct 01

The Best Roth IRA Benefits

Here is a recent article from fool.com discussing four benefits of the Roth IRA:

A Roth IRA can be an excellent way to save for retirement, and it has several benefits that you might not be aware of. For example, did you know that a Roth IRA can also be an effective tool to save for your childrens’ college education? Or that a Roth can be a valuable part of your estate planning?

Here’s what you need to know about these and some of the other best Roth IRA benefits.

1. The tax benefits can be excellent
The most obvious benefit of a Roth IRA is tax-free compounding: You don’t have to pay taxes on any capital gains or dividends on your investments. On top of that, any qualified withdrawals you make during retirement are free from income tax.

It’s worth mentioning that you get a similar tax benefit with a traditional IRA. In addition to tax-free capital gains and dividends, a traditional IRA gives you an up-front tax break, as you may be able to deduct your contributions from your taxable income. So the choice between the two account types comes down to whether you want your tax benefits now or in retirement.

One of the benefits of the Roth IRA’s tax-free withdrawals is that they protect you from income tax raises. If you’re still years or even decades from retirement, then there’s a good chance you’ll be in a higher tax bracket when you retire, so it may be best to invest through a Roth and forgo the up-front tax break. Federal income tax rates are historically low right now — after all, the top tax rate was 70% as recently as 1981. Contributing to a Roth IRA could allow you to avoid paying higher taxes in the future.

Images

Source: www.taxfoundation.org

2. No minimum or maximum age requirements
While a traditional IRA requires account owners to stop contributing and begin taking minimum distributions at age 70-1/2, a Roth IRA has no such mandates.

In fact, you are allowed to contribute to a Roth IRA so long as you have earned income, even if you’re 100 years old and receive payments from a business you own. The same goes for minors with income. If you’re 14 and work a summer job, then you can contribute to a Roth IRA as well, giving you the potential for many years of tax-free growth.

You’re also not required to begin taking distributions from your Roth IRA at any particular age. If you don’t need the money, you can leave it alone and enjoy additional years of tax-free compounding, which can have an enormous effect over the years.

Let’s say you retire at age 70 with a $500,000 Roth IRA, but you don’t need the money because your other retirement investments, such as your 401(k), provide enough income. If you leave your Roth IRA alone and it compounds at a conservative rate of 6% per year, then the account could be worth $1.2 million by the time you reach age 85. The fact that you never have to withdraw funds from a Roth IRA makes it an excellent vehicle for building an inheritance for your loved ones (more on that later).

Compound Chart

3. Your can still use your money if you need it
My personal favorite Roth IRA benefit is that your money isn’t as “tied up” as it is with other types of retirement accounts. Sure, all retirement plans — 401(k)s, traditional IRAs, etc. — have some provisions allowing you to make early withdrawals under certain circumstances, namely, financial hardship.

However, your Roth IRA contributions — though not any investment gains — can be withdrawn at any time and for any reason. If you have contributed $5,000 to a Roth IRA each year for 20 years, then you can access $100,000 of your savings whenever you need to. In a sense, your Roth IRA can be a retirement plan and an emergency fund in one.

There are also withdrawal provisions that let you access your investment gains early without a penalty. For example, you can withdraw gains to spend toward the purchase of your first home or to cover post-secondary education expenses.

For this reason, a Roth can also be an effective tool to save for your children’s (or your own) college education. If you work a part-time job during high school, you could save your money in a Roth IRA, enjoy tax-free compounding for a few years, and then withdraw any money in your account tax-free once you’re in college — or leave any excess in the account to get a head start on retirement savings. Note that if your withdrawals include investment gains, you’ll be responsible for paying income tax on the gains unless you’re over age 59-1/2, so keep this in mind before choosing to withdraw more than your original contributions early.

4. Roth IRAs can be good for estate planning
A Roth IRA can also be an effective estate planning tool, as it can not only allow your money to grow tax-free for your entire life, but also let you leave tax-free income to your heirs.

Your heirs will be subject to minimum distributions based on their age beginning in the year after your death — unlike the original account holder, the inheritor cannot let money in an inherited Roth IRA compound tax-free indefinitely.

The IRS publishes a list of “life expectancy factors” that are used to calculate the minimum distribution requirements. For example, let’s say you inherit a $100,000 Roth IRA and you’re 35 years old in the year following the owner’s death. The life expectancy factor is 48.5 for a 35-year-old, so to calculate the annual distribution requirement, you would take the account balance and divide by this factor, resulting in a $2,061 required distribution. The following year, you would use the life expectancy factor for a 36-year-old, and so on.

Even with these requirements, a Roth IRA can be an effective way to “prepay” taxes for future generations. Plus, given that you owe no taxes on your Roth contributions, setting aside as much as possible in a Roth can reduce the size of your taxable estate.

The takeaway
This is by no means an exhaustive list, and there are many pros and cons to all types of retirement plans, so it pays to do extensive research before making a decision. Having said that, the Roth IRA is a unique retirement savings vehicle and could be an excellent part of your long-term financial planning.

For more information, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646 today!

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Jul 09

Using a Self Directed Roth IRA to Plan Your Estate

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”).

With 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 2015 – estates over $5,430,000) 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.

Using a Self Directed Roth IRA to Plan Your EstateConverting 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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May 19

Contributing to an Inherited IRA

Once an IRA account owner dies, his or her IRA will be passed on to the beneficiary.  Typically, this will be a spouse or child, but can be anyone the account owner has named.  If there is no beneficiary, then the account will usually go through probate.  Contributions, in addition to taxes, will depend on who the beneficiary is.

If you inherit your spouse’s IRA, you have two options.  First, if you’re the sole beneficiary, you can designate the account in your name and treat it as your own.  You may continue to contribute to the plan, assuming you are qualified to do so.  The type of account (traditional or Roth), your age and income are all factors in deciding if you can contribute to the plan.  Secondly, you have the option of cashing out the IRA.  Note that taxes will become due if you choose this option.

Contributing to an Inherited IRAIt’s important to note the type of IRA you are inheriting.  You must follow the same rules as the original account.  If you inherit a traditional plan, you contributions are tax deductible (if you qualify), you must start taking required minimum distributions (RMDs) once you hit age 70 1/2 and you cannot contribute after that age.  Roth IRAs do not benefit from tax breaks since taxes are paid before contributions.  Qualified withdrawals are tax free, there are no RMDs and there are no age restrictions for contributions.

Whether you’re a spouse or not, you always have the option of withdrawing the funds.  A spouse has the option of taking that money and rolling it over into a new IRA and continuing to contribute.  However, a non-spouse cannot do this.  Moreover, a non-spouse cannot contribute to an inherited IRA and cannot rollover funds into or out of the IRA.

Lastly, non-spouse beneficiaries must continue to take RMDs if the original owner had begun doing so.  If not, you must take RMDs based on your own life expectancy, as per the IRS.  You must start these no later than December 31 the year following the year of the original IRA owner’s passing.  Note, you have five years to cash out the entire IRA in lieu of this.

If you have any questions about Inherited IRAs, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646.

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