Long Beach Financial Planner - Pete Mitchell » Traditional IRA

IRA Changes For 2011

Pete Mitchell — Wed, 26 Jan 2011 16:00:38 +0000

What’s new? Every year brings changes in tax law, and some of these revisions always seem to affect IRAs. Here is a look at some of the new wrinkles for 2011.

You can’t defer income resulting from a Roth IRA conversion in 2011. If you converted a traditional IRA to a Roth IRA in 2010, you could opt to divide the income resulting from the conversion between your 2011 and 2012 federal tax returns. (If you did go Roth in 2010, you have until October 17, 2011 to choose this income deferral option.) You don’t have this choice in 2011 – the income can’t be deferred to a future tax year.¹

The IRA charitable rollover is back. In 2011, IRA owners aged 70½ or older can again donate IRA proceeds to charity tax-free. The Tax Relief Act of 2010 brought back the opportunity, at least for this year.²

A charitable IRA rollover lets an IRA owner gift up to a total of $100,000 in IRA assets to one or more qualified charities or non-profit organizations. The distribution has to go directly from the IRA custodian to the charity. You don’t get a tax deduction for the move, but you could use this qualified charitable distribution to fulfill some or all of your 2010 RMD.²

The Tax Relief Act also gives IRA owners until January 31, 2011 to make 2010 charitable IRA donations.So you could transfer up to $100,000 from your IRA to a charity in January and have it retroactively count as a 2010 distribution, then transfer another donation of up to $100,000 to the charity later this year.³

Here’s the irritating asterisk on all this: if you took your 2010 RMD assuming that you couldn’t make a charitable IRA donation in 2010, there is no do-over available. You can’t put back your 2010 RMD into your IRA and redirect those assets toward charity. The IRS issued a statement on January 5 citing existing language in IRS Publication 590, explaining that “required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to an IRA.”⁴

You have three extra days to make your 2010 IRA contribution. The District of Columbia observes Emancipation Day on April 15, so the deadline for your 2010 IRA contribution is April 18, 2011.^5,6 (Remember to tell your IRA custodian that you are making a contribution for the 2010 tax year.)

You may have a chance to go Roth with your 401(k) or 403(b) in 2011. As a result of the Small Business Jobs Act of 2010, some employer-sponsored retirement plans are now allowing in-plan Roth conversions, i.e., the chance to “convert” a percentage of the pre-tax dollars you have saved to after-tax dollars without the necessity of a rollover to a Roth IRA. However, there are criteria to meet.

Your employer’s retirement plan document has to permit after-tax Roth contributions.
You must be older than 59½, or you have to have assets in a 401(k) or 403(b) account at a past employer that could potentially be rolled over to your current employer’s plan.^7,8

Roth IRA phase-outs have been set higher for 2011. While anyone can convert a traditional IRA to a Roth IRA, not everyone can contribute to a Roth IRA because of MAGI limits. For 2011, those phase-out limits have increased by $2,000 for joint and single filers. The phase-out range for joint filers and qualifying widows this year is $169,000-179,000. For single filers, it is $107,000-122,000.⁶

Traditional IRA deduction phase-outs are also higher for 2011. If you own an IRA and participate in an employer-sponsored retirement plan, your IRA contributions may or may not be deductible, depending on your MAGI. In 2011, the MAGI phase-out ranges are bumped up slightly to $90,000-110,000 for joint filers and qualifying widows and $56,000-66,000 for single filers and heads of households.⁶

One thing that hasn’t changed… With minimal inflation for 2010, there was no COLA to send the annual IRA contribution limit higher. You may contribute up to $5,000 to your IRA in 2011, $6,000 if you are 50 or older. If you have more than one IRA, your total 2011 IRA contributions to your IRAs cannot exceed the above limits.⁹

This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 – online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]

2 – online.wsj.com/article/SB10001424052748703395904576025610771041244.html [12/18/10]

3 – blogs.forbes.com/ashleaebeling/2011/01/06/taxwise-giving-from-your-ira-the-january-do-over/ [1/6/11]

4 – online.wsj.com/article/SB10001424052748703730704576065931348238132.html [1/7/11]

5 – irs.gov/newsroom/article/0,,id=233910,00.html [1/14/11]

6 – irs.gov/publications/p17/ch17.html#en_US_2010_publink1000252730 [1/14/11]

7 – bankrate.com/financing/retirement/converting-to-a-roth-401kk/ [11/4/10]

8 – sibson.com/publications-and-resources/compliance-alert/archives/?id=1534 [10/27/10]

9 – irs.gov/retirement/article/0,,id=202510,00.html [11/1/10]

10 – montoyaregistry.com/Financial-Market.aspx?financial-market=required-ira-distributions&category=1 [1/16/11]

Can I Roll My 401k into a Roth IRA?

Pete Mitchell — Fri, 09 Apr 2010 15:00:11 +0000

Can I Roll My 401k into a Roth IRA?

www.youtube.com/watch?v=Qc-J4XSBO4c

This question comes up more times than I can count. Can I roll my 401k into a Roth IRA?

And the simple answer is, not directly, but indirectly you can. And what do I mean by that?

Unless you have a Roth 401k, in which case you could roll it directly into a Roth IRA, but hardly anyone has a Roth 401k since they’re so new and there’s really not the same tax benefits to a company as a traditional 401k, which is why I don’t think you’re going to see them offered very much. But that’s a whole other topic for a whole other day.

A 401k has to be rolled first to a traditional IRA, because the IRS says you have to go from like product to like product, and what they’re talking about when they say “like” is the taxation on that product. And then you take it from the traditional IRA and you then place it into a Roth IRA.

Now know when you do that, that’s when you’re going to have this taxable event that comes up. And yes, there are ways to spread out your taxes. And yes, there are rules about being able to put money into a Roth IRA, so before you do it, make sure you talke to a qualified professional to see if it can be done in your situation, because every situation is different.

That’s the reason why the tax code is as big as it is. It’s because there’s so many stinking rules out there, and you’re left trying to go on the Internet and find the right ones. Hey, the Internet’s going to get you so far, but at some point you’re going to have to talk to someone and explain to them your situation, and they can tell you definitively what your options are. But just know that it’s got to be that indirect way. You go first to a traditional IRA and then from the traditional IRA into a Roth IRA.

That’s how you get your money from a 401k into a Roth IRA.

I’m Pete Mitchell, and I look forward to sharing more on the markets with you later.

Pete Mitchell’s- What To Do If You’re Laid Off

Pete Mitchell — Fri, 26 Feb 2010 16:00:35 +0000

WHAT TO DO IF YOU ARE LAID OFF

www.youtube.com/watch?v=oSeAfqm6sac

If you’re laid off, what happens to your retirement money? Well, you have three basic choices with your 401(k). One gives you more freedom and control than the other two.

You could just leave your 401(k) alone. The money will remain invested, and the financial firm handling your 401(k) will keep mailing you quarterly statements telling you how it is doing. Any future growth will be tax-deferred.¹

But this passive choice comes with an opportunity cost. If you just leave the 401(k) assets in the plan, you’re giving up control and flexibility. Your investment choices may be limited, the plan fees may be high, and you may not be able to quickly access your money or do what you want with it. If you have a trail of old 401(k)s left with a bunch of former employers, things can get really complicated when you retire – especially when you have to take Required Minimum Distributions (RMDs). Leaving the money in the plan may not be the wisest choice.

You could withdraw the money. This is a terrible choice – a last resort. It comes with a severe financial penalty. You will not get all the money you have invested back – far from it. You will lose 20% of your 401(k) assets to withholding taxes, and if you are under 55, the IRS will levy an additional 10% penalty for early withdrawal of the assets. By the way, distributions from a 401(k) are considered taxable income – so expect a big tax bill in the year you cash out.¹ The federal government does not want to see you wipe out your retirement savings. Neither does your financial advisor. (If you really need money, you could consider borrowing from your 401(k). The problem here is that most companies want the loan balance paid off when you leave – whether you leave work by choice or not.)

You could roll it over into an IRA. This is the choice that usually makes the most sense. You can move the money into an IRA through a rollover or trustee-to-trustee transfer. Or, you could direct the money into a so-called “conduit IRA,” a traditional IRA created to hold your old 401(k) assets until you move the money into another qualified retirement plan. (You can’t contribute to a conduit IRA.)² There’s no tax penalty when you do an IRA rollover or trustee-to-trustee transfer.After you do it, you have total control of the money, continued tax-deferred growth, expanded investment choices, and possibly lower management fees.¹

Rolling over the money into a Roth IRA might be a great move, provided you can meet two conditions. First, your adjusted gross income has to be less than $100,000 for the year in which you make the rollover. Second, you’ll have to pay taxes on the assets you convert.¹The upside is considerable: you get tax-free compounding, tax-free withdrawals if you are older than age 59½ and have owned your account for at least five years, and the potential to make contributions to your IRA after age 70½ without having to take RMDs. Contributions to a Roth IRA are not tax-deductible, but there are fewer restrictions on withdrawals.^3,4

In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan – you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or lower. There is no limit on the conversion amount. Incidentally, in 2010, anyone can convert a traditional IRA to a Roth IRA – the AGI restriction on such conversions disappears.⁵

What if you have to shiver through a 401(k) freeze? A “freeze” is when your employer reduces or suspends matching contributions to your retirement plan. FedEx, General Motors and Motorola have all recently chosen to do this.⁶ The answer: don’t let up on your personal contributions. If you can manage it, adjust your 401(k) contribution to a level where you effectively replace what your employer contributed. Saving for retirement should remain one of your highest priorities.

How is your money positioned? How are you invested today? Are you doing things designed to preserve and enhance your retirement money? You may want to talk with me about your options. If you’d like to, call me at 800-990-2734 or email me at Pete@PeteMitchellinc.com.

Citations.

¹articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/jobless-what-to-do-with-your-401kk.aspx [2/13/09]

² investopedia.com/terms/c/conduitira.asp [2/13/09]

³ fool.com/Money/AllAboutIRAs/allaboutiras03.htm [11/19/08]

⁴ irs.gov/publications/p590/ch02.html#d0e9236 [11/19/08]

⁵ kiplinger.com/magazine/archives/2009/01/sweet-deal-on-roth-ira-conversion.html [1/09]

⁶ biz.yahoo.com/ibd/090102/funds.html?.v=1 [1/2/09]

IRA Contribution Deadline by Pete Mitchell

Pete Mitchell — Wed, 17 Feb 2010 16:00:08 +0000

IRA Contribution Deadline

www.youtube.com/watch?v=-ZqRVfZq8GY

Don’t miss the IRA contribution deadline! Make sure you make your 2009 IRA contribution before April 15! With stocks performing so well these days, fully funding your IRA for 2009 (and 2010) could mean a tremendous boost toward saving for retirement.

If you’ve been contributing $50 or $100 to an IRA each month, there’s room to contribute a lot more. Putting $600 or $1,200 in your IRA annually is nice, but you can direct up to $5,000 into your IRA for tax year 2009 (and up to $6,000 if you turned 50 in 2009). This $5,000 (or $6,000) limit can be split between a traditional IRA and a Roth IRA. The maximum contribution may be reduced if your modified adjusted gross income, or MAGI, is really high.¹

As for your 2010 IRA contribution … you have until April 15, 2011 to make it, but you can also make it this year and cross it off your to-do list. There’s really no point in waiting until April 2011 to make that 2010 contribution – if you wait that long, you’ll potentially lose 15 months of interest and compounding.

Don’t delay – e-mail me today so I can help you fully fund your IRA. You may call me at 800-990-2734 or e-mail me at pete@petemitchellinc.com. I look forward to speaking with you.

¹ irs.gov/retirement/article/0,,id=202510,00.html [11/10/09]

The “How” & “Why” of an IRA Rollover – Presented by Pete Mitchell

Pete Mitchell — Fri, 05 Feb 2010 20:38:23 +0000

THE “HOW” AND “WHY” OF THE IRA ROLLOVER

A way to reinvest the lump sum you’ve saved for retirement.

www.youtube.com/watch?v=anWJAu84VeU

As retirement approaches … money decisions become increasingly major. One big decision concerns what to do with the money in your company retirement plan.

… Consider a direct rollover. For most people, the most attractive option is an IRA rollover. In other words, you transfer the money from your 401(k), 403(b) or 457 plan into an IRA. It is not hard to accomplish, provided you have the guidance of a qualified financial advisor.

Here are the basic steps. When you leave a company, you usually have three options with your retirement plan: you can leave the money in the plan, roll it over into a new plan (if you elect to keep working for a new employer), or do a direct rollover into an IRA.

A direct rollover is not the same thing as a direct payment to you. Yes, your employer can actually write you a check for the full amount of your 401(k) account, but 20% of that money will be withheld for taxes. Keep in mind that they 20% that they withhold may not be enough to cover all the taxes you owe.

If you want to avoid that 20% withholding, a direct rollover is the solution. It is a “trustee to trustee” rollover, which works like this: your employer writes a lump sum check not to you, but in the name of the trustee or custodian of the IRA that you are creating to hold the funds. You then let your company’s retirement plan administrator know that you’ll be doing a direct rollover. (There is almost always a form to be filled out, on which you can state the specific instructions for the distribution check.)

Your company sends you the check payable to the IRA trustee, with no withholding, and you have 60 days to deposit it in the IRA; day 1 is the day after you get the check. (Sometimes a wire transfer of assets occurs instead, between one investment custodian and another.) If you don’t complete the direct rollover in 60 days, you will pay tax on the entire amount. (There’s no grace period for weekends or holidays.)

If you want to leave work before age 59½ or you own shares of company stock, you should consider the tax implications created by those circumstances before attempting any kind of rollover.

Let’s talk about what you can and can’t do. You can make unlimited direct rollovers of your retirement account assets, and you can add the money in your retirement plan to an IRA you already have, if you don’t intend to go back to work and put those assets into a new employer plan. Once your retirement plan assets are in an IRA, you can invest them in practically any way you choose – in mutual funds, CDs, stocks, money market funds, annuities, and even more possibilities. You can also set up your IRA to make systematic payments to you.

You can’t roll over the assets from your retirement plan directly into a Roth IRA. You have to put them in a Traditional IRA first, and then convert to a Roth IRA by paying tax on the assets you want to convert before you can realize that tax-free growth.

Is it time to roll over your retirement money? If that time is here or getting closer, you need to be very careful with what could possibly be the largest lump sum you ever receive. Be sure to ask a qualified financial advisor about your IRA rollover options today.

Investment advice is offered through Pete Mitchell, Inc. a registered investment advisor in California.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice.