Dec 18

In What Order Do Roth IRA Distributions Come Out of the Account

In general, you cannot pick and choose the origin of each distribution you take. For example, if you take a distribution before the five-year holding period is up, you would want to take your contributions first, because they are not subject to tax or penalties. However, the ordering rules for determining Roth distributions are quite taxpayer favorable. Roth distributions are deemed to come out in the following order:

  • Regular Roth IRA contributions are distributed first
  • Next, converted amounts, starting with the amounts first converted
  • Earnings come out last

These ordering rules can significant impact the tax treatment of the distributions. For example, if you take a distribution before the five-year holding period is up of if you fail to satisfy the other requirements of a qualified distribution, the withdrawal still won’t be subject to the early distribution tax as long as you have taken less than the total amount of all contributions you have made to your Roth IRAs. Note that for purposes of these ordering rules, all Roth IRAs are considered a single Roth IRA.

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Mar 30

Do You Have to File a Form with the IRS if You Received Distributions from Your Roth IRA?

Yes. In general, File Form 8606 if you received distributions from a Roth IRA.
Use Form 8606, Nondeductible IRAs, to report:

Do You Have to File a Form with the IRS if You Received Distributions from Your Roth IRA?

  • Nondeductible contributions you made to traditional IRAs,
  • Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs,
  • Distributions from Roth IRAs, and
  • Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs.

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Feb 01

Is There Any Holding Period Requirement Before Taking Tax-Free Distributions from a Roth IRA?

Generally, distributions from a designated Roth account are excluded from gross income if they are (1) made after the employee attains age 59 1/2 , (2) “attributable to” the employee being “disabled,” or (3) made to the employee’s beneficiary or estate after the employee’s death. However, the exclusion is denied if the distribution occurs within five years after the employee’s first designated Roth contribution to the account from which the distribution is received or, if the account contains a rollover from another designated Roth account, to the other account.

Is There Any Holding Period Requirement Before Taking Tax-Free Distributions from a Roth IRA?

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Dec 28

Are Distributions that Consist of my Roth IRA Contributions Ever Subject to Income Tax?

No, the portion of your Roth IRA that consists of your contributions is never subject to income tax when it comes out – even if you take it out the day you made the contribution. That is because all contribution you made were nondeductible – meaning you already paid tax on the money. In addition, any distribution you take from a Roth IRA is presumed to be a return of your contributions until you have withdrawn all contributions you made to it over the years. In other words, all contributions all recovered before earnings before earnings are recovered.

If I establish a Roth IRA is there a certain amount of time I am not allowed to take tax-free distributions of investment returns?

Are Distributions that Consist of my Roth IRA Contributions Ever Subject to Income Tax?In general, you should not take a distribution of your investment returns for five years. A distribution within five calendar years of when you first establish a Roth IRA can never be a qualified distribution. Thus, counting the year of your first contribution as year one, you will satisfy the five-year requirement if you wait until the sixth year before withdrawing any earnings.

However, simply satisfying the five-year requirement will not automatically make a distribution qualified. It must also be at least one of the following:

  • A distribution you take after reaching 59 and 1/2
  • A distribution you take after becoming disabled
  • A distribution to your beneficiary or your estate after your death
  • A distribution you take to purchase a first home (up to a lifetime withdrawal limit of $10,000)

Therefore, if your distribution satisfies the five-year requirement and falls into one of the above categories, it will be qualified and, hence, entirely tax-free.

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Oct 07

Tax Strategies for a Self-Directed Roth IRA LLC

Using a Self-Directed Roth IRA LLC presents a number of exciting tax planning opportunities. Whether you currently have a Traditional IRA or a Roth IRA, the IRA Financial Group’s in-house tax and ERISA professionals have significant experience helping clients use a Self-Directed Roth IRA LLC to maximize their tax benefits and investment returns.

Investment Tax Strategies:

The primary advantage of using a Self-Directed Roth IRA LLC to make investments is that all income and gains associated with the Roth IRA investment grow tax-free and will not be subject to tax upon withdrawal or distribution. This is because unlike traditional IRAs, you are generally not subject to any tax upon taking Roth IRA distributions once you reach the age of 59 1/2. This presents a number of exciting tax strategies, a few of which are described below:

  • Purchasing a vacation home in or outside of the United States with Roth IRA funds and moving in tax-free at age 59 1/2
  • Purchasing a retirement home in or outside of the United States with Roth IRA funds and moving in tax-free at age 59 1/2
  • Purchasing an office building with Roth IRA funds and then using the building for your own business after you turn 59 1/2
  • Investing in precious metals and then taking possession of the metals once you reach the age of 59 1/2
  • Investing in tax deeds and then taking possession of the property personally once you reach the age of 59 1/2
  • Investing in a distressed property – generating large gains and then withdrawing the funds tax-free for personal use upon reaching the age of 59 1/2
  • Investing in an investment fund – generating large gains and then withdrawing the funds tax-free for personal use upon reaching the age of 59 1/2

Roth Conversion Valuation Discount Tax Strategies:

The amount of taxable income on a Roth conversion is based on the fair market value of the IRA assets subject to the conversion. Tax Strategies for a Self-Directed Roth IRA LLCTherefore, the lower the fair market value of the IRA assets the lower the taxes that will be due on the Roth conversion. In general, pursuant to case law, the standard of “fair market value” is an objective test using hypothetical buyers and sellers. Furthermore, in determining the valuation of an LLC, the assets to be valued must be the interests in the entity. The IRA Financial Group’s retirement tax professionals in conjunction with a number of valuation experts have developed a structure that will allow you to take a discount when determining the fair market value of the IRA assets subject to the Roth conversion, thus, reducing the amount of tax you will have to pay on the conversion.

The Roth Conversion Valuation Discount Strategy is based on tested case law. The valuation discounts applicable to an LLC with IRA assets typically fall into two categories: (1) a discount for lack of control, and (2) a discount for lack of marketability. The retirement tax professional at the IRA Financial Group along with a valuation expert will help develop a customized Roth conversion tax strategy that will allow you to take a discount of anywhere from 15% to 35% on the value of the IRA assets subject to the Roth conversion. The Roth Conversion Valuation Discount Strategy can save you thousands of dollars in taxes and is based on established case law.

For example, if you have a Traditional IRA and want to convert to a Self-Directed Roth IRA LLC to purchase raw land, real estate, precious metals, or invest in an investment fund, using the Roth Conversion Valuation Discount Strategy can save you thousands of dollars on the conversion.

To learn more about how a Self-Directed Roth IRA LLC can offer you significant tax and investment benefits please contact one of our IRA Experts at 800-472-0646.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Mar 18

What Are the Roth IRA Distribution Rules for 2016?

Distributions from Roth IRAs are not required to begin at any particular time, and there are no limitations on death benefits. Distributions from a traditional IRA, in contrast, must begin by April 1 following the year in which the owner reaches age 70 1/2 or (if later) retires and must generally be made in ways that will exhaust the account during the lifetimes or over life expectancies of the owner and his or her spouse. In other words, while congressional policy is that traditional IRAs be for retirement savings only, Congress acquiesces in the use of Roth IRAs for accumulating wealth to be transmitted at death.

Roth and traditional IRAs are subject to the same rules for distributions after the owner’s death. If the beneficiary is not the surviving spouse, distributions must either be completed by the end of the fifth calendar year following the year of the owner’s death or consist of a series of payments beginning before the end of the calendar year following the year of death and continuing not longer than the beneficiary’s life expectancy. If the beneficiary is a surviving spouse, distributions may be delayed until the spouse reaches age 70 1/2 or retires, or the spouse may elect to treat the IRA as his or her own.

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

What Are the Roth IRA Distribution Rules for 2016?Qualified special purpose distributions are distributions, up to a $10,000 lifetime maximum, that are “used” by the distributee within 120 days to pay “qualified acquisition costs” for property to serve as the “principal residence” of a “first-time homebuyer,” who must be the IRA owner, his or her spouse, or a child, grandchild, or more remote ancestor of the owner or spouse. Qualified acquisition costs are costs of acquiring, constructing, or reconstructing a residence, including “reasonable settlement, financing, or other closing costs.” A first-time homebuyer is a person who has not had a “present ownership interest in a principal residence” during the two years preceding the acquisition of the residence financed with the distribution. A distribution can qualify only to the extent of $10,000, less all prior qualified first-time homebuyer distributions received by the recipient.

A nonqualified distribution is excluded from gross income only to the extent of the excess of the taxpayer’s contributions to Roth IRAs, less all prior distributions, qualified and unqualified. A distribution of an excess contribution is not qualified and is therefore included in gross income to the extent of the income of the account required to be included in the distribution. An amount included in gross income on a nonqualified distribution may be subject to an additional 10 percent penalty tax under Internal Revenue Code Section 72(t) (e.g., if made to the owner before age 59 1/2 ). Very generally, the effect of these rules is that investment returns of a Roth IRA are tax-free to the distributee if received in a qualified distribution but are otherwise taxed.

The basis of property other than money received in a distribution from a Roth IRA is the property’s fair market value, whether or not the distribution is qualified. An owner’s lifetime gift of a Roth IRA to another person is treated as a distribution in full to the owner and a gift of an account or annuity that is not an IRA.

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Feb 12

Do You Have to Take Roth IRA Distributions in a Certain Order?

In general, you cannot pick and choose the origin of each distribution you take. For example, if you take a distribution before the five-year holding period is up, you would want to take your contributions first, because they are not subject to tax or penalties. However, the ordering rules for determining Roth distributions are quite taxpayer favorable. Roth distributions are deemed to come out in the following order:

  • Regular Roth IRA contributions are distributed first
  • Next, converted amounts, starting with the amounts first converted
  • Earnings come out last

Do You Have to Take Roth IRA Distributions in a Certain Order?These ordering rules can significant impact the tax treatment of the distributions. For example, if you take a distribution before the five-year holding period is up of if you fail to satisfy the other requirements of a qualified distribution, the withdrawal still won’t be subject to the early distribution tax as long as you have taken less than the total amount of all contributions you have made to your Roth IRAs. Note that for purposes of these ordering rules, all Roth IRAs are considered a single Roth IRA.

 

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Aug 18

Distribution Rules for Roth IRAs

Distributions from Roth IRAs are not required to begin at any particular time, and there are no limitations on death benefits. Distributions from a traditional IRA, in contrast, must begin by April 1 following the year in which the owner reaches age 70 1/2 or (if later) retires and must generally be made in ways that will exhaust the account during the lifetimes or over life expectancies of the owner and his or her spouse. In other words, while congressional policy is that traditional IRAs be for retirement savings only, Congress acquiesces in the use of Roth IRAs for accumulating wealth to be transmitted at death.

Distribution Rules for Roth IRAsRoth and traditional IRAs are subject to the same rules for distributions after the owner’s death. If the beneficiary is not the surviving spouse, distributions must either be completed by the end of the fifth calendar year following the year of the owner’s death or consist of a series of payments beginning before the end of the calendar year following the year of death and continuing not longer than the beneficiary’s life expectancy. If the beneficiary is a surviving spouse, distributions may be delayed until the spouse reaches age 70 1/2 or retires, or the spouse may elect to treat the IRA as his or her own.

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

Qualified special purpose distributions are distributions, up to a $10,000 lifetime maximum, that are “used” by the distributee within 120 days to pay “qualified acquisition costs” for property to serve as the “principal residence” of a “first-time homebuyer,” who must be the IRA owner, his or her spouse, or a child, grandchild, or more remote ancestor of the owner or spouse. Qualified acquisition costs are costs of acquiring, constructing, or reconstructing a residence, including “reasonable settlement, financing, or other closing costs.” A first-time homebuyer is a person who has not had a “present ownership interest in a principal residence” during the two years preceding the acquisition of the residence financed with the distribution. A distribution can qualify only to the extent of $10,000, less all prior qualified first-time homebuyer distributions received by the recipient.

A nonqualified distribution is excluded from gross income only to the extent of the excess of the taxpayer’s contributions to Roth IRAs, less all prior distributions, qualified and unqualified. A distribution of an excess contribution is not qualified and is therefore included in gross income to the extent of the income of the account required to be included in the distribution. An amount included in gross income on a nonqualified distribution may be subject to an additional 10 percent penalty tax under Internal Revenue Code Section 72(t) (e.g., if made to the owner before age 59 1/2 ). Very generally, the effect of these rules is that investment returns of a Roth IRA are tax-free to the distributee if received in a qualified distribution but are otherwise taxed.

The basis of property other than money received in a distribution from a Roth IRA is the property’s fair market value, whether or not the distribution is qualified. An owner’s lifetime gift of a Roth IRA to another person is treated as a distribution in full to the owner and a gift of an account or annuity that is not an IRA.

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Jun 25

“Borrowing” From a Roth IRA

If you contribute to a Roth IRA and you’re in a pinch for a little cash, there are instances where ya can withdraw from your account tax- and penalty-free.  While technically you cannot borrow from your Roth (since you can’t pay it back), these options can get you the quick cash you need.  Note: when at all possible, you should never take withdrawals from your retirement accounts.  The longer the money in them stays untouched, the better the earning power it will have when it’s time to retire.

"Borrowing" From a Roth IRAIRS Publication 590 outlines the order of distributions from Roth IRAs.  You can withdraw any of your Roth contributions at any time and for any reason without penalty or tax.  Since Roth IRAs are funded with after-tax dollars, you’ve already paid any taxes on those contributions, therefore the money is yours anytime you wish.  If you’ve had the account for more than five years, anything converted before then is also yours free and clear.  If the account is less than five years and you are under age 59 1/2, you will be subject to a 10% early withdrawal penalty.  Lastly, if you are over age 59 1/2 and your first Roth IRA has been open for more than five years, all earnings are now tax- and penalty-free as well.

Your other option concerns Rollovers.  You can withdraw any amount from your Roth IRA and use it at your discretion for up to 60 days.  You can then rollover the amount withdrawn into a different Roth IRA.  This is the only way to replace money “borrowed” from a Roth IRA.  There are two considerations to remember when performing an IRA Rollover.  First, as stated, you have 60 days to “return” the money to a new IRA.  Whatever amount is not returned to a new IRA will be treated as a distribution and any penalties or taxes will be due.  Secondly, you can only perform one of these rollovers during any twelve month period.  Up until last year, you could essentially roll over your money from one account to another and another, etc.  In Bobrow v Commissioner in 2014, the tax court ruled that the rollover limit is for each IRA owner and not each IRA.

It’s never prudent to borrow money from your IRA, however it may be necessary at times.  Be aware of any penalties you may face so you know exactly what this move will cost you.  If you have any questions, please contact one of the IRA Experts at the IRA Financial Group @ 800.472.0646.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

May 22

The Self-Directed Roth IRA Distribution Rules

The advantage of contributing to a self-directed Roth IRA is that income and gains generated by the Roth IRA investment can be tax-free and penalty-free so long as certain requirements are satisfied. Unlike with a traditional self-directed IRA, contributions to a self-directed Roth IRA are not tax deductible.

Unlike the self-directed Traditional IRA, there is no 70 1/2 age limit on making contributions. Individuals of any age with compensation are eligible to contribute to a self-directed Roth IRA. The total amount you may contribute to a self-directed Roth IRA for 2015 cannot exceed the lesser of $5,500 ($6500 if over the age of 50) or 100% of compensation ($11,000 for married couples – $13,000 if over the age of 50).

If you maintain a Traditional self-directed IRA, the maximum contribution to your self-directed Roth IRA is reduced by any contributions made to your Traditional self-directed IRAs.

Amount of Roth IRA Contributions That You Can Make for 2015

If your filing status is… And your modified AGI is… Then you can contribute…
married filing jointly or qualifying widow(er) < $181,000 up to the limit
> $181,000 but < $191,000 a reduced amount
> $191,000 zero
married filing separately and you lived with your spouse at any time during the year < $10,000 a reduced amount
> $10,000 zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year < $114,000 up to the limit
> $114,000 but < $129,000 a reduced amount
> $129,000 zero

Self-Directed Roth IRA Distributions Rules if Age 59 and under.

You can withdraw contributions you made to your self-directed Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Withdrawals from a Roth IRA you’ve had less than five years and under the age of 59½

If you take a distribution of self-directed Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You’re at least age 59½.
  • You become disabled or pass away.
  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
  • The distribution is made in substantially equal periodic payments.

The Self-Directed Roth IRA Distribution RulesWithdrawals from a self-directed Roth IRA you’ve had more than five years

If you’re under age 59½ and your self-directed Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You’re at least age 59½.
  • You become disabled or pass away.
  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
  • The distribution is made in substantially equal periodic payments.

Self-Directed Roth IRA Distributions Rules if Over Age 59½

Withdrawals from a Roth IRA you’ve had less than five years

If you have a self-directed Roth IRA LLC and you have not met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you’ve had more than five years.

If you’ve met the five-year holding requirement for the self-directed Roth IRA, you can withdraw money from a Roth IRA with no taxes or penalties.

Penalties on Conversions From a Traditional IRA to a Roth IRA

The penalty rules regarding conversions are a bit different than those for annual contributions, which may be taken at any time for any purpose free of income taxes and penalty. An early withdrawal of a conversion contribution has a different twist. The early withdrawal penalty applies to a distribution of conversion money from a Roth IRA when:

  • 1. The distribution is made within the five-tax-year period starting with the year that the conversion was distributed from a regular IRA; and
  • 2. Only to the extent that the distribution is attributable to amounts that were includable in gross income as a result of the conversion.

In general, when doing a Roth conversion, one can take a distribution of the funds that were converted at any time without tax, however, an early distribution penalty of 10% would apply if the five-year holding period from date of conversion was not satisfied.

For example, Joe made a $20,000 conversion from his regular IRA to a Roth IRA in 2008. The entire amount converted was includable in Joe’s income for 2008. Joe made no additional contributions or conversions to a Roth IRA in 2008 or in later years. In 2011, before he is age 59 1/2, Joe withdraws $10,000 from the Roth IRA. Joe will have no tax to pay on this withdrawal because he paid income taxes on the full $20,000 he converted in 2008; however, he will have to pay a 10% penalty (or $1,000) unless one of the IRA early withdrawal exceptions apply. Why? Because Joe didn’t keep the conversion amount in his Roth IRA for the required five-tax-year period since his original conversion.

So, if you are going to take funds “early” from your Roth IRA, weigh your conversion decision very carefully.

Deciding between a Traditional Self-Directed IRA and a Self-Directed Roth IRA?

Unfortunately there is no right or wrong answer when it comes to deciding whether one should make contributions to a self-directed IRA or self-directed Roth IRA. The decision generally depends on a variety of factors, which are generally facts and circumstance based, such as:

  • If you are not eligible to take advantage of tax-deductible contributions to a Traditional self-directed IRA, but qualify for after-tax contributions to a self-directed Roth IRA, then the Roth IRA is the better choice. Roth IRA contributions are made in after-tax dollars while earnings are generally are not taxable.
  • If contributions to a Traditional self-directed IRA contribution are tax deductible and you are also eligible to contribute to a self-directed Roth IRA, then:
    • if you expect your retirement tax rate to be equal or higher than it is today, a self-directed Roth IRA should yield the greatest benefit.
    • if you expect your retirement tax rate to be much lower than it is today, you may want to choose making contributions to a self-directed Traditional IRA.
    • If you expect your investment to generate strong returns, then a self-directed Roth IRA could be a option
  • The younger one is the more attractive a self-directed Roth IRA is because your Roth IRA will have more time to grow without paying any tax

To learn more about the self-directed Roth IRA and the rules surrounding contributions and distributions, please contact an IRA Financial Group tax professional at 800-472-0646.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageIRA Financial Group Tumblr pageIRA Financial Group Pinterest page