Email Consulting Guidance – HSA Contribution

Posted by James M. Carlson
Mar 06 2019

Q-1 We have a customer who has an HSA but is no longer eligible to contribute to it. She wrote a check at Shopco for some glasses or some item that was not correct and returned it. Shopco refunded her money by doing an electronic credit to that account. So now the account shows a deposit which she can’t do. How do we handle this?

A-1 A person who is no longer eligible to make an annual HSA contribution may be eligible to make a rollover contribution or a transfer contribution. When did the original withdrawal take place? Is she still within her 60 day rollover period? Is she eligible to make a rollover contribution of an HSA distribution and will she so instruct?

If so, the contribution may be treated at a rollover contribution even though it came from Shopco.

If not, the contribution would an excess contribution. She can/must withdraw the excess contribution. The bank will report the contribution as a regular/annual contribution. The distribution is to be reported as the withdrawal of an excess contribution (reason code 2 in box 3 on the Form 1099-SA). Box 2 on the Form 5498-

SA should be completed with 0.00 as there were no earnings related to the excess contribution.

Categories: Email Guidance

Email Consulting Guidance – QDRO or Transfer Incident to a Divorce

Posted by James M. Carlson
Mar 06 2019

Q-1 If a QDRO is required and there are retirement plans at several.different providers, some with Roth balances and tax deferred balances, are the parties able to designate which retirement account the QDRO will apply to and whether it be taken from Roth or tax deferred portions?

A-1 In a divorce, the two spouses will negotiate the division of their assets, including their IRAs and other retirement plan assets.

In a divorce there will either be a settlement agreement signed by both parties or if no settlement, a court order will need to define who gets/keeps the retirement assets, including IRAs. The two parties need to reach a settlement or a judge will need to define in the court order.

QDRO is a term applying to 401(k) and other retirement plans. Qualified Domestic Relations Order.

By definition a QDRO is a court order. Federal law states a person’s 401(k) funds are exempt from any creditor (except the IRS), including a former spouse. However, there is a limited exception for divorce situations. If the QDRO rules are met a state court can require the transfer of 401(k) assets within the 401(k) plan from one spouse to the other spouse (the alternate payee). The alternate payee most likely will be subject to the same distribution rules applying to the participant. That is, the alternate payee may not be entitled to an immediate distribution. A settlement agreement is not sufficient to transfer

401(k) or other pension funds from one spouse to the other spouse. There must be a QDRO.

A transfer incident to a divorce is the term used with respect to IRAs. A state court judge (or pursuant to a settlement agreement) does have the authority to have the IRA assets of one spouse transferred to the other spouse.

Such a transfer is not a taxable event.

Many times accountants and attorneys use the term QDRO to include IRA transfers. They should not.

There must be a specific QDRO for each retirement plan.

With respect to IRAs, the settlement agreement or the court order must be specific with each to each IRA.

Categories: Email Guidance

Email Consulting Guidance – 2018 IRA Contribution Deadline April 15 or April 17?

Posted by James M. Carlson
Mar 06 2019

Q-1 In between trying to get my Deficient RM D customers to make their withdrawals and getting my deceased customers taken care of before the close of day Monday, one of my IT techs wants to know the deadline for prior year contributions for 2018 so she can make sure our system is a set for 2019.

Patriots Day is on April 15th, but usually the day after Patriots Day is something also.

A1 For most U.S. taxpayers the tax filing deadline and the IRA contribution deadline for tax year 2018 is Monday April 15, 2019. However for those states which recognize Patriots Day on April 15th, the tax filing deadline will be extended to April17, 2019, due to the fact that the Emancipation Day holiday is observed on Apri 16th.

Patriots’ Day is April 15th and the “standard” federal tax filing deadline is also April 15th.

For reasons discussed below, I believe the tax filing deadline for a Massachusetts resident is Wednesday

April 17th, 2019. The Patriots’ Day holiday rule changes the tax filing deadline to April 16th and the Emancipation Day holiday rule changes the deadline to April 17th.

Code section 7503 provides that a tax deadline is extended until the following business day if the original tax deadline falls on a Saturday, Sunday, or legal holiday.

A legal holiday includes a legal holiday observed in Washington. D.C.

Emancipation Day in 2019 is Tuesday April 16, 2019 It is a legal holiday in the District of Columbia. It is observed on the 16th when the 16th falls on a weekday. It is observed on the 15th (preceding Friday) if the 16th falls on a Saturday and it is observed on the following Monday (17th) if the 16th falls on Sunday.

I have read that Connecticut, Florida and one other state may also now observe the Patriots’ day holiday. I need to do some additional research for these non-Massachusetts states.

Categories: Email Guidance

Email Guidance – IRA Rollovers

Posted by James M. Carlson
Mar 06 2019

Q-1 We have a client that has a Rollover IRA, Simple IRA and a SEP IRA at another firm. He would like to transfer those IRA's to AAA Trust, but, was wondering IF they or any could be combined, so he doesn't have 3 different IRA accounts.

A-1 The law permits a person who has a traditional IRA (rollover IRA), a SEP IRA and a SIMPLE IRA to combine (i.e. transfer) all three into one traditional IRA, one SEP IRA or one SIMPLE IRA if the person has met the two year rule applying to SIMPLE IRAs. The two year rule is- two years must have elapsed since the first SIMPLE IRA contribution was made for the person.

Presumably, the person would maintain one traditional IRA.

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Email Guidance – Preparing IRS Forms for a Roth IRA Conversion

Posted by James M. Carlson
Mar 06 2019

Q-1 One of our other IRA staff, received this IRA paper work and handled this closure. The accountholder is contacting me now as they never received a 1099-R from us.

It appears this was to be a conversion of traditional IRA funds at our bank to a Roth with JH Investors. Our staff treated it as a transfer, thus not generating him a 1099-R form.

I believe this should have been completed as a Distribution on our end (converting traditional funds to Roth funds) thus we would have generated a 1099-R which would match up with the 5498 he received. Would you agree with that?

A-1 Yes. The paper work. from JH Investors clearly indicated the funds were being moved from a traditional IRA with Mainstreet Savings into a Roth IRA with JH Investors. Consequently, your bank was/is required to prepare a 2018 Form 1099-R reporting this special transfer distribution as taxable, but not subject to the 10% tax if the person was under age 59½.

Although this was a special transfer transaction, it is a reportable transfer in contrast to a transfer which is not reportable. The IRS defines many transfers as not being reportable, but not this transfer.

A reportable transaction is one which the IRS says must be reported.

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Email Guidance – Distribution of Inherited Funds in Iowa

Posted by James M. Carlson
Mar 06 2019

Q-1 A lady has a Roth IRA and at the time of opening she named her husband as the beneficiary. The couple has divorced. The lady never changed her beneficiary. The lady has now passed away with the beneficiary of the Roth IRA being her now ex-husband.

What is the Iowa law regarding the distribution of the inherited funds?

We are also checking with our bank attorney. We will update you after she researches the situation.

A-1 The state of Iowa has enacted a statute - 598.208 which covers the IRA divorce situation. Upon divorce the prior designation of the ex-spouse becomes void unless the IRA owner would re-designate the ex-spouse to again be the designated beneficiary.

This statute changed the law as determined by the Iowa Supreme Court in Schultz v. Schultz in 1999.

The 5-year rule applies to a Roth IRA when a person's estate is the designated beneficiary of a Roth IRA. As presently written, the CWF form defines the decedent estate to be the beneficiary when no one else has been designated as a beneficiary (primary or contingent).

The designation of the ex-spouse is voided. The 5-year rule does not require that there be an immediate lump sum distribution. However, it does require that the inherited Roth IRAs be closed by 12/31/2025 if the Roth owner dies in 2019.

If she had her Roth IRA for at least 5-years, all distributions from the inherited Roth IRA will be tax free.

The two children will not have the right to stretch out distributions (tax-free) over their life expectancy which would have been the case if they had been designated as the contingent beneficiaries.

Categories: Email Guidance

Email Guidance – Excess HSA Contribution

Posted by James M. Carlson
Mar 06 2019

Q-1 We have a customer who made an excess contribution into his HSA account for 2018. The excess contribution was in the amount of $1,175. The customer only has $270.03 in his account so we can't have him withdraw the excess contribution. How do we handle that? Do we, simply send his 5498-SA and let him consult with a tax professional on how this will affect him or is there something else we should do?

A-1 The IRS has not furnished sufficient helpful guidance on the topic of excess HSA contributions. The bank should consider the approaches discussed below and then settle on its administrative approach. What is to be done when the HSA owner informs the HSA custodian that he or she has made an excess HSA contribution?

It is not clear to me if the contribution was made in 2018 for tax year 2018 or was made in 2019 for tax year 2018. For discussion. Purposes I am assuming it was made in 2018 for tax year 2018.

The bank is to prepare the 2018 Form 5498-SA and box 2 will be completed to report the total contribution amount made in 2018, including the excess amount of $1,175.

The HSA owner is responsible to complete the 2018 Form 8889 (and Form 5329) and explain that he made an excess contribution and whether or not it has been corrected by withdrawing the excess.

A person who has a normal HSA distribution will receive a Form 1099-SA with a reason code 1 for a normal distribution. A person who withdraws an excess HSA contribution will receive a Form 1099-SA with a reason code 2.

The bank should consider three approaches:

Approach #1. Have the person withdraw the $270.03 and then inform him that some of the 2018 distributions ($879.97) which were processed as normal HSA distributions were really the withdrawal of excess contributions and he/she or the tax accountant will need to explain to the IRS. Under this approach the bank does not modify the 2018 Form 1099-SA.

Approach #2. Will HSA contributions be made in 2019? One possible approach, the person makes a sufficient 2019 contribution and then withdraws the $1,150 (plus earnings) before 4/15/19.The bank will prepare the 2019 Form ·indicating the excess of $1,150 was withdrawn in 2019.

Approach #3. Have the person withdraw the $270.03 and also inform him that the bank is going to change the 2018 1099-SA which was prepared as follows. The bank will prepare two 2018 1099-SA forms. One form wil report $879.97 ($1,150- $270.03) as the withdrawal of an excess and the remainder as a normal distribution.

The bank would report the withdrawal of the $270.03 on the 2019 Form 1099-SA.

In order to get the 2018 1099-SA for the $879.97 the bank would change the transaction code for certain distributions from normal to excess. If the 2018 Form 1099-SA has already been mailed, a corrected form would need to be prepared with respect to the "normal" amount and a new Form 1099-SA would need to be prepared for the excess amount withdrawn in 2018.

CWF believes a person who has made an excess contribution and then withdraws such funds cannot complete their tax return to show the distribution was normal because it was not. The person was withdrawing an excess contribution.The IRS needs to furnish more helpful guidance.

Categories: Email Guidance

Email Guidance – Transferring IRAs After 70½

Posted by James M. Carlson
Mar 06 2019

Q-1 Could she transfer her IRA from another institution into this one here or not, since she is over 70½. She is trying to consolidate.

A-1 A person who is subject to the RMD rules may consolidate a number of IRAs at one bank.

A person can transfer an IRA subject to an RMD at Bank #1 to Bank #2. The 2019 RMD then must be taken from Bank #2 by 12/31/2019.

Transferring an RMD is permissible whereas taking a distribution and rolling it over is not allowed.

The law has been designed so that there is a time a traditional IRA will cease to exist so that the tax benefits end.

The law requires a person age 70½ or older to take a RMD each year.

It appears your customer wants to get around the RMD rule.

In general, once an RMD is withdrawn it cannot be re-contributed as an annual contribution or as a rollover contribution.

The only exception I'm aware of is - if a person has both a traditional IRA and a SEP-IRA or SIMPLE IRA, the person must take an RMD from each such IRA each year. However if the person is self-employed and is still eligible for a SEP IRA contribution or a SIMPLE IRA contribution, then the person can us the RMD amounts as the source of cash to make their the SEP-IRA or SIMPLE IRA contribution.

Categories: Email Guidance

Email Guidance – Deceased Spouse’s Roth IRA Becomes Roth IRA of Surviving Spouse

Posted by James M. Carlson
Mar 06 2019

Q-1 We have a customer who had a Roth IRA. She passed away and the husband (beneficiary) did not transfer to him before he passed away. She passed away in 2016 and he passed away this week (2019). Do we go ahead and transfer to him/estate or do we transfer to contingent beneficiary.

A-1 You indicate the Roth IRA owner died in 2016.

There are two reasons her Roth IRA became his Roth IRA.

First, if he did not take his RMD from the inherited Roth IRA in 2017, then he is deemed to have elected to have the inherited Roth IRA become his own Roth IRA. This happens as a matter of law whether or not he or the bank changed any records.

Second, we have written the Roth IRA plan agreement to provide that her IRA became his Roth IRA if he made no election of the five year rule or the life distribution rule by 9/30/2017.

Did he have his own Roth IRA? Hopefully he did and he had named a beneficiary.

Did he designate a beneficiary with respect to this Roth IRA?

The bank should have established for him in 2017 either an inherited Roth IRA or his own Roth IRA.

Although he may not have wanted to act with respect to this inherited account, he needed to and the bank also needs to.

Under IRS reporting rules, the bank was required to prepare a 2016, 2017 and 2018 Form 5498 for him showing the FMV of the Roth IRA. If the Form 5498 reporting was done for her, this is incorrect.

When did she open her Roth IRA? If she had met the 5-year rule, each and every distribution to a Roth IRA beneficiary will be tax-free.

If she had met the 5-year rule, so had he and so has his beneficiary.

If he did not designate a beneficiary, his beneficiary is his estate. You should establish an inherited Roth IRA, the John Doe estate abo John Doe's Roth IRA.

Because his estate is the beneficiary, the 5-year rule must apply and the life distribution rule is inapplicable. As such, the five year rule will apply to the estate and the Roth IRA must be closed by 12/31/2025.

Had he designated a beneficiary this inherited Roth IRA would have earned tax free income for,the life expectancy of the beneficiary. This is a situation which should be avoided.

Categories: Email Guidance

Email Guidance – Direct Rollovers

Posted by James M. Carlson
Mar 06 2019

Q-1 I have two questions regarding Direct Rollovers:

  1. Does a Direct Rollover count towards the one Rollover in a 12-month period? I wasn't sure how that worked since the check is actually made payable to the bank FBO of the customer
  2. If an employer completes their own Direct Rollover form, which the customer signs, would we need to complete our Rollover form?

A-1 Your rollover or direct rollover questions are very timely and perceptive.

Neither the 60 day rule nor the once per year rule apply to any direct rollover from a pension plan into an IRA. The once per year rule applies only for IRA to person to IRA transactions. It does not apply to distributions from a pension plan.

A pension plan must furnish a special distribution form to the individual. It is called a section 402(f) form or notice. One of the options for the individual is to complete the form to instruct that she or he is doing a direct rollover to their traditional IRA or their Roth IRA. If your client will furnish you a complete copy of that distribution form, including the portion where they instruct to do the direct rollover, then the bank does not need this person to complete a rollover certification form. Although completion of the rollover certification form is "extra" insurance if you would obtain it as the form informs the person that he or she assumes responsibility if for some reason the distribution would be found ineligible to be directly rolled over.

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