Archive for Investment Policy

IRA Rollover Goofs to Avoid

Most people feel doing an IRA Rollover or distribution is simple. Instead there are thousands of pages of rules and regulations. Here is an excerpt from one such case.

A taxpayer wanted to buy an investment property with the proceeds from two old IRAs and place it in his self-directed IRA. Even with his financial team in place, the attempted rollover failed three different IRA rules:
• It violated the once-per-year IRA rollover rule.
• It violated the same-property rollover rule.
• It missed the 60-day rollover deadline.

How do these mistakes happen, and how can they be prevented?

This case is dated from Feb. 1 to Feb. 6, 2013, when the taxpayer took distributions from two former IRA that he used to buy the investment property. This was his first failure; because of the once-per-year rollover rule, only one of the IRAs was eligible for rollover.

He went on to make matters worse by using the money from his IRA distributions to buy the investment property outside of his IRA.

He intended to put the property in the IRA, completing what he thought would be a 60-day rollover. But his method violated the same-property rollover rule, which holds that tax payers must roll over the same property that was distributed. You cannot distribute cash from the IRA, and then roll over real estate back to an IRA.

The taxpayer also missed the 60-day rollover because neither he nor his alleged expert team realized that his investment property had not yet been placed into his IRA.

But again, timing wasn’t the only issue. Even if this taxpayer had moved the investment property back into an IRA within the 60-day window, it still would not have been a valid rollover.

In fact, had he completed such a transaction, the tax consequences of doing so would have been even more severe than what he already faces.

The reason stems from that same- property rule. For IRA-to-IRA rollovers, including those going from Roth IRAs to Roth IRAs, the property distributed from the original account must be the same property contributed to the receiving account. These rules also apply to SIMPLE and SEP IRAs.

If cash is distributed from an IRA, as in this case, then cash must be rolled over within 60 days.

The same-property rule extends beyond cash. If a person takes an IRA distribution of property other than cash, the same property must be put back into a retirement account in a timely manner if the person wants to complete a valid rollover.

Individuals also cannot receive an IRA distribution of 100 shares of ABC stock worth $20,000 and roll over $20,000 of XYZ stock — because it’s not the same property that was distributed from the IRA.

There is an exception to the same-property rule for rollovers distributed from a company retirement plan, such as a 401(k). In this case, recipients have a choice: They can either roll over the same property to an IRA or they can sell the property distributed from the plan and roll over the cash proceeds from the sale.

Get help when doing anything with a Government Sponsored Qualified Plan.

Reaching a market top?

There are many reasons for caution as the stock market marches higher.

    • Corporate insiders are selling at a feverish pace.

    • The Fed continues to hint that tapering will begin soon (this will take the liquidity out of the bubble balloon).

    • Margin debt at record levels

    • Investor complacency as “VIX” hits 10 year low.

    • Huge inflows of small investor monies from cash to equities (after sitting on the sidelines for 5 years. Small investors always buy high and sell low).

    • Professional investors are raising cash.

    • Warnings from top money managers of bubble like conditions.

    • Every sector in the market is up substantially versus 1999 when it was just tech stocks.

    • Small cap stocks are super expensive.

The Fed will keep interest rates low which will move the market to continue upward for a while. The higher it goes the greater the drop. Check with your advisor and review your Investment Policy and the standard deviation you are willing to accept. Then, get your strategy in place.

Where do you want your wealth to go?

Most people have a vivid image in their mind of where they want their wealth to go upon their death. It looks something like this:

    • To the accountants $0
    • To the lawyers $0
    • To the IRS $0
    • To Charity $1
    • To the Family The Rest

Look familiar? Yet, only 40% of Americans have drafted a will telling the world legally what you want to happen to your wealth…If you are part of the 60% who have failed to carry out this duty to your family or loved ones…well, the state in which you reside, when you die, has a plan laid out for you. I can assure you that your hard earned wealth, under the state’s plan, will NOT carry out your desires in any fashion that you think. Google your state’s statute on dying intestate.

I advise all my clients, at a minimum, to draft a Living Trust as a more comprehensive vehicle than a will. If you have chosen only do a will, here are some basics you should have in your will package.

    • Last will and testament
    • Living will
    • Medical directive
    • Power of attorney
    • Medical power of attorney

Get some professional legal advice to draft your will. Do not be penny wise and pound foolish (unless, you want to get back at your family, upon your death, one more time!!). If you already have completed your documents…have them reviewed. There have been major changes that affect distribution starting in 2013.

Hand drafted wills (typed by yourself) are asking for trouble. A comma in the wrong place, the use of the word “and” or “or” in the wrong way can have a huge impact.

What about those online wills…well, if you are living paycheck to paycheck with virtually no assets…at least use these vehicles as opposed to nothing. For those that have some assets – get professional help.

It is best to work with a Board Certified Estate Attorney. Have your Certified Financial Planner, acting as a quarterback, consult with you and your Estate Attorney. It will be money well spent.

Health-Care Reform Taxes Alter Client Strategies

Two new levies on high-income individuals were cemented into the tax code…both apply to joint filers earning more than $250,000.

At 0.9%, the Medicare Hospital Insurance Tax is the lighter one. It’s assessed on earned income – chiefly wages and self-employment income – that tops the above-stated threshold. For example, a single client with a $300,000 salary will owe 0.9% on $100,000 ($300,000 earned income, minus the $200,000 threshold for single taxpayers.)

Larger and more vexatious is the Unearned Income Medicare Contribution Tax. Commonly called the investment income tax or the health-care surtax, it is 3.8% on the smaller of (1) net investment income or (2) the amount by which the client’s modified adjusted gross income (MAGI) exceeds the $250,000/$200,000 threshold. Thus if either (1) or (2) is zero, so is the surtax.

Two broad approaches exist for reducing the surtax, although they aren’t always equally efficient (as the accompanying chart demonstrates).

The first entails lowering net investment income. Such income can include taxable interest, dividends (qualified or not), annuities, rents, capital gains, income from trading in financial instruments or commodities, gain on a second home or passive activity income.

To cut the client’s surtax, it is suggested that you reposition into assets that generate little or no currently taxable income. This includes tax-deferred non-qualified annuities, real estate (because depreciation deductions offset income from the property), oil and gas investments, master limited partnerships, and cash-value life insurance, especially non-modified endowment contract (MEC) policies. Withdrawals from non-MECs begin with non-taxable basis recovery. Policy loans can also provide clients with non-taxable cash flow. Fill up taxable accounts with municipal bonds because their interest isn’t subject to the surtax.

The second planning lever calls for reducing taxable non-investment income such as wages, income from an active business activity, pension income and distributions from traditional individual retirement accounts. Workers and self-employed clients should consider increasing their non-qualified or Section 79 contributions.

Roth IRA’s can keep the surtax at bay, too. Whereas traditional IRA distributions count toward MAGI and thus can trigger the tax, Roth withdrawals don’t.

Hedge Your Bets

There are a few things that will probably affect your investment portfolio in the next few months.

• Europe will try to save its debt crisis to no avail.

• U.S. debt ceiling of $16 trillion will have to be raised meaning printing additional dollars. This will weaken the dollar, eventually raising interest rates and inflation. Presently, all households (families) now owe $160,000 up from $92,000 just four years ago. How are you going to come up with your $160,000?

• Increasing interest rates will lead to the bubble bursting in all bonds, especially high yield bonds. This loss in bonds will spill over to stocks.

• Continuing bankruptcies by cities unable to keep their unrealistic promises for pensions and free giveaways. (Don’t you wish we could take legal action against all the politicians that voted for these things, or their estates, to get some of our money back?)

• Fiscal cliff: Due to bickering in Washington starting in January 1, 2013 taxes will go up $500 billion and spending cut by $500 billion. That is a recipe for a new recession! Consequently, people will stop spending, corporate profits drop and stock values drop.

• Emotional politics. Business and individuals are hesitant to spend knowing the present Administration could get reelected and continue to hammer businesses, and individuals with more taxes and regulation. Consequently, everyone is in a state of paralysis. No new hiring…no new spending…emotional stagnation.

• To protect yourself…DO NOT sell all your equities. How many people who sold out in 2008 never got back in, or bought more at the low, and missed this huge rally.

• Instead you should investigate “hedging your bets” by purchasing “puts” against the indexes. It is a form of insurance. So if the markets drop, your “hedge” will gain an equal amount. No loss for you. If the markets do not drop, then you simply lose the small amount that you paid for the “insurance.”

Discipline or regret.