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Last-minute IRA contribution OK with proper request

 

The date of an irrevocable letter of authorization sent to a financial services company by an individual should be considered the date of the contribution to his retirement account, the IRS determined in a recent private letter ruling.

This situation involved a taxpayer who sent his financial services company a letter of authorization (LOA) instructing the company to transfer funds from one of the taxpayer’s nonretirement accounts to an IRA. The date of the letter – April 15 – was treated as the day of the contribution.

Thus, if the LOA was postmarked by April 15, or if the individual made a verbal request to the company by April 15, the taxpayer is deemed to have made the contribution by the end of the preceding tax year. The verbal request must be summarized in a document and signed and dated by the financial services company.

The letter of authorization must specify the amount of the cash contribution, the account from which the funds are being transferred and the tax year for which the contribution is made.

The rules regarding an IRA account allow taxpayers to make contributions to their accounts by the due date of their returns without taking into account any extensions.

If a taxpayer made a contribution to his account by April 15, 2014, it would count as a 2013 IRA contribution because that is the due date for the 2013 return.

The issue here is that, although the actual transfer of funds occurred after April 15, the contribution authorized by the LOA was considered made in the preceding year. The IRS treated the date of the authorizing letter as the contribution date.

This private letter ruling (Letter Ruling 201437023, June 18, 2014) is consistent with a 1985 IRS private letter ruling in which the IRS stated that the postmark date of a contribution would be treated as the contribution date.

Please keep in mind that private letter rulings are not binding on the IRS. These rulings are based on a particular taxpayer’s facts and circumstances. There is no guarantee that the IRS would take the same position in another situation.

©2014 CPAmericaInternational

 

Most husbands and wives name their spouse as the primary beneficiary of their IRA. What does a surviving spouse need to consider as the beneficiary?

Like any other beneficiary of a decedent’s IRA, a surviving spouse can receive a distribution as a beneficiary. But a surviving spouse who is the sole beneficiary of the decedent’s IRA has two additional favorable options that are not available to other beneficiaries.

The surviving spouse may:

➤ Elect to treat the decedent’s IRA as the surviving spouse’s own IRA; or

➤ Roll over the decedent’s IRA into an IRA established in the spouse’s name.

In either case, the surviving spouse is treated as if he or she had funded the IRA.

Making the spousal election or rollover has three major advantages:

1. Required distributions may be delayed. With the rollover or the election, required distributions must begin no later than April 1 of the year following the year in which the surviving spouse attains age 70½.

By comparison, if the IRA remains in the decedent’s name and the decedent’s death occurred:

➤ Before lifetime distributions commenced, then lifetime distributions to the spouse generally must begin by the later of (1) Dec. 31 of the year following the year in which the decedent died, or (2) Dec. 31 of the year in which the decedent would have attained age 70½ had he or she lived.

➤ After required distributions began, payouts to the spouse-beneficiary must begin in the year following the IRA owner’s death.

Thus, a surviving spouse who is younger than the decedent can defer the start of the payout period by making the rollover or electing to treat the decedent’s IRA as the spouse’s own IRA.

2. Distribution period may be extended. Normally, a beneficiary’s required minimum distribution (RMD) is based on that beneficiary’s single life expectancy. With a spousal rollover or an election, the IRA is treated as if the surviving spouse had funded it. In that case, the spouse can take RMDs using the favorable Uniform Lifetime Table, which is based on the joint life expectancy of the spouse and a hypothetical 10-years-younger beneficiary. Note that a separate lifetime distribution table applies if the spouse was more than 10 years younger than the IRA owner.

3. Surviving spouse can name own beneficiaries. By naming new, younger beneficiaries after the rollover or the election, the surviving spouse may be able to extend the IRA payout period. Otherwise, when the surviving spouse dies, the balance remaining in the first decedent’s IRA will be distributed over what remains of the payout period that applied when the surviving spouse began receiving RMDs.

There is a potential tax issue for surviving spouses who are under age 59½. Once the spouse elects to roll over the decedent’s IRA into the spouse’s own IRA, pre-age-59½ withdrawals from that IRA generally will be subject to the 10 percent early distribution penalty tax on top of regular income taxes – unless an exception applies.

To avoid this problem, the surviving spouse could keep the entire IRA balance in the decedent’s name until the spouse reaches age 59½. Any withdrawals before that age will be penalty-tax-free. The regulations provide that a surviving spouse-beneficiary’s election can be made “any time after the individual’s date of death.”

©2014 CPAmerica International

 

Are you thinking about rolling your Traditional IRAs from one financial institution to another? Or maybe you need a temporary loan for less than 60 days. Whatever the reason may be, beware, the rules have changed.

You have 60 days after the day on which you receive your distribution to complete a rollover of your traditional IRA to another IRA. The entire amount of distribution from your IRA is taxable at your ordinary income tax rate if the rollover is not completed timely. In addition, if you are under the age of 59 ½ when the distribution is made, the amount is subject to the 10% penalty.

There’s a one-year waiting rule for rollovers. Until December 31, 2014, you are permitted to make one nontaxable rollover in any 1-year period for each IRA account, meaning that after you distribute assets from your IRA and rollover any part of that amount, you cannot make another rollover from the IRA to another (or the same) IRA within one year.

For example, you have two IRAs – IRA1 and IRA 2 – and you make a tax-free rollover from IRA1 into a new IRA (IRA3). You cannot make another tax-tree rollover from IRA1 or from IRA3 into another IRA within one year. You could, however, roll IRA2 into any other IRA because you did not roll money in to or out of that account.

A late February 2014 Tax Court case (Bobrow, T.C. Memo, 2014-21) changed the one-year rule. The Tax Court ruled that the limit of one rollover per year applies on an aggregate basis not on an IRA-by IRA basis. The Internal Revenue Server announced that the new rule will not apply to any rollover that involves a distribution that occurs before January 1, 2015.

 

Seizing the occasion of “National Small Business Week” in mid-May, the U.S. Department of the Treasury encouraged small business owners to learn more about making starter savings accounts, called myRAs, available to their employees.

The Treasury has provided more details on its website about the working of the myRA program that it will roll out later in 2014.

President Obama promised in his 2014 State of the Union address that he would take executive action to create myRAs that would be available through employers and backed by the U.S. government. MyRAs were described as being simple, safe and affordable starter savings accounts to help low- and moderate-income wage earners save for retirement.

On its website, the Treasury stated that in late 2014 it will begin offering the myRA program. Treasury highlighted these key features of myRAs:

➤ Employees may open an account with as little as $25.

➤ Account holders may add to savings through regular payroll direct deposit – $5 or more every payday.

➤ Account holders will pay no fees.

➤ MyRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees.

➤ MyRAs will not be limited to one employer – the account will be portable.

➤ MyRA contributions can be withdrawn tax-free.

➤ Earnings can be withdrawn tax-free after five years if the saver is at least age 59½.

➤ Account holders can build savings for 30 years or until their myRA reaches $15,000 – whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs.

As further explained in Treasury’s “myRA: Top Questions & Answers,” the myRA account will hold a new add-on Treasury security. As a result, savers will add to the value of a single security with each contribution they make, rather than buying additional securities. The security in the myRA account – like other U.S. savings bonds and Treasury securities – will be backed by the U.S. Treasury.

The retirement savings account will be a Roth IRA account and have the same tax treatment and follow the rules of Roth IRAs. The same tax advantages that apply to Roth IRAs will also apply to myRAs.

An individual who changes jobs can continue to add savings to an existing myRA account by setting up deposits through any employer that offers payroll direct deposit. An individual with multiple jobs will be able to use direct deposit from each paycheck to contribute to a single myRA. The deposits will be automatic every payday.

Employers will not be required to make myRA available to their employees.

Treasury said it will finalize procedures for rollovers to private-sector accounts (after the account is 30 years old or has reached its $15,000 maximum) when it launches myRAs later in 2014.

©2014 CPAmerica International

 

Appalled by what it called the IRS’s unfair argument, the Court of Appeals for the Eighth Circuit has reversed a Tax Court decision that a taxpayer did not make a timely rollover to his IRA from which he previously had made IRA withdrawals at different times.

The Tax Court had held that the rollover, which was in the same amount as one of the withdrawals, was not timely because it was not made within 60 days of that withdrawal. However, the Eighth Circuit found that the rollover occurred within 60 days of a withdrawal in a larger amount and thus

qualified as a valid partial rollover.

During 2007, Harry Haury made four withdrawals from his IRA:

➤ Feb. 15 – $120,000

➤ April 9 – $168,000

➤ May 14 – $100,000

➤ July 6 – $46,933

On April 30, 2007, Haury deposited $120,000 into his IRA. The IRS matched the $120,000 contribution with the $120,000 distribution and concluded more than 60 days had elapsed, precluding rollover treatment. The Tax Court agreed with the IRS.

On appeal, Haury argued that the $120,000 contribution occurred within 60 days of the April 9 distribution and rollover treatment should be allowed. The appellate court agreed with Haury (Haury v. Commissioner, CA-8, wMay 12, 2014).

During the appeal, the IRS acknowledged that the 60-day limit was satisfied. However, the IRS argued that the partial rollover defense was forfeited because Haury had failed to argue it to the Tax Court. The appellate court rejected this contention.

Then the IRS tried to argue that Haury failed to prove that he had not already exercised his one-rollover-per-year opportunity within the 12 months preceding this transaction.

The appellate court characterized this argument as silly and factually without merit since the IRS agreed that it had access to the transactions in Haury’s IRA account during the year leading up to April 30, 2007. There were no prior rollovers in the records.

Important Reminder: The IRS has historically applied the one-rollover-per-year rule separately to each IRA. However, starting with distributions made after 2014, it intends to apply the rule on a more restrictive aggregate basis.

©2014 CPAmerica International

 

The Tax Court agreed with the IRS in a recent case that the one-rollover-per-year rule applies to all of a person’s IRAs, not to each of his IRAs separately. What is curious is that the IRS’s position in this case and the court’s holding are contrary to an IRS publication and at least one private letter ruling.

During 2008, Alvan Bobrow requested and received a distribution from his traditional IRA. Later, he received a distribution from his rollover IRA. Within 60 days of each distribution, Alvan replaced the funds in the IRA accounts.

The Tax Court ruled in favor of the IRS, saying that the distribution from the rollover IRA was taxable because Alvan failed the one-rollover-per-year rule. The court said that the plain language of the tax code limits the frequency of nontaxable rollovers a taxpayer may elect. By its terms, the one-year limitation is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. The court also upheld the IRS’s assessment of the accuracy-related penalty (Alvan J. and Elisa Bobrow v. Commissioner, TC Memo 2014-21, Jan. 28, 2014).

The IRS position and the court’s holding are at odds with the IRS position in IRS Publication 590, Individual Retirement Arrangements, and in Private Letter Ruling 8731041.

“Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover,” according to Publication 590.

Publication 590 contains the following example:

Illustration: A taxpayer we’ll call Chris has two traditional IRAs (IRA-1 and IRA-2). On Date 1, Chris makes a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Chris cannot, within one year of Date 1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, Chris can make a tax-free rollover from IRA-2 into any other traditional IRA because Chris has not, within the last year, rolled over, tax free, any distribution from or made a tax-free rollover to IRA-2.

Neither the courts nor the IRS are bound by positions stated in IRS publications or tax form instructions. And only the taxpayer who receives a private letter ruling may rely on the conclusions expressed in it. The court in Bobrow did not address IRS Publication 590 or the private letter ruling.

©2014 CPAmerica International

 

If you listened to the State of the Union address last month, you heard President Obama unveil a new type of retirement savings plan called “myRA.”

MyRA is a savings vehicle designed to serve people whose employers do not provide access to a retirement plan. The best estimate is that about half of all workers and

75 percent of all part-time workers are in this category.

Here are the details released to date:

➜ MyRAs will be backed by a security that looks and feels like a savings bond.

➜ The government will back them with the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federalemployees’ Thrift Savings Plan.

➜ Savers will be guaranteed that the value of their accounts will never go down.

➜ Savers will pay no fees on the accounts.

➜ Savers can open the accounts for as little as $25 and can make additionalcontributions in amounts as small as $5.

The myRA will use after-tax dollars, like a Roth IRA, and withdrawals under most circumstances will not be taxed. While it is funded by paycheck deductions, savers will be able to keep their accounts when they change jobs.

Although the program can begin without legislative approval, employers will not be required to participate. Congressional approval is required to force employers who do not have retirement accounts to set up payroll withholding procedures for myRA.

The myRA program has a $15,000 limit. After reaching that mark, savers will have to move their dollars to a Roth IRA.

Even if you qualify for myRA, you may wish to consider a Roth IRA as an alternative. Both Roth IRAs and myRAs are expected to have the same income limits on contributions.

If you decide to open a Roth IRA, you should shop for a custodian that charges no fees. You will not be subject to the savings limits, and you will not have to wait for your employer to agree to participate.

With a Roth IRA, you may not be able to set up an account with contributionthresholds as low as the $25/$5 amounts available with myRA. However, you can probably approximate the “safety of principal” aspect of myRA by investing exclusively in government bonds.

©2014 CPAmerica International

 

The Tax Court ruled on a case in December that involved falsified documents, deception and forgery – perpetrated by the wife.

The wife’s tangled web included:

➜ Submitting falsified requests to withdraw funds from her husband’s IRAs

➜ Forging her husband’s signature to endorse the distribution checks

➜ Depositing the funds into a joint account that only she used

➜ Using the proceeds for her personal benefit

The husband did not find out until the next year. The Tax Court said the husband was not required to include the distributions in his gross income and was not liable for the additional tax on early distributions.

Andrew Roberts and his wife, Cristie Smith, maintained two joint checking accounts. Although the accounts were titled in joint name, Roberts exclusively used one account, and Smith exclusively used the other account.

Roberts did not have a checkbook for, write checks on or make withdrawals from Smith’s account, and he didn’t receive or review the bank statements. He didn’t know about, authorize or benefit from any deposits into, or withdrawals from, Smith’s account.

The custodians of Roberts’s two IRAs received requests with his forged signature, faxed from Smith’s workplace, to withdraw approximately $37,000 from his IRAs. Roberts did not make or authorize the requests.

Checks were sent pursuant to the withdrawal request, the endorsement was forged, and the checks were deposited into Smith’s joint account that she maintained separately from Roberts. The court inferred that Smith (or someone on her behalf) forged Roberts’s signature on the distribution requests and endorsements.

Roberts first learned of the unauthorized withdrawals when he received Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., early in the following year. By the time Roberts had determined Smith’s involvement, the couple was already involved in a divorce proceeding.

Roberts advised the trial court of what had happened, and the court’s decree of dissolution took into account that Smith had withdrawn the funds.

Throughout their marriage, Smith prepared and filed a joint income tax return with Roberts. In early 2009, Roberts, although separated from Smith, discussed with her the preparation and filing of a joint income tax return for 2008. He understood from that conversation that he and Smith would still file a joint return.

Roberts gave his tax information to Smith so that she could prepare the 2008 joint return. However, Smith prepared and filed separate returns, using married filing separate filing status for herself and single filing status for Roberts.

On Roberts’s return, Smith made several errors, including not reporting the IRA withdrawals as income. Roberts’s return showed a refund that had been electronically deposited into the joint account controlled by Smith. She did not show Roberts the return or give him a copy, despite his asking for one.

Upon examination, the IRS argued that Roberts should have reported the withdrawals as taxable distributions because he was the owner of the IRAs and the person entitled to receive distributions, the distributions were deposited into a joint account, and they went toward “family living expenses.” The IRS also found it significant that Roberts never attempted to return the funds to the IRAs or contest the distributions once he discovered the payments.

Roberts claimed that he was not a payee or distributee of the funds because the IRA withdrawals were made pursuant to forged requests, the checks were stolen, the endorsement signatures were forged, and he had received no economic benefit.

The Tax Court concluded, based on common sense as well as its finding of fact and analysis, that Roberts was not a payee or distributee of the funds. The court noted that, although it has held that the distributee or payee of an IRA distribution is “generally” the participant or beneficiary entitled to receive the distribution, it has rejected the claim that the recipient is “automatically” the distributee.

The court also found that Roberts’s failure to timely pursue a state law remedy did not necessarily mean that he had received a taxable distribution from his IRA accounts. Thus, on the basis of the overall facts, the court concluded that Roberts did not fail to report any income attributable to the IRA distributions. Because the withdrawals were not distributions taxable to Roberts, he was not liable for the additional tax on early withdrawals.

However, the court ruled against Roberts on the issue of filing status. It reasoned that, because Roberts and Smith were still married on Dec. 31, 2008, and were not separated for the last six months of the year, the proper filing status was married filing separately.

The court also held that, to the extent that the final computations showed that his understatement of tax exceeded the greater of 10 percent of the tax required to be shown on the return or $5,000, Roberts would be liable for a substantial underpayment penalty (Andrew W. Roberts v. Commissioner, 141 TC No. 19, Dec. 30, 2013).

©2014 CPAmerica International

 

If you’re holding money in a traditional IRA, maybe it’s time for you to take another look at a Roth conversion.

Since the $100,000 income limitation was removed in 2010, you have no restriction on your ability to transfer funds from a traditional IRA to a Roth IRA – and no limit on the amount you can transfer.

You will have to pay tax currently on the amount of the transfer that would have been treated as a taxable distribution, if you had actually received the money. But the future benefits can be significant.

Future distributions, including profits, from the Roth account will escape tax entirely, provided you have had a Roth account in place for at least five years. Moreover, there is no required minimum distribution when you reach age 70½.

Statistics recently released by the IRS for 2010 – the latest year for which information is available – show that wealthier people are taking advantage of the Roth conversion opportunity in record numbers. Conversions increased more than nine times in 2010, rising to $64.8 billion from $6.8 billion in 2009, according to IRS data. That was the first year in which Roth conversions exceeded contributions.

The wealthiest Americans – those with estates large enough to be subject to the estate tax – receive an additional benefit. Any income taxes paid as a result of the conversion reduce future estate taxes. Without the conversion, the heirs will eventually pay the income taxes anyway, so the estate tax savings is a net benefit to the family.

A Roth conversion may not be for everyone, but you may wish to take a second look. If you convert in early 2014, you may not have to pay the resulting income taxes until April 15, 2015. That gives you more than a year to continue to use those tax dollars to enhance your retirement savings.

With the IRS relaxing the rules on in-plan Roth conversions, your 401(k) plan should also be considered as a conversion candidate if it offers a Roth account feature.

 

With only a few days remaining in 2013, it is time to complete your year-end tax planning and make your New Year’s resolutions.

Here are planning points you might want to consider:

  1. If you can use additional tax deductions in 2013, pay your deductible expenses by Dec 31. If you are short on cash, consider charging your credit card. For tax deduction purposes, plastic works like cash.
  2. If you reached age 70½ on or before Dec. 31, 2013, you may need to take a required minimum distribution from your traditional IRA by April 1, 2014. If you’re already taking your required minimum distributions, another may be due by the end of the year. The penalties can be significant, so be sure you know how much you need to withdraw and by what deadline.
  3. If you have losses in you stock portfolio, you may be able to save some 2013 taxes by selling your losing positions. Just be sure you do not run afoul of the wash-sale rule, which prevents you from claiming a loss if you repurchase the same security within 60 days before or after the sale date.
  4. If you have money accumulated in a traditional IRA, consider whether it would make sense to convert some or all of your savings to a Roth IRA. You will have to pay tax on the conversion, but there are advantages to a Roth IRA – withdrawals are generally tax-free and are not subject to the minimum distribution requirements. It pays to take a look.
  5. If you have children or grandchildren, explore a Section 529 college savings program. Many states offer tax incentives to residents who participate in their state-sponsored program.
  6. If you are going to reach the age at which you qualify for Social Security retirement benefits during 2014, consider whether you want to take the payments immediately or delay the start of your benefits. A delay may increase the amount you receive monthly.
  7. If you do not have a will or if it has been quite a few years since you reviewed it, make an appointment with your attorney and your estate planner for a date early in 2014. If you do not have a will, the laws of your state may determine who inherits your assets.
  8. If you have a Section 401(k) plan at work and don’t yet participate, visit your payroll department to set up periodic contributions beginning early in 2014. Do not pass up the opportunity for tax-sheltered investment earnings by delaying your contributions until later in the year.
  9. While you are visiting the payroll department, make sure your federal and state income tax withholding is set at an appropriate level. Too much or too little withholding is not financially sound.

Gather your tax information and get it to your tax preparer early in the filing season. With all the tax changes that took place for 2013, you do not want to be unpleasantly surprised just before the due date by a higher amount of tax due.

©2013 CPAmerica International 





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