by Mat Sorensen | May 10, 2016 | News
Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that the plans investments grow tax-free and come out tax-free. But if tax-free investing isn’t enough to get you excited, rest assured, there are more benefits to the Roth IRA. I’ll note just three more in this article.
Remember, Roth IRAs are for nearly everyone with earned income. They’re not restricted to high income earners. Check out my prior article here if you’re unfamiliar with the back-door Roth IRA. Okay, now lets over the other perks of Roth IRAs.
No Required Minimum Distributions
First, Roth IRAs are not subject to RMD. Traditional retirement plan owners are subject to rules known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 70 ½. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax free income (free of capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax free income during the account owner’s life time. Learn more about the facts and fiction about IRA RMDs here.
Spousal Rollover: The Best Asset to Leave to Your Spouse
Second, a surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or can combine that Roth IRA into their own Roth IRA. Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. Non spouse beneficiaries (e.g. children of Roth IRA owner) cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. The non-spouse beneficiary becomes subject to required minimum distribution rules but can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death and is able to continue to keep the tax free return treatment of the retirement account for 5 years after the death of the owner. The second option for non-spouse beneficiaries is to take withdrawals of the account over the life time expectancy of the beneficiary (the younger the beneficiary the longer they can delay taking money out of the Roth IRA). The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA for tax free returns and growth.
Tax and Penalty Free Withdrawals Before Age 59 ½ On What You Put In
Third, Roth IRA owners are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early withdrawal penalty and taxes too, but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out funds penalty and tax free). This makes the Roth IRA the most powerful savings account out there because you can take out what you put in without penalty or tax for whatever reason you may have as hardship is not required. Traditional IRAs have no such benefits.
Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leave out many high income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income.
by Mat Sorensen | Dec 1, 2015 | News
If you are age 70 1/2 or older and if you have a traditional IRA (or SEP or SIMPLE IRA or 401k), you must take your 2015 required minimum distributions (“RMD”) by December 31, 2015. In short, the RMD rules require you to distribute a portion of funds from your retirement account to yourself personally. These distributed funds are subject to tax and need to be included on your personal tax return. Let’s take an example to illustrate how the rule works. Sally is 72 and is required to take RMD each year. She has an IRA with $250,000 in it. According to the distribution rules, see IRS Publication 590, she will need to distribute $9,765 by the end of the year. This equates to about 4% of her account value. Next year, she will re-calculate this annual distribution amount based on the accounts value and her age. Once you know how to calculate the RMD, determining the distribution amount is relatively easy. However, the rules of when RMD applies and to what accounts can be confusing. To help sort out the confusion, I have outlined some facts and fiction that every retirement account owner should know about RMDs. First, let’s cover the facts. Then, we’ll tackle the fiction.
Fact
- No RMD for Roth IRAs: Roth IRAs are exempt from RMDs. Even if you are 70/12 or older, you’re not required to take distributions from your Roth IRA. Why is that? Because there is no tax due when you take a distribution from your Roth IRA. As a result, the government doesn’t really care whether you distribute the funds or not as they don’t receive any tax revenue.
- RMD Can Be Taken From One IRA to Satisfy RMD for All IRAs: While each account will have an RMD amount to be distributed, you can total those amounts and can satisfy that total amount from one IRA. It is up to you. So, for example, if you have a self directed IRA with a property you don’t want to sell to pay RMD and a brokerage IRA with stock you want to sell to pay RMD, then you can sell the stock in the brokerage IRA and use those funds to satisfy the RMD for both IRAs. You can’t combine RMD though for 401(k) and IRA accounts. Only IRA to IRA or 401(k) to 401(k).
- 50% Excise Tax Penalty: There is a 50% excise tax penalty on the amount you failed to take as RMD. So, for example, if you should’ve taken $10,000 as RMD, but failed to do so, you will be subject to a $5,000 excise tax penalty. Check back next month where I will summarize some measures and relief procedures you can take if you failed to take required RMD.
- 401(k) Account Holder Still Working for 401(k) Employer: If you have a 401(k) with a current employer and if you are still working for that employer, you can delay RMD for as long as you are still working at that employer. This exception doesn’t apply to former employer 401(k) accounts even if you are otherwise employed.
Fiction
- RMD Due by End of Year: You can make 2015 RMD payments until the tax return deadline of April 15, 2016. Wrong! While you can make 2015 IRA contributions up until the tax return deadline of April 15, 2016, RMD distributions must be done by December 31, 2015.
- Roth 401(k)s are Subject to RMDs: While Roth IRAs and Roth 401(k)s are both tax-free accounts, the RMD rules apply differently. As I stated above, Roth IRAs are exempt from RMD rules. However, Roth 401(k) owners are required to take RMD. Keep in mind, you could roll your Roth 401(k) to a Roth IRA and thereby you would avoid having to take RMD but if you keep the account as a Roth 401(k) then you will be required to start taking RMD at age 70 ½. The distributions will not be subject to tax but they will start the slow process of removing funds from the tax-free account.
- RMD Must Be Taken In Cash: False. Required Minimum distributions may be satisfied by taking cash distributions or by taking a distribution of assets in kind. While a cash distribution is the easiest method to take RMD, you may also satisfy RMD by distributing assets in kind. This may be stock or real estate or other assets that you don’t want to sell or that you cannot sell. This doesn’t occur often but some self directed IRA owners will end up holding an asset they don’t want to sell because of current market conditions (e.g. real estate) and they decide to take distributions of portions of the real estate in-kind in order to satisfy RMD. This process is complicated and requires an appraisal of the asset(s) being distributed and partial deed transfers (or partial LLC membership interest transfers, if the IRA owns an LLC and the LLC owns the real estate) from the IRA to the IRA owner. While this isn’t the recommended course to satisfy RMD, it is a potential solution to IRA owners who are holding an asset, who have no other IRA funds to distribute for RMD, and who wish to only take a portion of the asset to satisfy their annual RMD.
The RMD rules are complicated and it is easy to make a mistake. Keep in mind that once you know how the RMD rules apply in your situation it is generally going to apply in the same manner every year thereafter with only some new calculations based on your age and account balances each year thereafter.
Click here for a nice summary of the RMD rules from the IRS.
by Mat Sorensen | Dec 2, 2014 | News
I posted a comprehensive article last week about 2014 retirement plan contributions in general. However, as the year ends I wanted to highlight three important deadlines you must know if you plan to set-up a Solo 401(k) in 2014. A solo 401(k) is a retirement plan for small business owners or self employed persons who have no other full time employees other than owners and spouses. It’s a great plan that can be self directed into real estate, LLCs or other alternative investments, and that allows a the owner to contribute up to $52,000 per year (far more than any IRA). Keep in mind though that it is just for self employed persons and new business owners.
2014 Solo 401(k) Setup Deadlines
First, the 401(k) must be adopted by your business by December 31, 2014. Practically speaking, this means you should be starting soon (if you haven’t already) so that documents can be completed in time. If the 401(k) is established on January 1, 2015, or later you cannot make 2014 contributions.
Second, both employee and employer contributions can be made up to the company’s tax return deadline INCLUDING extensions. If you have a sole proprietorship (e.g. single member LLC or schedule C income) or partnership then the tax return deadline is April 15, 2015. If you have an s-corporation or c-corporation, then the tax return deadline is March 15, 2015. Both of these deadlines may be extended 6 months by filing an extension and the date to make 2014 contributions will also be extended.
Third, while employee and employer contributions may be extended until the company tax return deadline you will typically need to file W-2’s for your wages (e.g. an s-corporation) by January 31, 2015. The W-2 will include your wage income and any deduction for employee retirement plan contributions from your wage income will be reduced on the W-2. As a result, you should make your employee contributions (up to $17,500 for 2014) by January 31, 2014 or you should at least determine the amount you plan to contribute so that you can file an accurate W-2 by January 31, 2015.
For more details on the contribution deadlines, please visit my prior blog article here.
by Mat Sorensen | Nov 25, 2014 | News
Retirement account/plan contributions are one of the most powerful tax strategies you can implement but you’ve got to make them by the deadline so that they can reduce this years tax liability. With the end of the year fast approaching, now is the time to make certain you are maximizing this important tax strategy for your 2014 tax planning. Please find below a table outlining the deadlines for 2014 retirement plan contributions according to your type of retirement account. If you are self-employed, you’ll notice the deadline also may depend on the type of company you own (e.g. s-corp or LLC) but also whether you are making contributions as an employee of your company and/or as the employer. First, let’s summarize the IRA contribution deadlines.
IRA Contribution Deadlines
| Type of IRA |
Contribution Type |
Deadline Details |
| Traditional IRA |
Traditional, Deductible |
April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 219(f)(3); You can file your return claiming a contribution before the contribution is actually made. Rev. Rul. 84-18. |
| Roth IRA |
Roth, Not Deductible |
April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 408A(c)(7). |
| SEP IRA |
Employee |
N/A; employee contributions cannot be made to a SEP IRA plan. |
| Employer Contribution |
March 15/April 15th, Due Date for Company Tax Return Filing (including extensions). IRC § 404(h)(1)(B). |
| Simple IRA |
Employee Elective Deferral |
January 30, 2015. IRC § 408(p)(5)(A)(i). |
| Employer Contribution |
March 15/April 15, Due Date for Company Tax Return Filing (including extensions). IRC § 408(p)(5)(A)(ii). |
In summary, for traditional and roth IRA contributions you have until the individual tax return deadline of April 15, 2015 to make 2014 contributions. SEP and SIMPLE IRA contribution deadlines are based on the company tax return deadline which could be March 15th if the company is a corporation and April 15th if it is a sole proprietorship or partnership. Keep in mind that this deadline does NOT include extensions so even if you extend your personal tax return filing to September 15, 2015, you still have a April 15, 2015, contribution deadline for Roth and Traditional IRAs.
401(k) Contribution Deadlines
| Solo 401(k) |
Business Structure |
Type of Cont. |
Deadline Details |
| 401(k), including self-directed Solo 401(k) (plan must be adopted by 12/31/14) |
Sole Proprietorship |
Employee Elective DeferralContribution |
April 15, 2015, contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105. |
| S-CorporationOr C-Corporation |
Employee Elective Deferral contribution |
March 15, 2015 (corporation filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
March 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105 |
| Partnership (e.g. partnership LLC) |
Employee Elective Deferral Contribution |
April 15, 2015 (partnership return filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and Election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105. |
There are a few important things to keep in mind regarding 401(k) contributions.
401(k) Contribution Deadlines Can Be Extended
First, the contribution deadline for employer and employee contributions is the company tax return deadline INCUDLING extensions. So, if you have a solo 401(k) you can extend your company tax return and your contribution deadline is also automatically extended. For example, if you have a solo 401(k) plan adopted by your s-corporation, then your s-corporation tax return deadline is March 15, 2015, but that can be extended 6 months until September 15, 2015, upon filing an extension to extend the company tax return with the IRS. If you do this, you’d have until September 15, 2015, to make the 2014 employee and employer contributions. That being said, the employee contributions are taken from your salary/wages and if you make traditional 401(k) employee contributions those amounts are reported on your personal W-2 and reduce your taxable wages. The W-2 is effectively where your tax deduction for traditional employee contribution arises is it reduces your taxable wages on your W-2. As a result, you’ll need to make or at least know the amount you intend to make for employee contributions by January 31, 2015 as that is the W-2 filing deadline for 2014.
New 401(k)s Must Be Adopted by December 31st
Second, if you are establishing a new Roth or Traditional IRA, you can create that new account at the time of the IRA contribution deadline. However, if you are establishing a new solo 401(k) plan, you must have the plan established by December 31, 2014. Because there are a number of documents and procedures required to create a new 401(k) plan, this is not something that can be left to the last minute and you should start immediately if you intend to open a 401(k) this year.
Make 2014 Contributions in 2014
And lastly, while the deadlines for most 2014 retirement plan contributions for IRAs and 401(k)s runs into 2015, to keep things simple and stress-free we recommend making 2014 contributions by December 31, 2014, when possible.
As you can see, the contribution deadlines vary depending on the type of account/plan but also on the type of contribution. With respect to contributions to a self-directed solo 401(k), the contribution deadline also varies depending on the type of company you own that has adopted the plan. Therefore, it is important that you understand these deadlines and don’t miss out on an opportunity to maximize your tax deductions. For guidance on the contribution limits in 2014, please click here.
As previously stated, it is not too late to setup a retirement account/plan if you have not done so already. The deadline to set up a 401(k) and to make contributions for 2014 is typically the last day of the year, although I wouldn’t wait until the last day or even the last week of the year to do so. If you are interested in setting up a self-directed solo 401(k), please contact us immediately as we are helping clients establish these and so that we can get it set up before the end of the year.
by Mat Sorensen | Nov 12, 2013 | UBIT & UDFI Tax
An IRA may invest into a real estate investment trust. Real estate investment trusts (“REIT”) are trusts whereby the company undertakes certain real estate activities (e.g. own or lend on real estate) and returns profits to its owners. An IRA may invest and be an owner in a REIT. As many self directed IRA investors know, a form of unrelated business income tax (“UBIT” tax) known as unrelated debt financed income tax (“UDFI” tax) can arise from real estate leveraged by debt.
Many REITs engage in real estate development activities and/or use debt to leverage their cash purchasing power and as a result may cause a form of UBIT tax known as UDFI tax to IRA owners. Most REITS will not pay corporate taxes and as a result will not be considered exempt from UBIT tax as a result of having paid corporate tax. However, income from REITs is still typically exempt from UBIT and UDFI tax because the definition of a “qualified dividend” in a REIT has been defined to include dividends paid by a REIT to its owners. IRS Revenue Ruling 66-106. Qualified dividends from a REIT are exempt from UBIT and UDFI tax. REITs can be publically traded or private trusts but are not easy to establish. They require at least 100 owners and must distribute at least 90% of their taxable earnings to their owners each year. Despite the general application of exception to UBIT/UDFI tax for REITs, a REIT may be operated in a manner that will not allow for qualified dividends to be paid and therefore income from the REIT would not be exempt from UBIT/UDFI tax. If you’re investing into a REIT with an IRA, make sure you know whether the REIT intends to be exempt from UBIT/UDFI tax or not. As discussed, most will be exempt from UBIT/UDFI tax but some REITs may choose to operate in ways that will not qualify for the exception. Because UBIT/UDFI tax is about 39% at $10,000 of annual income this is something every IRA should understand before investing into a REIT.
