IRA Contribution Limits for 2018 – Unchanged at $5,500 and $6,500; 401(k) Limits Do Change

Posted by James M. Carlson
Oct 31 2017

Inflation was approximately 2.0% for the fiscal quarter ending September 30, 2017, so many of the IRA and pension limits as adjusted by the cost of living factor have not changed or the changes have been quite small.

Th e maximum IRA contribution limits for 2018 for traditional and Roth IRAs did not change – $5,500/$6,500.

The 2018 maximum contribution limit for SEP-IRAs is increased to $55,000 (or, 25% of compensation, if lesser) up from $54,000. The minimum SEP contribution limit used to determine if an employer must make a contribution for a part-time employee remains the same at $600. The 2018 maximum contribution limits for SIMPLE-IRAs are unchanged at $12,500 if the individual is under age 50 and $15,500 if age 50 or older.

The 2018 maximum elective deferral limit for 401(k) participants is changed to $18,500 for participants under age 50 and $24,500 for participants age 50 and older. The catch-up amount of $6,000 did not change.

Contribution limits for a person who is not age 50 or older.

Tax Year Amount

2008-12 $5,000

2013-18 $5,500

Contribution Limits for a person who is age 50 or older.

Tax Year Amount

2008-12 $6,000

2013-18 $6,500

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IRS Revises IRA Model Forms - 5305 Series

Posted by James M. Carlson
Sep 29 2017

The IRS has updated their model IRA forms for traditional IRAs, Roth IRAs and SIMPLE IRAs. The IRS issued the revisions in April of 2017. The IRS has not issued any guidance as to when an IRA custodian or IRA trustee must use the April 2017 versions for either new IRA accountholders or existing IRA accountholders.

Traditional IRA Form Changes

The sole change to the traditional IRA Forms 5305 and 5305-A was to change Article I to set forth the 2017 IRA contribution limit so it reads as follows,

Article I

Except in the case of a rollover contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), an employer contribution to a simplified employee pension plan as described in section 408(k) or a recharacterized contribution described in section 408A(d)(6), the trustee will accept only cash contributions up to $5,500 per year for 2013 through 2017. For individuals who have reached the age of 50 by the end of the year, the contribution limit is increased to $6,500 per year for 2013 through 2017. For years after 2017, hese limits will be increased to reflect a cost-of-living adjustment, if any.

Roth IRA Form Changes

There are two changes to the Roth IRA Forms 5305-R and 5305-RA. First, Articles I and II have been changed to set forth the 2017 Roth IRA contribution and income limits. Secondly, prior forms had provisions not allowing a conversion contribution to be made in certain situations. Such laws were repealed effective for tax year 2010. The sentences in Article II discussing the old conversion rules have been deleted.

Article I

Except in the case of a qualified rollover contribution described in section 408A(e), or a recharacterized contribution described in section 408A(d)(6), the custodian will accept only cash contributions up to $5,500 per year for 2013 through 2017. For individuals who have reached the age of 50 by the end of the year, the contribution limit is increased to $6,500 per year for 2013 through 2017. For years after 2017, these limits will be increased to reflect a cost-of living adjustment, if any.

Article II

  1. The annual contribution limit described in Article I is gradually reduced to $0 for higher income level. For a grantor who is single or treated as single, the annual contributions is phased out between adjusted gross income (AGI) of $118,000 and $133,000; for a married grantor filing jointly, between AGI of $186,000 and $196,000; and for a married grantor filing separately, between AGI of $0 and $10,000. These phase-out ranges are for 2017. For years after 2017, the phase-out ranges, except for the $0 to $10,000 range, will be increased to reflect a cost-of-living adjustment, if any.
  2. In the case of a joint return, the AGI limits in the preceding paragraph apply to the combined AGI of the depositor and his or her spouse.

SIMPLE IRA Form Changes

The sole change to the SIMPLE IRA Forms 5305-S and 5305-SA was to change Article I to set forth the new rules allowing rollover contributions to be made with respect to distributions from other eligible employer plans and other eligible IRAs as long as the 2 year requirement has been met.

Article I

The trustee will accept cash contributions made on behalf of the participant by the participant's employer under the terms of a SIMPLE IRA plan described in section 408(p). In addition, the trustee will accept transfers or rollovers from other SIMPLE IRAs of the participant and, after the 2-year period of participation defined in section 72(t)(6), transfers or rollovers from any eligible retirement plan (as defined in section 402(c)(8)(B)) other than a Roth IRA or a designated Roth account. No other ontributions will be accepted by the trustee.

CWF Revisions

CWF will be issuing an IRA Form System update in December and the applicable forms will reflect the IRS versions of April 2017. Print versions shipped on or after October 23, 2017 will reflect these changes

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7 Cardinal IRA Rollover Rules

Posted by James M. Carlson
Aug 31 2017

An individual who complies with the IRA rollover rules is not required to include an IRA distribution in their income, and if under age 59½, will not owe the 10% tax or the 25% tax as applicable. The general tax rule is, a person who receives an IRA distribution which is included in their income before age 59½ owes a 10% tax of the amount withdrawn unless an exception applies. However, there is a special rule for certain early SIMPLE-IRA distributions. The additional tax rate increases to 25% if a SIMPLE-IRA participant withdraws SIMPLE-IRA funds before he or she has satisfied a 2 year requirement unless an exception would apply.

There are seven (7) cardinal IRA rollover rules:

  1. An RMD is never eligible to be rolled over
  2. A person is authorized to rollover only one distribution within a 12 month period (365 days)
  3. The rollover must be completed within 60 days of the distribution
  4. If property is distributed (and not cash), such property must be rolled over. The property cannot be sold and the proceeds rolled over as is the case when property is distributed from a qualified plan
  5. SIMPLE IRA funds may be rolled over into a traditional IRA, SEP-IRA, or 401(k) plan or vice versa only if the individual has met the 2 year requirement
  6. A non-spouse beneficiary of an inherited IRA is never eligible to roll over a distribution from an inherited IRA; an
  7. Roth IRA funds can only be rolled over into the same or a different Roth IRA. When can the IRS grant relief if an individual fails to comply with any of these 7 rules?

The IRS’ position is, we can grant relief if the individual failed to comply with the 60 day requirement, but if the failure is for any of the other six (6) rules, we can’t grant relief.

The IRS has been granted the authority by a 2001 tax law to grant relief to someone who has missed the 60 day rule because he or she incurred some difficulty or hardship and it would be unjust or inequitable for the IRS to not waive the 60 day rule for the individual. Waive means the IRS creates a new 60 day period for the individual to complete the rollover.

The IRS' position is - it does not have the authority to grant rollover relief to a person who fails to comply with any of the other rollover rules.

The IRS can't grant relief to any person who has taken multiple IRA distributions during a twelve month and makes an ineligible rollover contribution.

The IRS can't grant relief to a non-spouse beneficiary who was paid an unrequested distribution by an IRA trustee.

The IRS can't grant relief and allow someone to roll over a required distribution.

The IRS can't grant relief if a person receives an in-kind distribution from his or her IRA, sells the asset, and then impermissibly rolls over the sales proceeds.

If a distribution is ineligible to be rolled over for any of the non-Roth IRA reasons, such distribution will need to be included in the individual's taxable income except to the extent any basis was distributed. If such distribution is impermissibly rollover over, it will be an excess contribution subject to the excess contribution rules until corrected by withdrawal.

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SIMPLE-IRA Summary Description - IRA Custodian Must Furnish by October 2017 for 2018

Posted by James M. Carlson
Jul 03 2017

What are a financial institution's duties if it is the custodian or trustee of SIMPLE IRA funds? After a SIMPLE IRA has been established at an institution, it is the institution's duty to provide a Summary Description each year within a reasonable period of time before the employees' 60-day election period. CWF believes that providing the Summary Description 30 days prior to the election period would be considered "reasonable." The actual IRS wording is that the Summary Description must be provided "early enough so that the employer can meet its notice obligation." You will want to furnish the Summary Description to the employer in September or the first week of October. The employer is required to furnish the summary description to its employees before the employees' 60-day election period. IRS Notice 98-4 provides the rules and procedures for SIMPLEs. This notice is reproduced in CWF's IRA Procedures Manual.

The Summary Description to be furnished by the SIMPLE IRA custodian/trustee to the sponsoring employer depends upon what form the employer used to establish the SIMPLE IRA plan.

The employer may either complete Form 5305-SIMPLE (where all employees' SIMPLE IRAs are established at the same employer-designated financial institution) or Form 5304-SIMPLE (where the employer allows the employees to establish the SIMPLE IRA at the financial institution of his or her choice).

There will be one Summary Description if the employer has used the 5305-SIMPLE form. There will be another Summary Description if the employer has used the 5304-SIMPLE form. If you are a user of CWF forms, these forms will be Form 918-A and 918-B.

The general rule is that the SIMPLE IRA custodian/trustee is required to furnish the summary description to the employer. This Summary Description will only be partially completed. The employer will be required to complete it and then furnish it to its employees. The employer needs to indicate for the upcoming 18 year the rate of its matching contribution or that it will be making the non-elective contribution equal to 2% of compensation.

However, in the situation where the employer has completed the Form 5304-SIMPLE, the IRS understands that many times the SIMPLE IRA custodian/trustee will have a minimal relationship with the employer. It may well be that only one employee of the employer establishes a SIMPLE IRA with a financial institution. In this situation, the IRS allows the financial institution to comply with the Summary Description rules by using an alternative method.

To comply with the alternative method, the SIMPLE IRA custodian/trustee is to furnish the individual SIMPLE IRA accountholder the following:

  • A current 5304-SIMPLE: This could be filled out by the employer, or it could be the blank for
  • Instructions for the 5304-SIMPL
  • Information for completing Article VI (Procedures for withdrawal) (You will need to provide a memo explaining these procedures)
  • The financial institution's name and address.

Obviously, if an institution provides the employee with a blank form, he/she will need to have the employer complete it, and, the employee may well need to remind the employer that it needs to provide the form to all eligible employees.

CWF has created a form which covers the “alternative'' approach of the Summary Description being provided directly to an employee.

The penalty for not furnishing the Summary Description is $50 per day.

Special Rule for a "transfer" SIMPLE IRA.

There is also what is termed a "transfer" SIMPLE IRA. If your institution has accepted a transfer SIMPLE IRA, and there have been no current employer contributions, then there is no duty to furnish the Summary Description.

However, if there is the expectation that future contributions will be made to this transfer SIMPLE IRA, then the institution will have the duty to furnish the Summary Description.

Reminder of Additional Reporting Requirements

The custodian/trustee must provide each SIMPLE IRA account holder with a statement by January 31, 2018, showing the account balance as of December 31, 2017 (this is the same as for the traditional IRA), and include the activity in the account during the calendar year (this is not required for a traditional IRA). There is a $50 per day fine for failure to furnish this statement (with a traditional IRA, it would be a flat $50 fee).The purpose of this requirement is so that employees may determine their elective deferral contributions that are being contributed to their SIMPLE-IRA on a timely basis.

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Purchasing A Financial Institution Having Inherited IRAs- Caution Is Warranted

Posted by James M. Carlson
Jun 01 2017

Most everyone tends to believe what the IRS says is correct and must be followed. That is not always the case. The IRS must follow the statutory law and its regulations, and the U.S. Tax Court has no problem ruling that the IRS is wrong in its tax position. Courts give some deference to the IRS, but it is not absolute. For example, in the Bobrow rollover case the tax court ruled the IRS did not have the authority to expand the once per year rollover rule to permit a person to make rollovers on a per plan agreement basis.

Sometimes a taxpayer should be more conservative and adopt a position more conservative than the IRS' position. This is the case with inherited IRAs. In IRS Notice 2002-27 and the instructions for Forms 1099-R and 5498 the IRS had stated an IRA beneficiary is responsible to calculate and withdraw the applicable required distribution. The IRA custodian is not required to send a beneficiary a required distribution notice as it must for someone age 70½ or older.

An IRA custodian must remember that its relationship with its IRA clients is primarily governed by the IRA plan agreement and not by what IRS guidance provides. The IRA plan agreement requires that certain distributions be made to IRA owners who are age 70½ and older and to an IRA beneficiary after the IRA owner dies. A strong argument exists that the IRA custodian has a duty to make sure such distributions are taken.

The law imposes a 50% excise tax when a person fails to take their RMD by the applicable deadline. This 50% tax is an annual tax. For example, if a beneficiary had an RMD of $400 for 2013 and fails to withdraw it for 2013-2016 but withdraws it in 2017, the beneficiary owes $800 plus interest and applicable penalties (i.e. $200 for 2013, 2014, 2015 and 2016).

A financial institution wants to protect itself against the following situation. Bank A had purchased Bank B in 2013. Bank B had a long time IRA client, Jane Smith, who had died in February of 2012 at age 73. She had designated her daughter Mary (age 48) to be her IRA beneficiary. It is now May of 2017. Mary's IRA CD has just matured and she is in the process of deciding if she will reinvest it with Bank A or have it transferred to another IRA custodian. Mary understands her IRA is an inherited IRA. The problem is - Mary's IRA is not listed on the computer system at Bank A as an inherited IRA. It is listed only as her own IRA. She has not taken any required distributions for 2012-2016.

What's to be done? What are the possible adverse tax consequences and the possible adverse non-tax consequences? Jane is required to pay the 50% on her missed RMDs unless she can convince the IRS she should not have to pay the tax on account of the IRA custodian's failure to perform its duty of distributing the RMD for each year. The IRS may well rule she owes the taxes on account of Notice 2002-47. Jane may well commence legal action to include the IRA custodian (Bank A) in her tax dispute with the IRS. Litigation is expensive and it is to be avoided.

When a financial institution buys another financial institution (and its IRAs) the buyer wants to determine that there are no inherited IRA problems within the seller's IRA portfolio. There should be a thorough review conducted before the closing and possibly the inclusion of a contract provision where the seller remains liable if any unknown problems arise after the sale/purchase.

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IRS Guidance on the One Rollover Per Year Rule

Posted by James M. Carlson
May 30 2017

A person generally cannot make more than one rollover from the same IRA within a 1-year period. A person also cannot make a rollover during this 1-year period from the IRA to which the distribution was rolled over.

Beginning after January 1, 2015, one can make only one rollover from an IRA to another (or the same) IRA in any 12- month period, regardless of the number of IRAs one owns.

The one-per year limit does not apply to:

  • rollovers from traditional IRAs to Roth IRAs (conversions
  • trustee-to-trustee transfers to another IR
  • IRA-to-plan rollover
  • plan-to-IRA rollover
  • plan-to-plan rollovers

Once this rule takes effect, the tax consequences are:

  • one must include in gross income any previouslyuntaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover (other than a rollover from a traditional IRA to a Roth IRA) in the preceding 12 months, an
  • one may be subject to the 10% early withdrawal tax on the amount you include in gross income.

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CWF's Primer on IRA Rollover Rules

Posted by James M. Carlson
May 08 2017

There are seven (7) IRA rollover rules:

  1. An RMD is never eligible to be rolled over
  2. A person is authorized to rollover only one distribution within a 12 month period
  3. The rollover must be completed within 60 days
  4. An inherited IRA (non-spouse beneficiary) is never eligible to roll over a distribution from an inherited IRA
  5. 5. If property is distributed (and not cash), such property must be a rollover The property cannot be sold and the proceeds rollover over as is the case when property is distributed from a qualified plan
  6. SIMPLE IRA funds may be rolled over into a traditional IRA, SEP-IRA or a 401(k) or vice versa only if the individual has met the 2 year requirement
  7. Roth IRA funds can only be rolled over into the same or a different Roth IRA.

A person who fails to comply with all of the above 7 rules is ineligible to make a rollover contribution.

The IRS has been granted the authority by a 2001 tax law to grant relief to someone who has missed the 60 day rule because he or she incurred some difficulty or hardship and it would be unjust, or inequitable for the IRS to not waive the 60 day rule. Waive means the IRS creates a new 60 day period for the individual to complete the rollover.

The IRS' position is - it does not have the statutory authority to grant rollover relief to a person who fails to comply with any of the other rollover rules.

The IRS can't grant relief to any person who has taken multiple IRA distributions during a twelve month and makes an ineligible rollover contribution.

The IRS can't grant relief to a nonspouse beneficiary who was paid a distribution by an IRA trustee. The IRS can't grant relief and allow someone to roll over a required distribution.

The IRS can't grant relief if a person receives an in-kind distribution from his or her IRA, sells the asset, and then impermissibly rolls over the sales proceeds. If a distribution is ineligible to be rolled over but it is contributed as a rollover, such distribution will need to be included in the individual's taxable income and it will be an excess contribution subject to the excess contribution rules until corrected by withdrawal.

Categories: Traditional IRAs

IRS Issues 2018 Indexed Amounts for HSAs

Posted by James M. Carlson
Apr 16 2017

IRS Issues 2018 Indexed Amounts for HSAs

The HSA contribution limits for 2018 are $50 higher for single HDHP coverage and $150 for family HDHP coverage. The Treasury Department and Internal Revenue Service issued new guidance on the maximum contribution levels for High Deductible Health Plans (HDHPs) that must be used in conjunction with HSAs. The 2018 limits are set forth in Revenue Procedure 2017-37.

 

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Understanding What Forms Are Needed to Establish a SIMPLE IRA Plan And a SIMPLE IRA

Posted by James M. Carlson
Mar 06 2017

Understanding What Forms Are Needed to Establish a

SIMPLE IRA Plan And a SIMPLE IRA

In order to establish its SIMPLE IRA plan, a sponsoring employer must execute either the IRS Model Form 5304-SIMPLE or the Form 5305-SIMPLE.

Each eligible employee must establish his/her own SIMPLE IRA to receive elective deferrals and the employer’s matching or non-elective contribution. The IRS has two model forms for this - a Form 5305-S (trust) and a Form 5305-SA (custodial).

CWF Form 941 uses/incorporates Form 5305-S. CWF Forms 940 and 942 use/incorporates the custodial version, Form 5305-SA.

These two forms do not discuss or reference what form the employer completed in order to establish its SIMPLE IRA plan. These forms authorize the trustee or the custodian to accept contributions made on behalf of a participant under the employer’s SIMPLE IRA plan.

Some IRA representatives are confused because the IRS does not have a 5304 version for an individual to establish his/her SIMPLE IRA.

One can see a person thinking the IRS might have another 5304 SIMPLE IRA form to be used by the individual, but this form has not been written by the IRS as the IRS does not think it is needed.

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DOL/EBSA Proposes Extending Compliance/ Applicability Date For Fiduciary Rule and Related Exemptions From April 10, 2017 To June 9, 2017

Posted by James M. Carlson
Feb 20 2017

DOL/EBSA Proposes Extending Compliance/ Applicability

Date For Fiduciary Rule and Related Exemptions From April 10, 2017 To June 9, 2017

The Trump administration is going to review whether or not the Fiduciary rule as created by the Obama administration should go into effect. On February 3, 2017, the President issued a memorandum directing the DOL/EBSA to examine the Fiduciary rules and the new and revised prohibited transaction exemptions to determine if such changes are not cost effective and may actually result in Americans having reduced access to retirement information, financial advice and investments.

The new definition of fiduciary was to go into effect as of April 10, 2017, as were various prohibited transaction exemptions.

The DOL/EBSA has formally issued a notice that it is proposing that the fiduciary applicability date be changed to be June 9, 2017, rather than April 10, 2017. Other applicability dates are also extended. This proposal is being published in the Federal Register on March 2, 2017, in order to allow the "new" DOL/EBSA to collect additional information and review it before the new Fiduciary rules go into effect and decide if changes in the Obama rules are warranted.

Comments on the subject of the proposed extension must be submitted by March 17, 2017 (a Friday). This is 15 days following its publication.

Comments on the subjects raised in the presidential memorandum must be submitted by April 17, 2017 (a Monday). This is 46 days following its publication as the 45th day is a Sunday and so the deadline is the following Monday. Comment submissions must include the agency name (Department of Labor/Employee Benefits Security Administration) and the Regulatory Identification Number (RIN) of RIN 1210- AB79. Submitters are encouraged to use one of the electronic submission options rather than submitting a paper submission. These comments will be available to the public.

Comments may be submitted using one of the following methods.

1. Send an email to: EBSA.FiduciaryRule- Examination@dol.gov. In the subject line of your email include RIN 1210-AB79.

2. Go to the Federal eRulemaking portal and follow the instructions for submitting comments. The portal is located at: (http:/www.regulations.gov).

3. Mail your written comments to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, WASHINGTON, DC 20210, Attention: Fiduciary Rule Examination. The 15 day and 45 day submission deadlines will require an individual to act promptly. We expect there will be many comment submissions.

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