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Have You Made This Year’s Required Minimum Distribution?

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If you are retired and have iIRA-Services-RMDnvested in a retirement plan, December 31st is one date that should be marked clearly on your calendar. That’s the last day that you are allowed to make any Required Minimum Distributions, or RMDs, to avoid a steep IRS penalty. In fact, penalties for mishandling these withdrawals are among the most costly penalties in the entire tax code.

Here’s what you need to know about handling this year’s RMD.

What are RMDs?

Retirement accounts like 401(k)s and Traditional IRAs delay taxation on your investment gains, which incentivizes you to save more while you are working. But once you retire, the IRS wants to begin collecting on those unpaid taxes, which they can do when you make a withdrawal from your retirement accounts. So, the IRS requires a minimum withdrawal each year – the RMD.  (Roth IRAs, which includes tax-free withdrawals, are exempt from the RMD rule.)

If you have a Traditional IRA, you should start taking an RMD – which you will need to calculate – when you turn 70 ½. If you have a work-sponsored plan, such as a 401(k), you should start taking RMDs either when you turn 70 ½ or when you retire, whichever is later. If you do not withdraw your RMD, the IRS will charge you a tax penalty equal to 50% of your RMD amount. For example, if your RMD is $20,000 and you withdrew zero dollars before the January 31 deadline, the IRS will charge you a $10,000 penalty.

How to calculate your RMD

RMDs are calculated using a few different factors. Your particular RMD is based on your current age, the amount of money in your retirement plan, and your expected life expectancy, as calculated by the IRS. The IRS publishes calculation tables every year, known as the IRS Uniform Lifetime Table

To find your RMD for this year, find the “life expectancy factor” next to your current age on the table. Then divide your retirement account balance (as of December 31of last year) by your life expectancy factor.

For example, if you are 80 or will turn 80 sometime in 2015, your life expectancy factor is 18.7. And if you had $100,000 in your Traditional IRA on December 31st 2014, your RMD calculation for 2015 would be: $100,000/18.7 = $5,348. It’s always a good idea to double check your calculation with your financial advisor.

Special situations for RMDs

1st year of RMDs

In the first year that you take an RMD, you have the option of delaying your withdrawal until April 1 of the following year. So, if you turned 70 ½ in 2015, you can delay your first RMD until April 1st of 2016. But remember that if you do this, you will need to make two withdrawals in one calendar year, the first by April 1 and the second by December 31, in order to stay compliant for next year. Depending on your situation, the extra withdrawal could move you into a higher tax bracket.

Younger spouse

If your spouse is more than 10 years younger than you and would inherit your retirement plan, then the RMD calculation is based on a different table, called the “Joint and Survivor Life Expectancy Table.” This calculation table reduces your RMD amount to help ensure there are sufficient funds to support your younger spouse’s retirement.

Multiple retirement plans

If you have more than one retirement plan through your employer, you are required to calculate and withdraw RMDs for each individual plan. However, if you have more than one IRA, you can combine the withdrawal. For example, if you calculate that you must withdraw $1,000 out of one IRA and $2,000 out of another, you can divide those withdrawals across both accounts- however you prefer, as long as you take out a total of $3,000 from all your IRAs.

Inherited retirement plan

The  person inheriting your retirement plan will also need to do an annual RMD, should you pass away. If your spouse inherits the plan, they have the option of rolling the money over into their own IRA and following the normal retirement RMD schedule.

If someone besides your spouse inherits your retirement plan, they will need to calculate RMDs based on the single life expectancy table. The inheritor must make RMDs immediately, and are not allowed to wait until their retirement. For example if your 50-year old son inherits your plan, he is not allowed to wait until he turns 70 ½ to begin RMD withdrawals.

You worked hard to save up money in your retirement plans so make sure that money doesn’t slip away to costly penalties.

How To Avoid Taxes From Required Minimum Distributions

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IRA, Withdrawal, TaxesOne of the hallmark benefits of investing in a retirement plan is the ability to defer taxes on your savings and investment gains. But the IRS won’t let you get away with this perk indefinitely, and you will eventually have to start paying taxes on your savings through IRS-mandated withdrawals known as Required Minimum Distributions (RMDs).

For those that don’t necessarily need to make withdrawals on their retirement fund on a regular basis, or those that would like to postpone taxes further, RMDs can be frustrating and lead to extra taxes. First, RMDs add to taxable income, driving up your tax liability. Also, withdrawing from your retirement account means your savings are no longer in a tax-deferred account and if you reinvest the money through a regular brokerage account after the RMD, you’ll be paying extra taxes on your future investment gains as well.

If it is more beneficial for you to continue deferring taxation on your savings, as there are a few strategies you can use to avoid RMDs.

How do RMDs Work?

First, let’s back up to explain the basics of RMDs. RMDs only apply to retirement plans, like Traditional IRAs and Traditional 401(k)s, that trigger a tax on withdrawals. There are no RMDS for accounts with tax-free withdrawals, such as Roth IRAs.

The rules around RMDs vary by type of account. Traditional IRAs, for example, require RMDs each year once you turn 70 ½ years old. If you have a work retirement plan, you don’t need to make RMDs until you either turn 70 ½ or retire, whichever is later.

RMD amounts also vary, and are calculated based on your life expectancy and your account balance. To find your RMD, divide your account balance by your expected life expectancy (using a chart prepared by the IRS).

Penalties for not paying your RMD every year are among the most onerous in the tax code, at 50% of the RMD amount. For example, if your RMD is $10,000 and you don’t make a withdrawal, you’ll owe $5,000 in extra taxes that year.

So, how do you avoid RMDs if you don’t actually require those annual withdrawals to meet your needs? Roth IRAs are your best bet, and there are a few different rollover strategies to consider.

1. Make a lump-sum Roth IRA rollover

Rolling over your entire Traditional IRA or 401(k) balance into a Roth IRA has pros and cons. The year that you make the rollover, you will need to pay taxes on the entire account balance, meaning you will take a fairly sizable, one-time tax hit.

But, on the upside, you will never have to make RMDs in the future, and your savings will grow tax-free from that point on. This approach can make sense if you are in a relatively low tax bracket and have the money to pay off all your retirement plan taxes right away.

2. Spread out small transfers to a Roth IRA

Once you turn 59 ½, you can also choose to make smaller withdrawals every year from your taxable retirement plans (Traditional IRAs and 401(k)s) to a Roth IRA. By making smaller withdrawals, you can avoid getting pushed into a higher tax bracket by that extra income, and taxes on withdrawals will be fairly minimal.

The downside of this approach is that it requires more effort on your end, and you will see less tax-free growth in the future since your Roth IRA balance will accumulate more slowly than a lump sum transfer.

This strategy works best if you finish your Roth rollover before you start taking Social Security because taxable retirement plan withdrawals add to your total income, which can lead to extra taxes on your Social Security payments. Keep in mind that it usually does not make sense to delay Social Security after age 70.

Both approaches have their merits and can help you minimize if not completely avoid RMDs. By planning ahead, you can take money out of retirement plans on your schedule to make sure you have the most tax-effective approach. In the meantime, read more about making this year’s Required Minimum Distribution in our next article.

News & Ideas – April 2015

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Important April DApril calendar deadlineseadlines

Take note of the following important April deadlines:

April 1: Deadline for investors who turned 701⁄2 in 2014 to take their Required Minimum Distribution (RMD).
April 10: Final deadline for the second installment of property tax payments. Payments received after this date are considered delinquent.
April 15: Deadline for 2012 contributions (must be post-marked by April 15), and deadline for filing your tax return (or requesting an extension).

If you have missed any of these deadlines, please contact your accountant to find out what the repercussions are and/or the penalties you may be subject to, if any.

Paperless Notifications for Property Tax and Expense Payments

For those of you who have opted to go paperless, we applaud your actions.

As part of our continuing efforts in this regard, if you hold real estate directly in your account, we will be e-mailing our Property Tax Payment Request form, along with any property tax bills we receive, beginning May 1, 2015. This form can simply be completed, then faxed or e-mailed back to us. You may instruct us either to send the check with the original tax document to you for filing or directly to the tax authority We ask that requests be submitted as promptly as possible to allow us to make timely processing of your payments.

In addition, we occasionally receive asset summaries, insurance policies, utility bills, and similar documents, pertaining to assets held in your account. We will forward these promptly to the e-mail address indicated on your account. If a payment is required, we will also attach the Expense Payment Request form for your convenience. Once we receive your instructions indicated on that form we will forward the payment to the authorized provider.

Also, we suggest clients consider arranging with their providers to have bills sent directly to them at their residence or primary address. This will provide more time for receipt and processing of payment requests. Please note: if you require the original document to be sent to you, a $5.00 forwarding fee will apply, charged to your account.

Consider the benefits of a Roth IRA

Roth IRAs are designed to leave more money in your hands down the road. Establishing a Roth IRA now or converting some of your Traditional IRA may save you money in taxes, especially over longer periods, growing yourself a bigger nest egg.

Qualified Distributions are tax-free

Once you are over the age of 59 1⁄2, having held a Roth IRA for at least 5 years’ time, the funds can be distributed tax-free. They can also remain in the Roth IRA indefinitely to grow even further until you need them.

Funds held in a Roth IRA, unlike the Traditional IRA, are not subject to mandatory withdrawals starting at age 70 1⁄2, so you are free to maintain the balance of funds in your Roth IRA even after the age 70 1⁄2 milestone at which Traditional IRAs must begin.
Converting money from Traditional IRA to Roth IRA will reduce the amount remaining in
Traditional IRAs that is subject to the Required Minimum Distributions.

You can take physical possession of your ‘hard assets’ like real estate or precious metals, tax-free. This is possible when you make Qualified Distributions (over the age of 59 1⁄2, with 5 years in the Roth IRA). Now they are yours to hold and to use as you wish.

No eligibility age limit for contributions

New contributions to your Roth IRA are still permitted after 701⁄2, as long as you have earned income. If your income (MAGI) exceeds $6,500 but is less than $116,000 (or $183,000 if filing jointly), you may be entitled up to the maximum contribution, including the catch-up provision of $6,500.

No RMDs for sole spousal beneficiaries

A spouse, who is the sole beneficiary of a Roth IRA that meets the criteria for qualified distributions, may make the Roth IRA their own, tax-free. Not only that, they can even make new Contributions to it going forward, as long as they have earned income. A non-spouse beneficiary (or a spouse who is not sole beneficiary) may elect to take distributions according to his or her own life expectancy. These too will be tax-free to the beneficiary (again, assuming the original Roth IRA owner had met the criteria for qualified distributions at the time of death).

No income limits for converting to Roth IRA

Even if your earnings are too great to allow you to make new Contributions to a Roth IRA, you are allowed to make Conversions to a Roth IRA without limitations from your existing Traditional IRA. Yes, it will be taxable in the year you convert, but this could still pay off handsomely in the long run, as you may be able to keep the money working for you indefinitely, before ultimately withdrawing it tax-free. However, you should consult with your tax advisor to determine what is best for you and your tax situation.

Thinking of your legacy (children and grand-children)?

For a parent of a child who has earned income, a Custodial Roth IRA can be a great way to teach the value of saving and investing. Besides getting a head start on saving and investing, the child can learn and see how a small investment made today (especially when repeated periodically) can grow into a large pile of funds over time. Down the road, the child could tap into it for qualified higher education expenses, and similarly, they could use up to $10,000 towards their first home purchase – without tax or penalty, in either case.

While we’re on the subject of legacy (children and grand-children), be sure to consider an ESA (Education Savings Account, formerly known as a Coverdell account). An ESA allows you to make an annual non-deductible contribution of up to $2000 to a specially designated investment trust account, which will grow free of federal income taxes. Withdrawals from the account will generally be tax-free as well, when used for qualified K-12 or college expenses.

Your Responsibilities

As a self-directed IRA account holder, it is important for you to know and understand your responsibilities:

  • Choosing your investment(s)
  • Performing due diligence on your investment(s)
  • Understanding the risks related to your investment(s)
  • Monitoring your investment(s)’ performance
  • Knowing whether your investment is liquid and how to liquidate
  • Understanding Prohibited Transaction rules and avoiding them
  • Ensuring that valuations are provided to us for all assets on at least an annual basis
  • Understanding our fees and minimum balance requirement

Please read our Fee Schedule and Financial Disclosure.

You are solely responsible for the success of your investments. IRA Services Trust Company does not assume responsibility for any investment decision. Therefore, it is important that you choose suitable professionals (accountants, tax advisors, attorneys and financial advisors) to assist you with your investment decisions.

News & Ideas – January 2015

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2014 Annual Statement & Tax Documents

 

Statements for the period ending 12/31/14 will be available by January 31st. This statement is an annual consolidated statement that includes a full-year summary. If you have online access to your account, please take note that your quarterly statements for the first, second, and third quarters will be replaced by the annual statement.

The annual statement will serve as your substitute Form 5498. The information that will appear on your substitute Form 5498 (contributions, rollovers, account valuation) will be furnished to the Internal Revenue Service.

If you took a distribution, did a Roth conversion, or had any other taxable transaction, you will receive a Form 1099R which will be issued by January 31st.

Required Minimum Distributions (RMDs)

If you are over 70 1⁄2 or will turn 70 1⁄2 this year, you will receive notification letters and reminders indicating the amount of your required minimum distribution. For investors who turned 70 1⁄2 in 2014, the deadline to receive your RMD is April 1st 2015. If you are turning 701⁄2 this year, your deadline is April 1st 2016. Please note that if you have an IRA at another financial institution, you may take your RMD from that IRA account should you wish to do so.

If you choose to take your RMD from your IRA Services account, please send in your request so that your distribution is issued to you prior to the deadline. If your request entails a liquidation and/or an in-kind distribution, please send your request now (preferably by February 1st) to allow enough time to process the liquidation and/or re-registration by April 1st.

For investors who were over the age of 70 1⁄2 prior to December 31, 2013, the deadline to receive your RMD is December 31, 2015. Please send us your request as soon as possible, but no later than December 15. 2015. Failure to provide your request to us in a timely manner may result in your distribution not being issued by the deadline. As a result, you may face penalties from the IRS.

For more information on requesting a distribution, please call us at 1-800-248-8447 or send an email to info@iraservices.com.

Valuations

For investors who hold Real Estate and/or IRA LLCs in their account, the deadline to submit your valuation so that it appears on your 2014 year-end statement was January 12, 2015.

If you submitted your valuation after January 12, your new fair market value will be reflected on your first quarter statement for 2015.

For investors who hold other asset types, please contact your investment provider to ensure that they have provided us with the fair market value of your asset(s).

Reminders About Statements and Fees

Go Paperless today

Beginning with your March 2015 statement, a $5.00 per paper statement fee will be charged each quarter. To avoid this cost, you may elect to download your statements from our website. To elect to go paperless, visit our websitewww.iraservices.com, log into your account, and change your delivery method under the Statement Section in the lower left corner of the display. If you don’t have an online account and wish to establish one, submit an Internet Access Request form available on our website www.iraservices.com under the Forms & Fees tab. Should you require any assistance, send an email to info@iraservices.com or call Customer Service at 800-248-8447.

Remember, if you wish to pay account fees due in 2014, you must do so by January 31, 2015. Funds received after this date may be returned to you. To pay your account fees, please send a check made payable to “IRA Services Trust Company” indicating the total amount of fees to be paid. You may only pay 2014 fees which have not already been paid by you.

Consider the benefits of a Roth IRA

Roth IRAs are designed to leave more money in your hands down the road. Establishing a Roth IRA now, or converting some of your Traditional IRA, may save you money in taxes, especially over longer periods, growing yourself a bigger nest egg.

Qualified Distributions are tax-free

Once you are over the age of 59 1⁄2, if you have held a
Roth IRA for at least 5 years, those funds can be distributed tax-free. Funds held in a Roth IRA, unlike the Traditional IRA, are not subject to mandatory withdrawals starting at age 70 1⁄2, so you are free to maintain the balance of funds in your Roth IRA after the age 70 1⁄2 milestone.

Converting money from Traditional IRA to Roth IRA will reduce the amount remaining in Traditional IRAs that is subject to Required Minimum Distributions.

No eligibility age limit for contributions

New contributions to your Roth IRA are still permitted after 701⁄2, as long as you have earned income. If your income exceeds $6,500 but is less than $116,000, you may be entitled to make up to the maximum contribution, including the catch-up provision of $6,500.

No RMDs for sole spousal beneficiaries

A spouse, who is the sole beneficiary of a qualified Roth IRA, may make the Roth IRA their own. Distributions from the Roth IRA would be tax free. In addition they can make new Contributions, as long as they have earned income.

A non-spouse beneficiary (or a spouse who is not the sole beneficiary) may elect to take distributions according to their own life expectancy. These too will be tax-free to the beneficiary, again assuming the original Roth IRA owner had met the criteria for qualified distributions at the time of death.

No income limits for converting to Roth IRA

Even if your earnings are too great to allow you to make new Contributions to a Roth IRA, you are allowed to make Conversions from your existing Traditional IRA to a Roth IRA without limitations. It will be taxable in the year you convert, but this could still pay off handsomely in the long run, as you may be able to keep the money working for you indefinitely, before ultimately withdrawing it tax-free. Ask your accountant or tax advisor for advice on the best option for you.

Thinking of your legacy? (Children and Grand-children)

For a parent of a child who has earned income, a Custodial Roth IRA can be a great way to teach the value of saving and investing. Besides getting a head start on saving and investing, the child can learn and see how a small investment made today, especially when repeated periodically, can grow into a significant amount over time. Later, the funds can be used for qualified higher education expenses, and up to $10,000 towards their first home purchase without tax or penalty.

While we are on the subject of legacy (children and grand-children), be sure to consider an Education Savings Account. An ESA allows you to make an annual non-deductible contribution of up to $2000 to a specially designated investment trust account, which will grow free of federal income taxes. Withdrawals from the account will generally be tax-free as well when used for qualified K-12 or college expenses.

Don’t let April 15 sneak up on you

If you missed out on, or were unable to Contribute to your IRA or Roth IRA in 2014, you are not out of luck. You can still make a Contribution for last year (2014) if we receive it or it is postmarked and dated prior to April 15, 2015. With sufficient earned income, you can still Contribute up to $5,500 (or $6,500 if 50 years of age or above) for 2014. Your account benefits from this provision, allowing you a final chance to ‘catch-up’ on 2014.

Contact Us

IRA Services
PO Box 7080
San Carlos, CA 94070-7080

(800) 248-8447
(605) 385-0050
info@IRAServices.com