Complete Financial Planning

2011 IRA Changes

27 Things You Should Know About The 2011 Tax Laws

You have until April 18, 2011 to make your 2010 IRA contribution.

The IRA contribution deadline for most years is April 15, the same day that your tax return is due. However, the federal government and the District of Columbia recognizes Emancipation Day as a holiday. And because this holiday falls on April 15 this year, the deadline for 2010 IRA contributions has been extended to April 18, 2011.

If you file for an extension for your 2010 tax return, you must still make your 2010 IRA contribution by April 18, 2011. The tax filing extension does not apply to your IRA contribution.

If you are under 50 by December 31, 2010, you can contribute $5,000 to your IRA for 2010.
If you are 50 or older by December 31, 2010, you can contribute $6,000 to your IRA for 2010.

• Your Annual Required Minimum Distribution (RMD)

Use the IRA Uniform Distribution Table, which you will find here, and the value of your IRA on 12-31 of the previous year to calculate your RMD for the current year.

Note, this is for IRAs and qualified plans (like 401ks) that you own. Do not use this for IRAs and 401k's you inherited from someone other than your spouse.

Click here to use our calculator to determine your RMD.

You must start taking a Required Minimum Distribution (RMD) the year you turn 70 1/2.

So if you turn 70 1/2 in 2011, you will have to take an RMD for 2011. Your 2011 RMD will be based on your 12-31-2010 account value and your age as of your birthday in 2011.

You have until April 1 of the following year to take your first RMD. So if 2011 is the year you must take your first RMD, you have until April 1, 2012 to take the 2011 RMD.

Of course if you decide to wait until the following year to take the RMD for your first year, you will have to take two RMDs in the second year. For instance, if 2011 is the first year you must take an RMD and you wait until April 1, 2012 to take your 2011 RMD, you will end up taking your 2011 and the 2012 RMD in 2012. This will double the amount of income you have to report on your 2012 income taxes and could have adverse tax consequences if the additional RMD distribution puts you into the next tax bracket or causes your Social Security to be taxed.

If you turned 70 1/2 in 2010 and haven't yet taken your 2010 RMD (your first RMD), you have until April 1, 2011 to take your 2010 distribution. Then, you must take your 2011 RMD by December 31, 2011.

• IRA and Retirement Plan Contribution Limits

Please click here for a table of the current IRA and retirement plan contribution limits.

• Converting Traditional IRA dollars to a Roth IRA in 2010

As you may have heard, if you convert Traditional IRA dollars to a Roth IRA in the 2010 calendar year, you can choose to pay all of the income taxes as a result of the conversion in 2010 OR you can defer the taxes and pay half in 2011 and pay the other half in 2012. This ability to defer paying the income tax is only for conversions that occur in 2010.

Please click here to view an illustration showing the future value of a $25,000 Traditional IRA compared to converting all $25,000 to a Roth IRA in 2010. This illustration assumes the account owner is 65, has a spouse that is 64 and is the primary beneficiary and also has two children who are listed as the contingent beneficiaries.

Please keep in mind I am assuming income taxes using today’s tax brackets, none of the money is spent and all required minimum distributions at age 70 ½ and beyond are re-invested. Also, when comparing values, it is not so much a matter of how old the account owner is as is the passage of time.

The Results

After 5 years, when the account owner is 70 years old, the Roth IRA is worth $1,071 more than the Traditional IRA.
After 10 years, when the account owner is 75 years old, the Roth IRA is worth $2,358 more than the Traditional IRA.
At the time of death of the account owner, 17 years later assuming normal life expectancy in this illustration, the surviving spouse would inherit $64,110 via the Traditional IRA or $71,358 in a Roth IRA – a $7,248 advantage for the Roth IRA as a result of the $25,000 conversion.
Over the life expectancy of both the spouse and the two children (a total of 50 years), the Roth IRA would generate over $288,000 in distributions with $6,250 of income taxes paid while the Traditional IRA would generate over $97,300 of distributions with over $24,000 of income taxes paid. This represents over a $191,000 advantage for the Roth IRA as a result of the conversion.

Conclusion

Converting to a Roth IRA is particularly beneficial if you plan on passing the dollars onto your spouse and children. There is very little benefit in the early years after conversion. The bigger benefit comes from your children inheriting a tax-free account and taking distributions over their life expectancy.
Converting to a Roth IRA would make sense if you believe that income tax rates are going to increase and stay high for an extended period of time.
You need to have the cash on hand to pay the income tax as a result of converting. It is not advantageous to convert if you have to use money from the Traditional IRA to pay the income taxes.

Note that other qualified accounts such as 401(k)’s, 403(b)’s and SEP IRAs can also be converted to a Roth IRA.

Please contact the office if you have any questions regarding the above information, the attached illustration or to schedule an appointment to review the particulars of converting some or all of your Traditional IRA dollars to a Roth IRA in 2010.

• Roth IRAs and the 5 Year Clock

Please click here to read some FAQs about IRA's you may find interesting.

• Please click here to read the article titled Could a Roth IRA Conversion Affect a Student's Financial Aid?

• Stretch IRA

Required Minimum Distribution (RMD) Rules for Inherited IRAs

The following is an overview of the rules for calculating the RMD for IRAs you inherit from someone other than your spouse.

The Stretch IRA is a term used to describe the process where a person who inherits an IRA takes withdrawals from the inherited IRA over their lifetime, rather than taking a lump sum distribution after inheriting the IRA.

The process of taking distributions over your lifetime is the "Stretch IRA." You are "stretching out" the distributions.

Contact our office for a copy of the Single Life Table used in this calculation or if you have additonal questions.

NOTE: If the participant (the person you inherited the IRA from) had not yet taken the entire RMD for the year of death, the balance of the RMD must be taken by the end of that year by the beneficiary of the account.

Individual Non-Spouse Beneficiary

A. If the Participant died on or after his or her required beginning date (generally April 1 of the year following the year the Participant attained age 70 1/2):

1. An individual non-spouse beneficiary may take distributions over his/her single life expectancy (non-recalculated) provided payments commence no later than December 31 of the year following the year the Participant died.

2. The beneficiary's life expectancy is always computed using the Single Life Table, rather than the Uniform Distribution Table used to compute the participant's RMD.

3. The non-spouse beneficiary uses the fixed term (or Minus 1) RMD calculation method.

4. The life expectancy factor is called the "Applicable Distribution Period", ADP, or the divisor.

5. The ADP is the life expectancy from the Single Life Table as of the first distribution year. The first distribution year is the year following the year of death.

6. For years 2 and beyond, calculate the applicable divisor by subtracting 1 from the previous year's divisor.

7. An individual non-spouse beneficiary may request a distribution based on the single life expectancy of the Participant (if longer than the non-spouse beneficiary's life expectancy) commencing in the year after death.

8. The non-spouse beneficiary may request a full distribution at any time.

B. If the Participant died before his or her required beginning date:

2. The beneficiary's life expectancy is always computed using the Single Life Table, rather than the Uniform Distribution Table used to compute the participant's RMD.

3. The non-spouse beneficiary uses the fixed term (or Minus 1) RMD calculation method for the lifetime distribution method.

4. As an alternative to lifetime distributions, an individual non-spouse beneficiary may, under the 5-year rule, request a distribution at any time. The assets must be fully distributed to the beneficiary no later than December 31 of the fifth year following the year of the Participant's death. As long as the assets are completely distributed by 12/31 of the 5th year following the year of death of the Participant, distributions need not be taken or may be taken in any amount during the 5 year period.

• Roth IRA Recharacterizations - September Action Plan

Click here for a discussion of Roth IRA Recharacterizations

FAQ's

Q: I didn't take my RMD for the previous year. This means that the 12-31 value of my IRA includes the RMD amount from the previous year. Do I reduce the 12-31 value of my IRA by the prvious year's RMD when I calculate the RMD for this year?

A: NO. When you calculate the RMD for this year, use the actual 12-31 value of your IRA; do not reduce the 12-31 IRA value by the amount of last year's RMD that was supposed to be withdrawn. You should take your current year distribution out this year as well and request a waiver of the 50% penalty on Form 5329 attached to last year's return. Both distributions (last year's and this year's) will be taxable this year.

Q: Can I convert the Required Minimum Distribution (RMD) from my TIRA to a Roth IRA?

A: No. You cannot convert the RMD from your TIRA to a Roth IRA. You would have to first take your RMD and then take an additional distribution from your TIRA and convert the additional TIRA distribution to your Roth.

Q: Can I rollover the Required Minimum Distribution (RMD) from my TIRA to another TIRA or to the original TIRA from which I took the RMD?

A: No. The RMD that you already took cannot be rolled back to the TIRA even if you are within the 60 days from the time you took the distribution. The reason is that your first distribution in an RMD year is deemed to constitute the RMD and an RMD is not rollover elligible.

Q: Can I make a Qualified Charitable Distribution (QCD) in 2011?

A: Yes. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended QCDs through 2011 and retroactively authorized QCDs for 2010 back to January 1, 2010. You must be 70 1/2 years old to take a QCD.

A QCD is a distribution from a TIRA or an Inherited IRA that goes directly to a charity. It permits individuals age 70 1/2 and older to take tax-free distributions from their IRAs of up to $100,000 per taxpayer per year. A single person can transfer $100,000 free from federal tax; a married couple can transfer up to $200,000 free from federal tax from separate accounts.

QCDs are beneficial for two reasons. First, they are beneficial to taxpayers who don't itemize their deductions. Second, because the QCD is not reported on your tax return as income, the QCD does not affect the taxation of your social security benefits.

Q: Does a QCD satisfy my Required Minimum Distribution?

A: Yes. A QCD satisifes your Required Minimum Distribution. For example, if you are required to take a $1,000 distribution this year because you are now at least 70 1/2 years old and you direct your IRA custodian to send the $1,000 distribution directly to your favorite charity [church, community foundation, Red Cross, etc.], your RMD will be satisfied and you will not have to take an additional distribution for the year.

Q: I have one 403(b) account and one Traditional IRA account. I am over age 70 1/2 and have to take an RMD this year, 2010. Becuase I have two different retirement plan types [403(b) and TIRA], I had to take an RMD from each account becuase RMDs cannot be aggregated for different plan types.

If I convert my 403(b) to a new TIRA account in January of next year, 2011, will I be able to aggregate the two TIRA accounts for my 2011 RMD and take the total RMD for 2011 from just one of the TIRA accounts even though on 12/31/2010 I still had two different types of accounts?

A: No. You will not be able to aggregate the RMD for the two accounts in 2011. Prior to converting the 403(b) to the new TIRA in January of 2011, you must take your RMD from the 403(b) plan based on the 12/31/2010 value. And your TIRA RMD will be based on its value as of 12/31/2010.

After you convert the 403b to a new TIRA in January 2011, you will be able to aggregate the two TIRA accounts for RMD purposes in 2012. That is, you could take the entire 2012 RMD from either account or in any combination.