Answers to The 70 1/2 Quiz!

Yesterday we tested your knowledge of the tax laws surrounding Required Minimum Distributions…  Let’s see how you did! 

  • 1 D: April 1, after the year that you turn 70 1/2. For example, if you turn 70 1/2. in the year 2005, the required beginning date would be April 1, 2006.
  • 2 Usually not.Let me explain. The year that you turn age 70 ? is often referred to as your required beginning year. You must take out a distribution for this year, but the government says that you have until April 1 of the following year before you need to actually take the money out.. Taking your beginning year distribution in the following year does not relieve you of the obligation to take a required distribution in that year, however. Thus, by waiting you will have to take two distributions in the following year-a delayed distribution from the beginning year and another for the current year!Why is this bad? Let us assume that your minimum distribution for the year 2005 was $15,000 and that you wait until March 31, 2006 to actually take out this amount. The $15,000 is treated as a distribution for the 2006 tax year.However, you also must take a minimum distribution for the year 2006, for which the deadline is December 31, 2006. If we assume that your minimum distribution for the year 2006 is $18,000, then your total distribution would be $33,000 in one calendar year! This might push you up into a higher tax bracket for 2006. Thus, in most cases it is best to take your minimum distribution during the year that you turn age 70 ?, rather than waiting until April 1 of the following year. It is best to prepare a tax projection in order to determine which way is best for you, depending on your circumstances.
  • 3 C: A 50% penalty. For example, if your minimum distribution was $20,000 and you only took out $8,000, then the difference would be $12,000. The penalty would be 50% of $12,000, which equals $6,000! Talk about a penalty!
  • 4 E: You can name almost anything or anyone. For example, you can name your spouse, children, grandchildren, a trust, a charity, your estate, or even your dog!
  • 5 A: YES! Under prior law, if you designated a charity as a partial beneficiary, this would prohibit your spouse from rolling over the rest of the proceeds or any of the other beneficiaries from electing to take IRA distributions over their lifetime. However, under the new laws, the spouse would have the right to roll it over into her IRA even though the charity was one of the primary beneficiaries, as long as the charity took out its distributions.
  • 6 No.?The final regulations no longer take the beneficiary into consideration.! It makes no difference even if there is no beneficiary because the individual would still take out a minimum distribution based upon the new table. There is an exception, of course, if a spouse is the primary beneficiary and he or she is more than 10 years younger than the IRA owner. In such a case you can use a different table that has longer life expectancies. However, in this example, this is not an issue.
  • 7 Yes!?If the spouse is the primary beneficiary of the living trust and the trust is the primary beneficiary of the IRA, and the other conditions listed below are also satisfied, then the IRS allows you to “look through” the trust and treat the spouse as being the primary beneficiary of the IRA. The spouse then has the right to roll it over into his or her own IRA.The required conditions are as follows:?
    1. The beneficiary designation must be valid under applicable state law.
    2. It must be irrevocable or become irrevocable at your death. Revocable trusts become irrevocable when you pass away and therefore a revocable trust can now be the beneficiary.
    3. All beneficiaries of the trust must be individuals.
    4. The beneficiaries must be identifiable from the trust document.
    5. A copy of the trust or trust certification that identifies the beneficiaries in any subsequent revisions must be given to the plan administrator no later than December 31st of the year after the?person passes away.
  • 8 D:The child would have the right to use any of these options; however, the best choice in most cases would be to take the distributions over his or her lifetime. The election must be made no later than December 31 of the year following the year of death. This is usually by far the best option for most non-spouse beneficiaries because it permits the maximum deferral for taxpayers who do not really need the money, while providing an option to receive the full amount in one year or over a five-year period if desired…Unfortunately, many IRA custodians default to taking out the distribution over a shorter period of time unless an election is made to extend it. Many beneficiaries (and their advisors!) are not aware of this rule and forget to make any election, and therefore are subject to the default provisions that the IRA custodian has. It is extremely important to review your custodian’s language in order to determine what options that they allow after you die.
  • 9 E: It doesn’t matter anymore! There used to be a number of factors to take into consideration before making your choice on calculating your Required Minimum Distribution such as selecting life expectancy, the recalculation method, single vs. joint, hybrid, term certain, etc. There is now one uniform table that most people will use. This table generally assumes that the beneficiary is 10 years younger than the IRA owner. The only exception is a situation in which the beneficiary is a surviving spouse who is more than 10 years younger than the IRA owner. Under the facts of this question, the spouse is 67 years old. Although this is only three years younger than the IRA owner, you can still calculate your minimum distribution assuming he or she is 10 years younger.
  • 10 C:?You might be depleting your IRA principal, but the IRS does not require this. The IRS merely requires that you take out a minimum distribution based on the new table and whether IRA principal decreases in a given year depends on whether the required distribution exceeds the growth in asset value for that year.For example, let us assume that your spouse is your primary beneficiary and both of you are 70 years old. According to the IRS tables, you have a life expectancy of 26.2 years. Therefore, if you have $100,000 in your IRA at the end of the prior year, you would have to take a minimum distribution of $3,817, which is about 4% of the IRA balance. If your investments inside of your IRA earn more than 4% , then your IRA will actually grow! The following chart illustrates what happens to your IRA balance if IRA investments earned a 10% return.

    IRA beginning balance:?$100,000

    Earnings during year:?10,000

    Less required minimum distribution -3,817

    Ending IRA Balance?$106,183

    Obviously, if your minimum distribution is greater than the earnings on your IRA, however, then you will start depleting your principal.

Take the 70 1/2 Quiz!

Many individuals with large IRAs understand that 70 1/2 is the magic age at which they have to start taking required minimum distributions. Unfortunately, these people often underestimate the complexity of the tax laws regarding this issue. Therefore, please take a few minutes to complete this 70 1/2 Quiz!

  1. At what date must you begin taking minimum distributions from your IRA?
    1. 70
    2. 70 1/2
    3. April 1 of the year you turn age 70 1/2
    4. April 1 of the year after you turn age 70 1/2
  2. Should you usually wait until this date before you take out your first minimum distribution?
    1. YES
    2. NO
  3. What is the penalty if you do not take out enough?
    1. 10%
    2. 25%
    3. 50%
    4. 75%
  4. Who can you name as beneficiaries to your retirement account?
    1. Spouse
    2. Children
    3. Grandchildren
    4. Pets
    5. Any or all of the above
  5. If I name my wife as 50% beneficiary, my son as 25% beneficiary, and a charity as 25% beneficiary, can my wife still roll over her interest into her own IRA after I am gone?
    1. Yes
    2. No, because the charity disqualifies the other beneficiaries from electing a rollover or an Inherited IRA.
  6. If I name my revocable trust as the primary beneficiary, am I required to take out my minimum distributions based on my single life expectancy?
    1. YES
    2. NO
    3. MAYBE
  7. If I name my trust as my primary beneficiary and my spouse is the primary beneficiary of my trust, will my spouse be allowed to roll over the proceeds into his or her IRA? [consistency]
    1. YES
    2. NO
  8. If I name a child as the primary beneficiary of the IRA, what options does he or she have with respect to minimum distributions after I die?
    1. within 1 year?
    2. within 5 years?
    3. over his/her lifetime?
    4. A, B or C
  9. I just turned age 70 1/2, am married and my spouse (age 67) is my beneficiary. What is my best choice for calculating my required minimum distributions?
    1. Recalculation?
    2. Term Certain?
    3. Hybrid
    4. Depends on circumstances
    5. Doesn’t matter
  10. Once I turn age 70 1/2, must I start depleting my IRA?
    1. Yes
    2. No
    3. Maybe

How do you think you did? On the average, most people get less than half correct!  Check in tomorrow for all the right answers!

To get the right answers for you, call us and schedule a Free Second Opinion with Jim Lange! 412-521-2732.

 

Quiz from MD Producer

Blog Series: How to Take Money Out of Your IRA Tax-Free!

Did you know there are several ways to take money out of your IRA tax-free? Remember, just because you CAN, doesn’t mean you SHOULD.

The first thing you should do is consult your tax/legal/financial advisor(s) and determine if taking money out of your IRA is the right step for you!

Option 7: Oil and gas investments.

Many people forget that some investments in an oil and gas investment generate an ordinary loss, which also can be utilized to offset distributions from an IRA.

Everyone’s situation is different! Make sure to consult your trusted advisors to determine what is appropriate for you!

 

Information gathered from MD Producer article for professionals

Blog Series: How to Take Money Out of Your IRA Tax-Free!

Did you know there are several ways to take money out of your IRA tax-free? Remember, just because you CAN, doesn’t mean you SHOULD.

The first thing you should do is consult your tax/legal/financial advisor(s) and determine if taking money out of your IRA is the right step for you!

Option 6: Income tax credits.

There are some investments that might generate a tax credit. If you give $3,000 away to a charity, this is a deduction and would save some taxpayers about $1,000 in taxes. On the other hand, the tax credit reduces your taxes dollar for dollar.

In the event that you can make $3,000 in tax credits, you would reduce your income taxes by $3,000. Therefore, tax credits are usually much more valuable than a tax deduction. Many investments can generate a tax credit. Have your advisor review the alternatives, as well as make sure that the overall investment return from the tax credit generator is a good one. Don’t just invest based on tax credit benefits. It is important that you always review the overall investment return with your advisor carefully.

Everyone’s situation is different! Make sure to consult your trusted advisors to determine what is appropriate for you!

 

Information gathered from MD Producer article for professionals

Blog Series: How to Take Money Out of Your IRA Tax-Free!

Did you know there are several ways to take money out of your IRA tax-free? Remember, just because you CAN, doesn’t mean you SHOULD.

The first thing you should do is consult your tax/legal/financial advisor(s) and determine if taking money out of your IRA is the right step for you!

Option 5: Losses relating to the sale of rental properties.

Many people forget that the loss on a rental property usually will generate an ordinary loss and not a capital loss. A net capital loss, as described above, is usually limited to only $3,000. An ordinary loss, on the other hand, may have no limitations (depending on your tax situation).

This particular opportunity has a lot of complications, exceptions, and holes to jump through, so have your trusted advisor review your situation carefully!

Remember, these are just ideas!  Everyone’s situation is different. Make sure to consult your trusted advisors to determine what is appropriate for you!

 

Information gathered from MD Producer article for professionals

Blog Series: How to Take Money Out of Your IRA Tax-Free!

Did you know there are several ways to take money out of your IRA tax-free? Remember, just because you CAN, doesn’t mean you SHOULD.

The first thing you should do is consult your tax/legal/financial advisor(s) and determine if taking money out of your IRA is the right step for you!

Option 4: Net operating losses.

If you have deductions or losses in a prior year that generated a negative taxable income, you may be able to carry that forward! Many of these deductions from the prior year are able to be carry forwarded into the next year and can be taken against the IRA distribution.

Everyone’s situation is different! Make sure to consult your trusted advisors to determine what is appropriate for your situation!

 

Information gathered from MD Producer article for professionals

Blog Series: How to Take Money Out of Your IRA Tax-Free!

Did you know there are several ways to take money out of your IRA tax-free? Remember, just because you CAN, doesn’t mean you SHOULD.

The first thing you should do is consult your tax/legal/financial advisor(s) and determine if taking money out of your IRA is the right step for you!

Option 3: Charitable contributions.

If you are very charity-minded, it may be best make an additional contribution to a non-profit organization, which is usually tax-deductible, or even ask your lawyer about establishing a charitable remainder trust. These charitable contributions can sometimes be used to offset an IRA distribution. Please understand that your itemized deductions are reduced depending on your adjusted gross income, so you should definitly consult a tax advisor before moving forward with any tax reduction strategy!

Everyone’s situation is different!  Make sure to consult your trusted advisors to determine what is appropriate for your situation!

 

Information gathered from MD Producer article for professionals

Blog Series: Take Money Out of Your IRA Tax-Free!

Did you know there are several ways to take money out of your IRA tax-free? Remember, just because you CAN, doesn’t mean you SHOULD.

The first thing you should do is consult your tax/legal/financial advisor(s) and determine if taking money out of your IRA is the right step for you!

Option 2: Capital losses.

Many investors have unrealized capital losses. Ask your advisor to determine the basis of each of your  investments and find out whether or not they have any unrealized capital losses. Please remember that only $3,000 of net capital losses can be usually taken on an income tax return. However, the additional capital losses can sometimes be carried forward to future years. This $3,000 loss can offset a $3,000 distribution from an IRA, making the distribution from the IRA income tax-free!

Everyone’s situation is different!  Make sure to consult your trusted advisors to determine what is appropriate for your situation!

 

Information gathered from MD Producer article for professionals

Blog Series: How to Take Money Out of Your IRA Tax-Free!

Did you know there are several ways to take money out of your IRA tax-free? Unfortunately, many investors are not aware of these options. Obviously, just because you CAN doesn’t mean you SHOULD.

The first thing you should do is consult your tax/legal/financial advisor(s) and determine if taking money out of your IRA is the right step for you! There is often a penalty for taking out the funds earlier than 59 1/2 and unless you meet certain criteria this penalty cannot be avoided.  Even if you CAN avoid a penalty, it is prudent to go over your situation with an adivsor and determine if there are other options that might work better for you.

Over the next 7 days this blog will explore some of the possibilities of taking cash out of your IRA tax-free!

Option number 1: Roth IRA Conversions

Even if you don’t need money now, you may want to consider converting some or all of your IRAs to Roth IRAs.  When you do this, it isn’t tax free!!!  You will typically pay the taxes in the year the conversion is made.  However, since Roth IRA’s grow tax free and you’ve already paid income tax on the amount you contributed/converted, if you need to take a withdrawal in the future, the money you withdrawal is income tax-free!

Everyone’s situation is different so be sure to ask your advisor to do a Roth IRA conversion analysis to find out if this option makes sense in your situation as well as when and how much you should be converting!

 

Information gathered from MD Producer article for professionals

 

Here Is A Social Security Claiming Strategy You May Not know!

What strategies can you use to increase you and your spouse’s joint lifetime Social Security benefits?

The file & suspend strategy puts a married couple in the position of receiving maximum Social Security benefits at age 70, with one spouse able to claim some of the benefits at their full retirement age.

As an example, if your full retirement age for a couple 66 and one spouse, let’s say the husband in this instance, claims Social Security at age 66 but then elects to suspend his benefit entirely, the wife can claim a monthly spousal benefit (roughly 50% of her husbands benefit) when she reaches 66.

This is accomplished by filing a restricted claim for a spousal benefit only at that time.  So while some spousal benefits are coming in, the couple has elected to put off receiving their own Social Security benefit until age 70.  This will allow them to collect the delayed retirement credits of 8% annually between ages 66 and 70.  At age 70 each spouse will be entitled to collect their own enhanced benefits.

Social Security planning pays off!