1) You may not convert or rollover a required minimum distribution (RMD). A year’s RMD must be taken prior to making any such transaction.

2) You may not claim “hardship” as an exception to the 10% early distribution penalty. No such exception exists!!

3) You may not name your estate as your IRA beneficiary if you want your beneficiaries to stretch your IRA.

4) You may not make a Roth contribution for 2012 if your income is above certain thresholds. Click here to see those thresholds.

5) You may not make a deductible IRA contribution if you actively participate in a company plan AND your income is above certain thresholds. Click here to see those thresholds.

6) You may not make a 60-day rollover of inherited IRA or inherited Roth IRA funds if you are a non-spouse beneficiary.

7) You may not rollover after-tax funds into a company plan.

You may not take a partial distribution from a company plan and still use any of the special lump sum distribution tax breaks.

9) You may not use the uniform life table to calculate RMDs if you are a beneficiary (spouse or non-spouse).

10) You may not take a qualified distribution of Roth IRA funds unless you have had any Roth IRA for more than five years AND are over 59 ½ (or the distribution is made pursuant to death, disability or for the first-time purchase of a home up to $10,000).

11) You may not convert only the after-tax funds from an IRA if you have both pre-tax and after-tax funds IRA funds. Such a conversion would be taxable according to the pro-rata formula.

12) You may not have the right financial advisor and/or CPA if they don’t know these rules!

-By Jeffrey Levine and Jared Trexler

If you have more than one IRA or Roth account, you can do one rollover from each account. So you could do five rollovers when you have five IRAs. If you do a rollover on April 20th, you cannot do another rollover from that account until the next April 20th.

The funds you roll over can go back into the account they came out of or into any other account you may have or into a new account you establish. Once an account receives a rollover, it too cannot do a rollover distribution for one year. However, it can receive more than one rollover during a year.

Once a rollover is done from an IRA or Roth account, any subsequent distributions cannot be rolled over to any other IRA or Roth account (Roth conversions are an exception to this rule). If a rollover is done, you have an excess contribution in the receiving IRA or Roth account.

Excess contributions can be corrected without a penalty if they are properly removed (following the procedures for withdrawing excess contributions) by October 15th of the year after the contribution is made. When they are not timely corrected, a penalty of 6% per year applies for every year the excess contribution amount remains in the account. The penalty is reported on Form 5329 which is treated as a standalone return. When the form is not filed, the statute of limitations does not start to run. So this penalty goes on forever, even to your beneficiaries. And, other penalties and interest can be assessed by IRS.

If you think you have violated the one-rollover-per-year-per-account rule, please talk to a specialist in this area as soon as possible to limit the taxes and penalties you will have to pay.

It is always better to do a direct transfer of funds from one IRA or Roth account to another account. You can do as many transfers as you want in a year. There is no possibility of having an excess contribution.

-By Beverly DeVeny and Jared Trexler

Almost anyone who has reached the age of majority owns some property. If you are young, that could consist of your car, your checking or savings account, your computer, your cell phone, and your MP3 player. If you are older, you likely have a more complicated estate.

Your will can be simple. The two shortest wills on record, Karl Tausch – “all to wife,” and Bimla Rish – “all to son,” are only three words. Or it can be as complicated as you want to make it. The longest will on record was by Fredericka Evelyn Stillwell Cook who died in 1925. It was 1,066 pages and was mostly in her own handwriting.

Many famous Americans have died without a will. Among them are Barry White, Kurt Cobain, Sonny Bono and many others in the entertainment industry. Howard Hughes, Martin Luther King, Jr., and Abraham Lincoln also died with no wills and Lincoln was an attorney!

In many cases these estates were not settled for years due to conflicting claims from wives, ex-wives, girl friends, children, illegitimate children, other family members and creditors. Don’t let that happen to your loved ones. If you don’t have a will, get one. If you have not updated an existing will in several years, review it and change it, if necessary. And don’t try to cut corners or costs here. Simple mistakes in do-it-yourself wills can cost your beneficiaries later. If you have more than a three word will; you should probably consult with an attorney.

-By Beverly DeVeny and Jared Trexler

Whether you are changing jobs, being laid off or simply retiring you will be faced with many decisions. One key decision will be what to do with the vested money you have accumulated in your prior employer’s retirement plan, whether its a 401(k) plan, 403(b) plan or a pension plan that allows you full access to your benefit, such as a cash balance plan. Among the options to consider may be:

•rolling over to a Traditional IRA
•taking a lump sum distribution
•leaving it in the company plan
•rolling over to a plan with your new company
•converting to a Roth IRA, or
•converting to a Roth account offered by the employer.
We will cover the first three options in this article and the last three choices next Monday.

Rolling over to a Traditional IRA
One of the most compelling reasons to roll over the money to a Traditional IRA is to facilitate the “stretch-out” opportunity. At your death, your beneficiaries can stretch distributions over a period of time equal to their own life expectancies. Many plans do not allow the stretch option even though the IRA rules permit it. Plans generally do not want to get involved with the administrative burden of keeping track of a deceased employee’s beneficiaries. Thus, some plans simply pay the account balance to beneficiaries over a short time period at best.

Estate planning can be enhanced by rolling over the assets to a Traditional IRA. IRAs offer the option of splitting accounts and naming multiple primary and contingent beneficiaries. Funds in a company retirement plan are subject to federal spousal protection laws that, for the most part, require participants to name their spouse as beneficiary for a least 50% of the account unless the spouse signs a waiver to consent to a different designation. With an IRA, you could name anyone you want as beneficiary, although some state laws do provide a default interest to the spouse even if he or she is not designated as a beneficiary.

Unlike many company plans, you do not have to select from a limited number of investment options within a Traditional IRA; you have a wide range from which to choose. You can even purchase an annuity that offers an annually increasing guaranteed death benefit that just might prove to be a great investment option in a volatile market. Further, Traditional IRAs have no withdrawal restrictions while company plans generally have some restrictions on withdrawals prior to age 59 ½. With an IRA, you have immediate access to your funds, regardless of your age.

On the downside, some protection from creditors may be lost when the funds move from an employer-sponsored retirement plan to an IRA. Under federal law, assets held in most employer plans receive unlimited protection from a participant’s creditors. With IRAs, that protection is determined under state statutes which may not be as paternalistic in nature. Thus, it’s important to know what protection you might be giving up to the extent you roll your assets into an IRA.

Lump Sum Distributions
A lump sum distribution is the payment of your entire vested account balance in one calendar year due to your (a) attainment of age 59 ½, (b) separation from employment (not for self-employed individuals), (c) death, or (d) disability (only for self-employed individuals). You generally would choose this option if you need the money to live on or if you’re eligible for special tax benefits due to your age or investment holdings. By withdrawing the money it will be subject to income tax, with the exception of any after tax contributions you previously made that are returned to you. This obviously is a very expensive option. However, there are two things to keep in mind: Net unrealized appreciation (NUA) and ten-year forward averaging.

If your company plan includes highly appreciated company stock, consider withdrawing some or all of the stock and rolling the rest of the plan assets over to an IRA or take it in cash. To the extent you do this, you will pay no current income tax on the NUA (the appreciation in the value of the stock while it resided in the company plan.) The cost of the stock to the plan (the basis) of the shares distributed will be treated as ordinary income in the year of delivery to you. The NUA will be deemed a long-term capital gain at whatever point the stock is sold, regardless of how long you or your beneficiaries have held it. There are many rules to follow so you might want to consult your financial advisor or professional who has special knowledge in this area.

Ten year forward averaging is only available if all the assets are distributed this way (i.e. no rollover of any portion to an IRA or another employer plan.) Also, it applies only if the plan participant was born prior to January 2, 1936. Capital gain rates can be used for any part of a lump sum distribution that is attributable to plan participation before 1936. The special ten-year averaging tax is a stand-alone calculation and is figured separately from regular tax, so the distribution is not added to your adjusted gross income. The tax is computed using the single filer tax rate that was in effect for 1986.

Unfortunately, taking a lump sum distribution means these assets will no longer enjoy the tax-deferred umbrella afforded by a qualified retirement plan. All future earnings will be taxable when earned.

Leaving it in the Plan
There are very few valid reasons for leaving retirement benefits in a company plan. Probably the most compelling one is inertia. Sometimes, people just don’t want to make a decision when it comes to these assets. Truly valid reasons may include: federal creditor protection afforded plan assets, the existence of outstanding plan loans which would become taxable if you leave the plan, owning life insurance in corporate plans, and, finally, being able to take distributions prior to age 59 ½ without being subject to the 10% early distribution penalty if you leave the employer in a year in which you are age 55 or older (for public safety employees, this age is 50).

Next time, we’ll explore further options for handling your company retirement plan money.

- By Marvin Rotenberg and Jared Trexler

Can I make a contribution? As long as you have earned income and, for IRA contributions, you are under age 70 1/2 for the entire year, you can contribute up to a maximum of $5,000 to your IRA or Roth IRA but no more than $5,000 to all IRAs and Roth IRAs combined. If your earned income is less than $5,000 you can contribute up to the amount of your earned income. Participation in an employer plan, including SEP and SIMPLE plans has NO impact on your ability to make an IRA contribution. There are income limits for making a Roth IRA contribution but you can contribute after age 70 1/2.

Can I make a contribution for my non-working (or lower wage earning) spouse? As long as you and your spouse meet the requirements listed above, yes a full or partial contribution can be made for a non-working spouse.

Can I deduct my contribution? Deductibility depends on several factors. These include whether or not you or your spouse is considered covered (not contributing) by an employer plan, your income, and your tax filing status. You can never deduct a Roth IRA contribution.

You can find more information on earned income, deductibility, and Roth income limits in IRS Publication 590. It is available on the IRS website at www.irs.gov. On the left hand side of the screen, click on Forms and Publications. Best of all, it is free.

If you make a non-deductible contribution to an IRA, don’t forget to file Form 8606 with your tax return. This form lets IRS know that you have after-tax money in your IRA. Later on, when you have to, or want to, take distributions from your IRA, you use this same form to let IRS know that not all of your distribution is taxable.

-By Beverly DeVeny and Jared Trexler

Unless Congress acts before the end of the year, a number of tax changes are scheduled to take place in 2013. You’ve probably already heard of a few of them, like income tax and capital gains tax rates rising to their pre-Bush tax cut levels. One tax change that may not be on your radar however, is the return of the gift tax exemption to $1 million. The gift tax exemption is the maximum amount that you can give away during your lifetime without incurring a tax – not counting amounts gifted using the annual exclusion amount, which is currently $13,000 per year, per person. Should you give away more than the gift tax exemption during your lifetime, then any additional gifts are subject to a special tax – the gift tax – which believe it or not, is taxable to you, the giver, and NOT to the recipient of your generosity.

Now I know that $1 million is a lot of money to most people, but it’s a far cry from the current $5 million exemption. Even if you believe Congress will pass a law increasing the estate tax exemption for 2013 to $3.5 million or $5 million, which many experts believe they will, there’s talk that if they do, the gift tax exemption won’t be brought along for the ride and will remain at $1 million. So if you are lucky enough to have more than $1 million and you would like to give a large chunk of it away, you might want to keep a tight watch on any gift tax related legislation – or lack thereof – before the end of the year. If it looks like the exemption is going to go back down to $1 million, you may very well want to give now (in 2012).

A word of warning though… Don’t forget that IRAs, 401(k)s and other types of retirement accounts cannot be gifted to another person during your lifetime. That’s one of the things that make these types of accounts so different and so much more challenging to incorporate into a long-term plan. If you “gift” your IRA or other retirement account to someone during your lifetime, it’s immediately taxable – to you! The recipient will have a pile of money, but no IRA, no tax-deferral and no stretch IRA when they die. So if you’re planning on giving away some of your assets before the end of the year, make sure you’re doing so with assets that can actually be gifted!

- By Jeff Levine and Jared Trexler

Thursday, March 8, 2012
Greenwood Village, CO
Session 1: 8:00am – 12:30pm
Session 2: 1:30pm – 6:00pm

Friday, March 9, 2012
Colorado Springs, CO
9:00am – 1:30pm

Saturday, March 10, 2012
Loveland, CO
9:00am – 1:30pm

A number of income tax provisions that affected individual tax payers expired at the end of 2011. Some examples of these include:

• the option for individuals to deduct state and local sales taxes instead of state and local income taxes on their federal return

• certain deductions for higher education expenses

• an allowance for school teachers to deduct up to $250 annually in out-of-pocket classroom expenses

The end of 2011 also closed the curtain on U. S. Saving Bonds being issued in paper form. Saving Bonds, which dated back to 1935, now will be available in electronic form only. While paper Saving Bonds are no longer are available for purchase, many banks and credit unions will continue to redeem them upon request.

The alternative minimum tax could be larger in 2012 because Congress has not extended the usual temporary relief.

Another provision that expired on December 31, 2011 and was near and dear to our hearts is the “Qualified Charitable Distribution” (QCD), which allowed seniors age 70 ½ and older to transfer up to $100,000 annually (including their required minimum distribution for the year) from their Individual Retirement Accounts (IRAs) to qualifying charities without having to report the distributions as taxable income.

If you have made one or more QCDs before, or were thinking about doing so in the future, you might want to hold off on taking any distributions from your IRA early in 2012. This provision has been reinstated twice after the start of a new tax year, and if for some reason it is instituted again this year you will be able to use it and pay no income tax on the amount going to charity. However, once payments have been made from your IRA to you, they are not eligible to be used for a QCD. A QCD would have to be made using other funds in your IRA, which generally would be less efficient for you.

Given the political gridlock in Washington and the fact that 2012 is an election year, tax uncertainty could linger for months. Stayed tuned to The Slott Report for further developments.

-By Marvin Rotenberg and Jared Trexler

Below are some frequently asked questions and our answers.

Can I make a contribution? As long as you have earned income and, for IRA contributions, you are under age 70 ½ for the entire year, you can contribute up to a maximum of $5,000 to your IRA or Roth IRA but no more than $5,000 to all IRAs and Roth IRAs combined. If your earned income is less than $5,000, you can contribute up to the amount of your earned income. Participation in an employer plan, including SEP and SIMPLE plans, has NO impact on your ability to make an IRA contribution. There are income limits for making a Roth IRA contribution but you can contribute after age 70 ½. If you are age 50 or older during the year, you can contribution an additional $1,000 to your IRA or Roth IRA for a total contribution amount of $6,000 for 2012.

Can I make a contribution for my non-working (or lower wage earning) spouse? As long as you and your spouse meet the requirements listed above, a full or partial contribution can be made for a non-working spouse.

Can I deduct my contribution? Deductibility depends on several factors. These include whether or not you or your spouse is considered covered (not contributing) by an employer plan, your income, and your tax filing status. You can never deduct a Roth IRA contribution.

You can find more information on earned income, deductibility, and Roth income limits in IRS Publication 590. It is available on the IRS website at www.irs.gov. On the left hand side of the screen, click on Forms and Publications. Best of all, it is free.

Editor’s Note: Or, because we are all about making it easier for you, click here to find IRS Publication 590.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler