The Pension Specialists Blog

After many years, the maximum IRA contribution limits for 2013 will be $500 larger. For 2008-2012, if a person was not age 50 as of December 31, then his or her maximum contribution was $5,000 assuming he or she had compensation of at least $5,000. This limit increases to $5,500 for 2013. For 2008-2012, if a person was age 50 or older as of December 31, then his or her maximum contribution was $6,000. This limit increases to $6,500 for 2013. The annual catch-up contribution limit for individuals age 50 or older remains at $1,000. Hopefully, contributions for 2013 will be larger than those for 2012 and end the recent decrease in IRA contributions.

Categories: Pension Alerts

During the first week of January we sent subscribers an email explaining that the American Taxpayer Relief Act of 2012 (ATRA) as signed into law by President Obama on January 2, 2013, extended the QCD (qualified charitable distributions) provisions for 2012 and 2013. These provisions will not apply for 2014 and subsequent years unless there would be another tax extension.

The IRS has recently issued guidance to IRA accountholders and also IRA custodians regarding QCDs for 2012 and 2013. A qualified charitable distribution (QCD) is an otherwise taxable distribution from a traditional IRA, Roth IRA, or a SEP IRA or SIMPLE-IRA to which a current year contribution has not been made, to an IRA accountholder or an inheriting IRA beneficiary who is age 70½ or older that is paid directly to a qualified charity. A QCD for a year can be used to satisfy the RMD for such year. A qualifying individual who makes a QCD may exclude from his or her gross income up to $100,000 for a year.

ATRA included two special transition rules to handle the situation that until ARTA was adopted retroactively an IRA accountholder was unable to make a QCD for 2012. Consequently, ATRA was written to include two special transition rules which allow an IRA accountholder or an inheriting beneficiary to make a QCD for 2012 in

January of 2013.

Transition rule #1. An IRA accountholder who had taken a distribution which did not qualify as a QCD in December of 2012 could in January give cash to the charity of all or a portion of such IRA distribution and have it now qualify to be a QCD for 2012 provided that such contribution would have been a 2012 QCD if it had been paid directly to the charity from the IRA. Note that distributions made directly to the IRA accountholder from January 1, 2012 to November 30, 2012 will not qualify as a QCD for 2012. As discussed in prior newsletters, if the distribution had been made directly to the charity under the QCD rules, the distribution will qualify as a QCD if all of the other requirements had also been met.

Transition rule #2. By January 31, 2013, the IRA custodian pursuant to the instruction from the IRA accountholder that he or she still wants to make a QCD for 2012 pays the charity directly a 2013 distribution. It will qualify to be a QCD for 2012 provided that such contribution would have been a 2012 QCD if it had been paid in 2012.

A QCD made in January of 2013 that is treated as a 2012 QCD will satisfy an individual’s RMD for 2012, This is true even if the individual would have otherwise owed the 50% tax for failing to take his or her RMD by December 31, 2012. The IRS has stated that a QCD made in January of 2013 must be for 2012 and cannot be designated 2013. This is true even if the individual had already satisfied his RMD for 2012. 2012 and 2013 Reporting Duties of the Individual

The individual is to report the total 2012 QCDs made in January 2013 on their 2012 Form 1040 by including the full amount of the 2012 QCDs (even if in excess of $100,000) on line 15a and not including any amount on line 15b (i.e. leave it blank), but “QCD” must be written next to line 15b. For years 2006-2011, line 15b had been completed with 0 if the QCD was the same as the total distributions.

The individual will also report on the 2013 Form 1040 the amount of 2012 QCDs made in January 2013. The specifics as to how such reporting is to be made on the 2013 Form 1040 as will be discussed in the instructions for the 2013 Form 1040.

An IRA accountholder or an inherited IRA beneficiary who makes a QCD for 2012 in January of 2013 must keep the appropriate tax records to substantiate the timing of the distribution from the IRA and the contribution to the charity.

If a 2012 Form 8606 must be filed, the instructions to the form will describe how to report any 2012 QCD made in January of 2013. An IRA accountholder must file a 2012 Form 8606, nondeductible IRAs, with his or her 2012 Form 1040 if: the 2012 QCD was from a traditional IRA and there was basis and there had been a distribution in 2012 other than the 2012 QCD or the 2012 QCD was from a Roth IRA.

2012 and 2013 Reporting Duties of the IRA Custodian and RMD Calculation for 2013.

ATRA states that the QCD made in January of 2013 for 2012 is treated as if if had been made on December 31. Because of this, the IRS has stated that in determining the RMD for 2013, the 2012 QCD made in 2013 must be subtracted from the fair market value as of December 31, 2012. Where appropriate an IRA custodian will need to send a revised RMD notice.

The IRA custodian will report any distribution occurring in 2012 on the 2012 Form 1099-R. As for years 2006-2011, these distributions are reported as taxable even if they were QCDs.

Distributions made in 2013, including any 2012 QCDs made in January of 2013 are reported on the 2013 Form 1099-R in the same manner. Boxes 1 and 2a will be completed with the same amount and the individual must complete line 15b to show as non-taxable.

2013 QCD Rules and Procedures

The standard rules and procedures will apply in 2013 for 2013 QCDs made after January 31. The check from the IRA custodian or trustee will need to be issued to the charity and the check must have a date of December 31, 2013, or earlier.

Any bets if it will be extended for 2014 and 2015?

Categories: Pension Alerts

Unlike with the QCD which has had another 2 year short term extension, the Coverdell ESA changes of 2001 have been adopted on a permanent basis. The main changes are: the maximum contribution limits remains at $2,000 and is not reduced to $500, qualifying education expenses are all school related education expenses and not just post-secondary expenses and the special rules applying to an individual who has special needs.

The IRS should be revising its model Coverdell ESA forms (Form 5305-E and 5305-EA) to incorporate the special laws applying to individuals with special needs and the law authorizing military death gratuities be rolled over into a Coverdell ESA. Certain family members of soldiers who receive military death death benefits may make a rollover contribution, subject to certain limits, up to 100% of such benefits into a Coverdell ESA.

CESAs For Special Needs Individuals

2013 Tax/Financial Planning Rule. There should be a Coverdell ESA established for every special needs individual. How many CESAs does your institution service for special needs individuals?

ARTA was enacted into law on January 2, 2013. The CESA law changes in effect from 2002-2011 were made permanent.

The special rules for individuals with special needs are now permanent. A $2,000 annual contribution may be made for an individual with special needs regardless of his or her age. That is, even if he person with special needs is age 39, an annual $2,000 contribution may be made to his or her CESA. As long as the earnings of the CESA are used for the special needs individual's educational needs, such income will not be taxable.

One would expect that many parents, grandparents, sisters, and brothers will choose to establish a Coverdell ESA for an individual with special needs. This assumes they understand the availability of the Coverdell ESA. For whatever reason, the IRS has not yet revised its model CESA forms to authorize and emphasize the special rules for individuals with special needs. Even though the IRS is busy implementing other taxes, the IRS hopefully will make this revision. We at CWF will be revising Coverdell ESA forms to discuss the special rules applying to individuals with special needs.

In many cases the fact that the only tax benefit is relatively nominal (no taxation of the earnings); in some cases, this no taxation of earnings will be a substantial tax benefit. Considering how easy it is to establish a Coverdell ESA, more people should be doing so.

Categories:

The IRS last revised the model IRA Forms 5305, 5305- A, 5305-R and 5305-RA in March of 2002. Since then there have been numerous tax laws enacted with IRA changes. The IRS has given no written explanation as to why the IRA forms have not been amended. We have asked a number of times when the IRS would be revising their IRA forms, but to no avail. It is not a good thing that the IRS has not updated their forms.

When is it necessary for an IRA custodian/trustee to furnish an IRA amendment? Is it necessary or required to furnish one in 2013?

Each institution must make its own determination because one needs to understand when was the IRA agreement last amended and how is it being amended. A primary question is, “when is the last time the financial institution furnished an amendment?” What do the current IRA plan agreements provide? Are there some IRAs set up with one certain plan agreement and others with a different plan agreement?

One may learn a tax lesson the hard way, if he or she adopts the position that an amendment is not required because the IRS has not said one is required. One must remember that the IRS has already stated in its governing IRA regulation(1.408- 6 (d) (4) (ii) (C) ) when an IRA amendment is required. The regulation must be followed until the IRS revises it.

There are two types of amendments – one which amends the IRA plan agreement and one which amends the IRA disclosure statement. Regulation 1.408- 6(4)(ii)(C) requires that an IRA amendment be furnished no later than the 30th day after the amendment is adopted or becomes effective.

The general rule in the governing IRA regulation is - a law change is enacted which impacts a provision found in the IRA plan agreement; the provision will be amended to implement the law change and the amendment will need to be communicated to the IRA accountholder or inheriting beneficiary.

When the IRS revises its model IRA forms, the amendment is considered to be mandatory or required. When a non-IRS change is made in the plan agreement by the financial institution (or the IRA vendor), the change may either be mandatory or not.

Mandatory changes deal with the tax code changes. For example, CWF has amended the Roth IRA plan agreement so that any person with funds in a traditional IRA is eligible to convert some or all of these funds to a traditional IRA even though he or she may have MAGI of more than $100,000.

The IRS has not yet amended its model Roth IRAs (Forms 5305-R and 5305-RA) to remove the $100,000 restriction. And the IRS has not given any guidance as to whether or not a conversion done in 2010 or later qualifies or doesn’t qualify since Form 5305-R and 5305-RA state that the custodian/ trustee may not accept a conversion contribution if the person has a MAGI greater than the $100,000.

The standard IRS rule for IRAs/pensions has always been - the plan document must authorize the action. For this reason, even though the IRS has not amended the Roth forms, CWF has. And CWF has added provisions authorizing new rollovers from 401(k) plans and other employer plans. And CWF has made other changes or amendments to adopt law changes. Other vendors have taken the approach, we don’t need to amend our form because the IRS has not done so. Similar changes have been made by CWF in the traditional plan agreement forms.

Non-mandatory amendments would be made by a financial institutions for its own administrative reasons. If an institution would want such a change or changes to apply to all existing IRA accountholders or some of them, the amendment would be furnished to those accountholders which the financial institution wanted the new provision to apply. An example, in 2011/2012 CWF added special provisions covering the topics of when a power of attorney is designated by the IRA accountholder, when a non-IRS creditor may impose a claim against an IRA, or when a trust beneficiary or an estate beneficiary will have special pass-through requests.

A long time ago (1986/1987) the IRS acknowledged that there are times that even though the IRA plan agreement has not been changed, a disclosure statement amendment must still be furnished. Example, when the deductible/nondeductible rules were first authorized in 1986/1987, such rules did not require the IRA form to be rewritten because the IRA form discusses the maximum contribution amount limit, but does not discuss the deductible/nondeductible rules. The IRS stated there needed to be a disclosure statement amendment discussing or explaining the deductible/nondeductible rules.

In summary, answering a question whether or or not an amendment is required is not all that simple. Sometimes the caller will furnish some additional information, but many times not. Each financial institution will need to make its own decision if there is a requirement to furnish one or both amendments or if it will furnish the amendments so there is no question.

It is true that the IRS has not been very active in auditing whether or not IRA custodian/trustees are furnishing IRA amendments as required by the IRA regulation. We at CWF believe it is in the best interest of a financial institution to furnish the amendments. The governing IRA regulation provides that a $50 fine may be assessed an institution for each time it fails to furnish the IRA plan

agreement and $50 each time it fails to furnish the IRA disclosure amendment.

Categories: Pension Alerts

A special type of rollover contribution is authorized. If a person receives a military death gratuity or a payment from Servicemembers’ Group Life Insurance (SGLI), this person may roll over all or part of the amount received to his or her Roth IRA. Such payments are made to an eligible survivor upon the death of a member of the armed forces.

If you are the person and you are a member of the decedent’s family, then you may make a rollover contribution to your Roth IRA. The maximum amount eligible to be rolled over is the total of the survivor benefits less any amounts already rolled over on your behalf of another family member’s behalf to a Roth IRA or other Coverdell ESAs. The amount of survivor benefits contributed to the Roth IRA will be basis and will not be taxed when withdrawn.

This special rollover must be completed within one year after the date the individual received the death benefit gratuity or the SGLI payment. The once per year rollover limit applying during a 12-month period does not apply to rolling over a military death gratuity or a SGLI payment.

This special rollover is not subject to the annual contribution limits applying to Roth IRA contributions.

Categories: Pension Alerts

1. On the bottom left there is an “Account Number”box. The IRA custodian is required to insert an account number in this box when filing more thanone Form 5498 for the same person. If your institution wants to earn some bonus points with the IRS,you will complete this box even though it is not required. A unique number should be used. Using such a number helps the IRS to process corrected information accurately. The account number may be a checking or savings account number or some other unique number with respect to an individual. The number must not appear anywhere else on the form (i.e. it cannot be the social security number)
2. In Box 7 only one of the 4 boxes must be checked to indicate the type of IRA. A person who has a traditional IRA, SEP IRA and Roth IRA would need to be furnished three 5498 forms.
3. Box 1. IRA Contributions (other than amounts in boxes 2-4, 8-10, 13a and 14a). Enter the amount of the annual contributions made on or after January1, 2012 through April 15, 2013 as designated for 2012. The IRA custodian is to report the gross amount of the annual contributions even if such contributions are excess contributions, or will be later recharacterized. These are still to be reported.
   
   A traditional IRA contribution, which is not properly reported in one of the other traditional IRA boxes as discussed below, is to be reported in box 1. For example, if a person tries to roll over $28,000, but does so on day 70 and the IRA custodian learns of this fact prior to filing the current year’s Form 5498, then the IRA custodian must report this $28,000 in box 1. This same procedure would apply if somehow non-IRA funds had been mistakenly transferred into an IRA
4. Box 2. Rollover Contributions. Enter the amount of the rollover contributions made on or after January 1, 2012 through December 31, 2012. Made means received by the Traditional IRA custodian. Also, enter those contributions which are treated as a rollover contribution (i.e. direct rollover). A rollover may either be an indirect rollover or a direct rollover. An indirect rollover means the paying plan (could be an IRA or an employer plan) issues the distribution check to the individual who then makes a rollover contribution by the 60 day deadline. A 60 day indirect rollover may occur between two traditional IRAs, two SEP-IRAs, or between a traditional IRA and a SEP-IRA or vice versa. Remember that nonspouse IRA beneficiaries are ineligible to roll over a distribution from one inherited IRA and redeposit it into another inherited IRA. A direct rollover occurs when an employer plan issues the check to the IRA custodian on behalf of the individual. By definition, a direct rollover cannot occur between IRAs. Employer plan means a qualified plan, section 403(b) plan or a governmental section 457(b) plan. The funds attributable to a nonspouse beneficiary of such plans are eligible to be directly rollover to an inherited IRA and would be reported in Box 2.
5. Box 3. Roth IRA Conversion Amount. This box will be completed when a conversion contribution is made to a Roth IRA
6. Box 4. Recharacterized Contributions. The IRSinstructions are very brief, “Enter any amounts recharacterized plus earnings from one type of IRA to another.” If a person had made either an annual contribution or a conversion contribution to a Roth IRA in either 2011 and/or 2012, he or she may elect to recharacterize it as adjusted by earnings or losses to be traditional IRA contribution in 2012. The total amount recharacterized is to be reported in box 4. Although the IRS instructions use the term, “plus earnings”, the IRS should use the term, “plus or minus earnings or losses.”
7. Box 5. Fair Market Value of Account. The IRSinstructions for this box are also very brief, “Enter the FMV of the account on December 31.” The IRS added a caution to self-directed and trust IRAs as follows: “Trustees and custodians are responsible for ensuring that all IRA assets (including those not traded on established markets or with otherwise readily determinable market value) are valued annually at their fair market value.” The instruction to report the FMV as of December 31 applies whether there is a living IRA accountholder or an inheriting IRA beneficiary. If the IRA accountholder or inheriting beneficiary is alive as of December 31, the individual closed his or her IRA during the year by taking a total distribution and he or she made no “reportable contribution”, then the IRA custodian is not required to prepare and file the Form 5498. However, if the IRA accountholder or inheriting beneficiary died during the year, the IRA custodian will need to prepare a final Form 5498 for the deceased IRA accountholder or inheriting beneficiary as discussed below.With respect to a deceased accountholder or a deceased inheriting IRA beneficiary, the IRS gives the IRA custodian two options. Option #1 - report the FMV as of the date of death. Option #2 - report the FMV as of the end of the year in which the decedent died. This alternate value will usually be zero because the IRA custodian will be reporting the end of year value on the Form 5498’s for the beneficiary or beneficiaries. If Option #2 is used, the IRA custodian must inform the executor or administrator of the decedent’s estate of his or her right to ask for the FMV as of the date of death. If the IRA custodian does not learn of the individual’s death until after the filing deadline for the Form 5498 (i.e May 31), then it is not required to prepare a corrected Form 5498. However, an IRA custodian must still furnish the FMV as of the date of death if requested to do so.
8. Box 6. Life Insurance cost included in box 1. An IRA custodian will normally leave this box blank or will insert a 0.00 since it is only to be completed if there was a contribution to an IRA endowment contract as sold by an insurance company a long time ago
9. Box 8. SEP Contributions. Any SEP contributions made to the IRA custodian during 2012 are to be reported in box 8. Such contributions could have been for 2011 or 2012.
10. Box 9. SIMPLE Contributions. Any SIMPLE-IRA contributions made during 2012 are to be reported in box 9. Such contribution could have been for 2011 or 2012.
11. Box 10. Roth IRA Contributions. Any Roth IRA contributions for 2012 are to be reported in box 10 as long as made between January 1, 2012 and April 15, 2013.
12. Box 11. Check if RMD for 2013. An IRA custodianis required to check this box if the IRA accountholder attains or would attain age 701/2 or older during 2013. The instructions do not discuss whether or not this box is to be checked for an inheriting traditional IRA beneficiary. It should not be checked for an inherited IRA. Completing this box is necessary only if the IRA custodian is required to prepare a 2012 Form 5498 for a person. This box is not checked with respect to an individual who died during 2012 and who would have attained age 701/2 or older during 2013 had he or she lived.
13. Boxes 12a (RMD date) and 12b (RMD Amount). An IRA custodian’s use of these two boxes is optional, it is not mandatory. Under current IRS procedures, the IRS does not require the traditional IRA custodian to furnish it with the RMD amount. The law is unsettled whether or not the IRS has the legal authority to require that an IRA custodian furnish the RMD amount. Since the IRS would like to be furnished this information, the IRS has added boxes 12a and 12b to the Form 5498. The approach adopted by the IRS is that a traditional IRA custodian by completing boxes 11, 12a and 12b on the Form 5498 and furnishing it to the IRA accountholder will meet the requirement that it must furnish a RMD Notice by January 31. The IRS instructions do permit the IRA custodian to furnish a separate Form 5498 with the only information being furnished is the information for boxes 11, 12a and 12b
14. Box 13a. Postponed contribution(s). Since we arediscussing completing the Form 5498 for a traditional IRA, we will discuss what needs to be done for postponed contributions to a traditional IRA. The individual will instruct you on an IRA contribution form the “prior” year or years for which he or she is making the postponed contribution(s). The individual must designate the IRA contribution for a prior year to claim it as a deduction on the income tax year. Postponed contributions may be made by individuals who have served in a combat zone or hazardous duty area or individuals who are “affected taxpayers” due to federally designated disasters. If the IRA custodian will report the contribution made after April 15 and the individual designates a contribution for a prior year, then the IRA custodian must prepare either (1) a Form 5498 for the year for which the contribution was made or (2) on a Form 5498 for a subsequent year. Under approach #1, the IRA custodian may choose to report the contribution for the year it is made. For example, if an individual in September of 2012 designated a contribution of $5,000 to a traditional IRA for 2010. The IRA custodian could choose to prepare a 2010 Form 5498 and report the $5,000 contribution in box 1. If the IRA custodian had not prepared a 2010 Form 5498 for this individual, the IRA custodian then would prepare an original 2010 Form 5498. If the IRA custodian had previously prepared a 2010 Form 5498 for this individual, the IRA custodian then would prepare a “corrected” 2010 Form 5498. Under approach #2, if the the IRA custodian is furnished a contribution after April 15, the IRA custodian may choose to report it on that year’s Form 5498. The amount of the contribution must be reported in box 13a and the year for which the contribution was made in box 13b and in box 13c the applicable code as follows: AF - Allied Force EF - Enduring Freedom or IF - Iraqi Freedom FD - Affected taxpayers of designated disaster area. Definition. An individual who is serving in or in support of the Armed Forces in a designated combat zone or qualified hazardous duty area has an additional period after the normal contribution due date of April 15 to make IRA contributions for the prior year. The period of time is the time the individual was in the designated zone or area plus at least 180 days.
15. Box 14a. Repayments. A traditional IRA accountholder who has taken a distribution under special disaster rules or who has taken a qualified reservist distribution is eligible to repay the distribution even though such repayment does not qualify as a rollover. Enter the amount of the repayment(s). Box 14b. Code. Enter the applicable code for the type repayment(s): QR - repayment to a qualified reservist DD - repayment of a federally designated disaster distribution. Note that repayments only have one reporting procedure whereas postponed contributions have two reporting procedures.
16. Duty To Prepare/Furnish Corrected Form 5498. An IRA custodian is required to prepare a corrected form 5498 as soon as possible after it learns there is an error on the original form as filed. The IRS furnishes the following example. “If you reported as rollover contributions in box 2, and you later discover that part of the contribution was not eligible to be rolled over and was, therefore, a regular contribution that should have been reported in box 1 (even if the amount exceeds the regular contribution limit), you must file a corrected For 5498.

Categories: Governmental Reporting, Pension Alerts

Effective as of January 1, 2013, a new 3.8% tax went into effect. The IRS has chosen to call this tax, the Investment Income Tax. In Code section 1411 this tax is called the Unearned Income Medicare Contribution.

This new 3.8% tax applies to certain individuals having net investment income and certain estates and trusts having net investment income. To determine the tax owing, a person will multiply 3.8% time the lesser of:

(1) his or her net investment income (NII) or a person's modified adjusted gross income as reduced by a threshold amount as set forth in the following table:

This tax will be owed only if an individual has net investment income and his or her modified adjusted gross income exceeds the applicable threshold amount. Note the discrimination in favor of a single person versus a married person.

The new tax means an individual before taking an IRA distribution will want to determine if he or she will have to pay the 3.8% tax on account of such distribution. For most people and situations, a person will not owe the 3.8% tax on his or her IRA or pension distribution, but in some situations the tax would be owed.

There will be times when a person’s IRA distribution will mean the individual will have to pay the 3.8% tax on the IRA distribution. Example. David has wage income of $160,000, he withdraws $10,000 from his traditional IRA and he has dividend income of $40,000. David’s tax filing status is single. David’s tax is equal to 3.8% times the lesser of his dividend income of $40,000 or the amount of his MAGI income in excess of $200,000 or $10,000. His tax is $380. He would not have owed any NIIT if he had not withdrawn the $10,000 as this distribution put his MAGI above his $200,000 threshold level.

There will also be times when a person’s IRA distribution will NOT mean the individual will have to pay the 3.8% tax on the IRA distribution. Example. David has wage income of $120,000, he withdraws $25,000 from his traditional IRA and he has dividend income of $40,000, David’s tax filing status is single. Since his MAGI, including the IRA distribution of $25,000, is $185,000 and is less than his threshold of $200,000, the 3.8% net investment income tax is not owed.

There will also be times when a person will take an IRA distribution and he or she will be required to pay the 3.8% tax, but the amount owed does not increase because of such IRA distribution. Example. Paula has wage income of $200,000, she withdraws $40,000 from her traditional IRA and she has dividend income of $60,000. Paula’s tax filing status is single. Her MAGI of $300,000 exceeds her threshold level of $200,000. Thus, she owes the 3.8% tax on the $60,000 of net investment income or $2,280 and not on the amount in excess of $200,00. She would have owed this $2,280 even if she not withdrawn $40,000 from her traditional IRA.

What types of income are defined to be non-investment income?

Distributions from IRAs, pension plans, 401(k) plans, tax sheltered annuities, etc. are not investment income. Social security benefits are not investment income.

Wages and income or profits from a nonpassive business including self-employment income are not investment income. Unemployment compensation and workers compensation are not net investment income.

What types of income are net investment income and so they might be subject to the 3.8% tax?

Investment income includes interest, dividends, gains from the sale of stocks, bonds, mutual funds, capital gain distributions from mutual funds, certain sales related to real estate, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, business income arising from certain passive activities, and the sale of an interest in a partnership and S corporations by an individual who had a passive interest. Such investment income is reduced by certain expenses properly allocable to the income. And any income or gain excluded from gross income for regular income tax purposes is also excluded from a person net investment income (e.g. $250,000 exclusion for sale of primary residence).

A person will need to take into account taxes owed on account of the net investment income tax in complying with the estimated tax payment rules.

This net investment income tax also applies to certain trusts and estates. It does not apply to corporations and other “active” businesses. It does not apply to trusts associated with IRAs or pension plans.

This new 3.8% Medicare tax (the net investment tax) is different from the new 9/10ths of 1 percent Additional Medicare tax which also went into effect on January 1, 2013. An individual is liable for the additional Medicare Tax if the individual's wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual's filing status:

Categories: Pension Alerts

President Barack Obama released his proposed 2014 fiscal year budget on April 10, 2013, He was over 64 days late as federal law requires him to furnish his proposed budget by February 4th. He is suggesting some radical changes with respect to IRAs and pension plans. In July of 2007 President George W. Bush had suggested some radical changes. None of his proposals were adopted. President Obama has adopted one of these changes – requiring certain small employers to automatically enroll employees to make IRA contributions. Time will tell if any of President Obama’s proposals will be adopted. Within this article, the term IRA account holder also means a pension participant. As you will observe, many of these proposed changes are complicated. Different rules for different classifications.

Proposed change #1. Certain Non-spouse Beneficiaries Must Use 5-Year Rule.

For IRA account holders dying after December 31, 2013, a non-spouse beneficiary no longer would be able to use the life distribution rules to withdraw funds from the inherited IRA or from the pension plans. Rather, the president's proposal would generally require the use of the 5-year rule. This applies to all IRA types. There would be two exceptions. First,any beneficiary who is disabled, chronically ill, or within 10 years of the age of the IRA accountholder would be able to use the life distribution rule beginning in the year following the year of the IRA accountholder’s death. Second, an inheriting IRA beneficiary who is a minor will have to take required distributions as under existing law using the life distribution rule with a major change. All distributions must be completed no later than the end of the fifth year after the individual reaches the age of majority. The Obama administration has estimated this change would raise tax revenues by an additional 4.9 billion over the next 10 years.

Proposed change #2. No RMD for Individuals with IRA and Pension Balances if Balance Less Than $75,000.

The RMD Requirement would be eliminated for some IRA accountholders. It would only apply to an IRA accountholder who attains age 70½ or older during 2014 or a subsequent year. The general rule would be: an individual would not be required to take an RMD if as of January 1 of the year he or she attains age 70½ his or her combined account balances in IRAs and pension plans was $75,000 or less. Once calculated the individual would not be required to take an RMD for subsequent years unless additional contributions were made to the IRA and/or other pension accounts and these contributions resulted in the $75,000 limit being exceeded. That is, increases in the account balance on account of investment gains would not require a person to start taking required distributions. This would be a complicated rule and additional guidance would need to be furnished. For purposes of the determining a person’s aggregate balance as of January 1, the person’s would aggregate the account balances of all IRAs, including Roth IRAs and the balances of all qualified pension plans with one exception. A person would be able to exclude from the RMD calculation any amount in a qualified defined benefit plan if such benefit amount was already in pay status.

Proposed change #3. Certain Small Employers Would be Required to Sponsor an IRA Program for Employees.

President Obama is again seeking a law requiring certain small employers to sponsor an IRA program requiring the employees to have a certain percentage withheld from their wages (i.e. automatic enrollment) and such amounts would then be contributed via direct deposit into their respective IRAs. An employee would have the right to elect to not be automatically enrolled or to opt out. An employer would have the right and duty to establish an IRA on behalf of each eligible employee. The employer would be protected from claims of liability regarding investment and compliance issues as long as the employer followed set rule and procedures. An employer would be required to sponsor an automatic IRA plan if it had more than 10 employees an no other retirement plan. A primary purpose of the new law may well be to induce an employer with no other plan to establish one – a SEP, SIMPLE, profitsharing or 401(k) plan.

Proposed change #4. Maximum Balance Limit to Apply to IRAs and Pension Plans

Commencing January 1, 2014, in general, a new maximum account balance limit of $3.4 million would apply to a person. A person would be required to aggregate their balances in any defined benefit plan, defined contribution plan, 403(b), 457, and IRAs. No additional contributions could be made once the $3.4 million limit is reached. There would substantial unspecified administrative duties on account of this new law. It appears an individual would be required to share IRA balances with his or her employer’s plan. There would be excess contribution rules applied if the 3.4 million limit was exceed-ed. The $3.4 million limit is not really $3.4 million as this limit is the actuarial equivalent of a joint and 100% survivor annuity paying an annual amount of $205,000 commencing at age 62. Since interest rates are currently low, the $3.4 million limit would become smaller if the interest rate increased. The Obama administration has estimated this change would raise tax revenues by an additional 9.0 billion over the next 10 years.

Proposed Change #5. A Limit to be Placed on Various Itemized Deductions and Above the Line Adjustments For High Income Individuals.

In order to have individuals with higher incomes pay more income taxes, a new limit would be imposed on the benefit that such a person can realize by taking a tax deduction or an above the line adjustment. The benefit can never exceed 28%. This proposed change is called the Buffet Rule. For example, if a person is in the 36.3% marginal tax rate, he or she will need to pay income taxon the amount in excess of the 28% as he or she is not allowed to claim a tax deduction or claim the tax benefit for the above the line adjustment. An above the line adjustment is a deduction claimed which reduces one’s gross income in determining modified adjusted gross income. It would apply to HSA contributions, IRA contributions, elective deferral contributions to a 401(k)plan, and to employer contributions for medical insurance coverage. If a person would have to pay income tax on an IRA or pension plan contribution because of this new tax, then the person will have basis. The proper records would need to be maintained. This 28% limit would apply to married couples with taxable incomes in excess of $223,050 and individuals with taxable income exceeding $183,250. The Obama administration has estimated this change would raise tax revenues by an additional 529 billion over the next 10 years. Obviously, this is the main tax revenue raising change.

Change #6. Revise Formula so COLAs Would be Smaller

Under current tax law and social security law, various benefits and tax income limits are revised according to certain cost-of-living formulas. Social security benefits are generally revised on an annual basis. Various income limits for pensions and IRAs are revised each year. HSA limits are revised each year. Revising the COLA limit formula will have the effect that social security benefits paid to retirees will not increase as much as they otherwise would have. Revising the COLA limit as proposed is estimated to reduce the federal deficit by $230 billion over the next 10 years.

Change #7. Cut-back on Deductions for ESOP Dividends

Under current law, C corporations are permitted to claim a tax deduction for employer stock held in an ESOP (Employee Stock Ownership Plan) if certain conditions are met. However, there have been quite a few cases where such corporations have gone bankrupt or lost substantial value. ESOPs can be very complicated. Both the IRS and the DOL have problems administering these plan. There are quite a few administrators within the Obama administration who would like to see fewer ESOP plans. One way to achieve this goal is to eliminate one of the principal tax benefits associated with SOP, the tax deduction for certain dividend payments. The Obama administration has proposed retaining the dividend deduction if the C corporation has annual receipts of $5 million or less, but eliminating the deduction if annual receipts are more than $5 million. The proposals by President Obama to change certain laws governing IRAs and pension plans most likely will not be adopted in 2013 or 2014. A political compromise by the Democratic Senate and the Republican House is very unlikely. Things will change if the Democrats regain control of the House of Representatives while retaining control of the Senate or the Republicans gain control of the Senate while retaining control of the House of Representatives in November of 2014. As the amounts within IRAs and pension plans grow, one can expect the politicians will look to these funds as a source of tax revenues and there will be suggested changes. Time will tell what changes are adopted.

Categories: Pension Alerts

Late Wednesday (January 2) afternoon, President Obama signed into law the "American Taxpayer Relief Act of 2012." In general, most of the temporary law changes made by the 2001 and 2003 law changes have been made permanent. For example, the 2001 Coverdell ESA laws are now permanent. Some of the tax changes from the 2009 law, however, are still temporary.

The Qualified Charitable Distribution (QCD) laws have again been extended for two years (2012 and 2013). As in 2010 there are special rules to be applied in two situation.

On January 1, 2013 both houses of Congress passed the "American Taxpayer Relief Act of 2012." Although there has not yet been any formal announcement that President Obama has signed this tax bill into law, he most assuredly will do so.

Qualified Charitable Distributions. The QCD laws have again been extended for two years. QCDs have been authorized again for 2012 and 2013. As in 2010, there are special rules to be applied in two situations.

Any QCD made after December 31, 2012, and before February 1, 2013, shall be deemed to have been made on December 31, 2012.

Any portion of a distribution from an IRA to an IRA accountholder made after November 30, 2012, and before January 1, 2013, may be treated as a QCD if the individual gives cash to the charity and the other requirements in order to have a QCD have been met (other than the rule requiring the payment be made directly to the charity from the IRA custodian/trustee). Presumably, furnishing a check will be deemed to be cash.

As we have discussed in prior guidance and newsletters, a distribution made between January 1, 2012, and December 31, 2012, qualifies as a QCD if the check was made payable to the charity and the other requirements were met as the law change is effective as of January 1, 2012.

The above change is effective after December 31, 2011.

Internal Designated Roth Conversion Contributions.

The law has now been expressly written to authorize a 401(k) plan to be written to allow a participant to instruct that funds be transferred (i.e. converted) from his or her non-Roth accounts into his or her Designated Roth account. The individual is not required to be eligible for a distribution to make this conversion transfer. The individual includes such amount in his or her income for such year and pays the applicable tax. This change is a revenue raiser, at least initially. In addition to 401(k) plans, this change also applies to certain 403(b) and 457(b) plans.

The above change is effective for transfers after December 31, 2012, in taxable years after such date.

1. CWF has a QCD Certification Form for 2012/2013 and we have reinstated our QCD brochure. We also sell e-Forms.
   
   
2. We have revised our IRA and HSA forms to discuss the 2012/2013 income limits and the fact that the maximum 2013 IRA limits are now $6,500/$5,500 rather than the $6,000/$5,000 limits applying for 2012. We suggest an IRA custodian furnish a 2012/2013 amendment to your existing IRA and HSA accountholders. You can furnish it at the same time you furnish your 2012 fair market value statement in January of 2013.
   
   See (http://www/pension-specialists.com/orderforms/Amendments2012.pdf) for an explanation of when and why IRA amendments need to be furnished and how to order updated IRA/HSA forms.
   
   
3. When there are tax law changes and regulatory changes, the IRS rules require an IRA custodian/trustee to furnish an amended IRA plan agreement and disclosure statement to IRA accountholders. The IRS has the authority to assess a $50.00 per IRA fine if such an amendment is not furnished. An IRA custodian/trustee using IRA plan agreements written before 2010 has serious compliance problems.
   
   
4. Be advised we have updated almost all of our IRA and HSA brochures and we have reinstated /updated our brochure explaining Qualified Charitable Distributions. Many times one or more brochures may be added to your January mailings with no additional postage cost. A brochure weighs approximately 3/10 of one ounce.

Categories:

Based on the consulting calls we are getting, individuals are finally realizing that they may benefit by converting some or all of their traditional IRA to a Roth IRA. Set forth below are some planning tips.

1. A 2012 conversion must be completed by December 31, 2012. There is no such thing as a carryback conversion (i.e.) one made between January 1, 2013, and April 2013, for tax year 2012.
   
   
2. A person is able to undo some or all of the conversion. A person has the right to recharacterize a 2012 conversion. In general, an individual has until April 15, 2013, plus an extension to recharacterize the 2012 conversion. If the person has timely filed his or her tax return for 2012, the deadline is October 15, 2013.
   
   
3. Although a person may add his or her conversion contribution to an existing Roth IRA, if he is converting specific assets, then he may wish to establish a separate conversion Roth IRA plan agreement. If it is recharacterized, it will be much easier if it has been segregated.
   
   
4. Consider charging a reasonable fee. There would be no fee for the 2012 conversion, but only for the recharacterization, if any. Doing the conversion by December 31, 2012, will give individuals important flexibility in planning their tax situation for 2012. They should be willing to pay a reasonable fee for this flexibility.

Categories: Roth IRAs