IRA Rules

Archive for July, 2010

Question: can someone in distribution of an IRA take advantage of the new rule to deposit a tax refund to the account?

If one is in required distribution, can they still direct deposit their tax refund to that account? The new option seems to make sense for other IRA’s like the Roth but I didn’t think it was possible to make a contribution to a traditional if you are in distribution. I know someone who is planning on taking advantage of the new option and I wondered if it won’t cause a problem later.
If the bank allows it (how could they stop it if the account number is valid?) is there a correction that can be made later?
Any help would be appreciated

Answer: A taxpayer who is required to take a minimum distribution from an IRA has reached the age of 70.5. After age 70.5, no additional contributions to a traditional IRA are allowed.

The IRS is allowing taxpayers who receive a refund on their tax return to deposit refund money into their IRAs. However, this does not change the rule that taxpayers over the age of 70.5 may not contribute to a traditional IRA.

A taxpayer over the age of 70.5 may contribute to a Roth IRA, and if the taxpayer had a refund, it may be deposited (in full or part) to the Roth IRA.

If a taxpayer who is not allowed to contribute to a traditional IRA makes a contribution anyway, the contribution will be treated as an excess contribution subject to a 6% annual excise tax for each year that excess contribution remains in the account.

Tax Law, Real Estate & Credit Tips : IRA Distribution Rules

Question: Would an IRA rolled-over from a 401(k) be subject to the same mandatory distribution rules at age 70 1/2?

Suppose I’d like to roll over an inactive 401(k) plan to a roll-over IRA. Normally the 401(k) would face mandatory distribution for each of the some 15 (?) years of life-expectancy beyond age 65. So for example I believe a $1.5M balance would have to be drawn down to zero in 15 years. (That doesn’t mean the money would disappear, withdrawals had to be taxed). Would I be able to defer tax with an IRA and pass it onto my children after I die?

Answer: 401(k) and IRA are currently subject to the same RMD (starting age 70.5).

One thing you may want to consider is gradually converting some to a Roth IRA (unless your income is too high). Tax would be due on the amount converted which is best paid from other sources (I reduced my W-4 allowances to increase withholding). If withholding is taken from the distribution, the withholding itself would be subject to 10% penalty.

There is no required minimum distribution from a Roth IRA, so it can continue to grow indefinitely past retirement (to cover inflation in later years, a lump sum without tax, or to leave to heirs).

There will be a special deal in 2010 to convert and then spread tax over 2011 and 2012. But I have been converting gradually about $10,000 per year to stay under the next tax bracket.

PS: It is best if any retirement plan beneficiaries are real people, not your estate or trust.

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Question: What are the rules for withdrawing contributions from a Roth IRA?

Is the only restriction that you can only withdraw contributions after the roth account has been open five years, or are there additional restrictions? For example, if my account has been open 10 years, can I withdraw contributions made 2 years ago?

Answer: It looks like you can withdraw contributions from RothIRA penalty and tax free any time, without waiting for 5 years. The IRS article about RothIRA doesn’t mention much about penalties, and both Fidelity and Vanguard state that “Roth IRA contributions can always be withdrawn at any time without penalty” (from the Fidelity site). The penalty and the 5-year rule only apply to withdrawing earnings. And by the way wherever the 5-year period is mentioned, it’s clear it’s referring to the age of the account, not of the money being withdrawn.

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