Archive for Retirement

IRA Mistakes on RMD #2

IRA Rules
One of the benefits of an IRA is that RMDs for multiple IRA accounts can be aggregated. This includes SEP and Simple IRA accounts. The RMD should be calculated for each account separately, but after that , the RMD amounts can be added together and taken from any one or combination of accounts.

403(b) Accounts
A similar aggregation rule exists for 403(b) accounts. A person with more than one 403(b) account can calculate the RMD for each account and then add the RMDs together. The total amount can then be taken from one or a combination of 403(b) accounts.

Employer Plans
RMDs from employer plans, not including 403(b) plans , SEP, and Simple IRAs, CANNOT be aggregated. A person with multiple 401(k), Government 457(b) or other employer plans must calculate the RMD for each individual plan and take that RMD from that plan only.

Roth IRAs
There is no need to worry about whether Roth IRAs can be consolidated because Roth IRAs have NO RMDs during the account owners lifetime.

Other
Any plan making a series of substantially equal payments over a period of 10 years or more, or over life expectancy, cannot aggregate that payment with the RMD from any other retirement account. The distribution from the account making these substantially equal payments is considered the RMD from that account only.

Next blog will show what happens when you get the aggregation wrong!

IRA Mistakes on RMD- #1 by Paul Ferraresi

RMD or Required Minimum Distribution is the minimum amount you must take from your IRA starting at age 70 1/2. If you do not take the amount , then, you are subject to a 50% penalty tax plus the regular income tax on the amount you did NOT take out!!!

Many people have multiple IRAs. The IRS rules state that you must calculate the RMD for each account separately. Once completed the RMD amounts can be added together. The distribution can be taken in any proportion from one or more of the aggregated accounts.

An RMD cannot be rolled over from any one IRA account to another, and the RMD is considered the first funds distributed from any retirement account during the year.

Say an IRA CD comes due in February, it cannot be moved in its entirety as a 60 day rollover to another retirement account. The RMD amount must be subtracted from the amount that is eventually rolled over.

The same is true for employer plans. All plan distributions are considered rollovers, even when they go directly from one plan to another retirement account.

A STEEP PRICE FOR MEDICARE recommended by Paul Ferraresi

Planning may help high income seniors avoid paying up to four times the going rate for Part B and Part D coverage.

In 2017, the standard premium for Medicare Part B is $134 a month. Most enrollees pay for Part B via reductions in their Social Security benefits, and the overall average monthly fee is $109.

Yet some senior pay almost quadruple that much – $428.60 a month ($957.20 for married couples) – for the exact same medical insurance.

Seniors who pay more for Part B also pay Medicare as much as $76 per month extra for prescription drug coverage, known as Part D.

This is the IRMAA – the income related monthly adjustment amount. If people are on Medicare, and their tax return shows high income, Medicare adds the IRMAA amount to their monthly premium.

Modified adjusted gross income over $85,000 ($170,000 on joint returns) brings IRMAA into play, with amounts increasing as MAGI hits certain thresholds. (Here, MAGI includes tax-exempt interest income.)

THE TWO-YEAR LAG

The Medicare trustees’ 2016 report projects that Part B monthly premiums, which have risen from a maximum of $161.40 in 2007 to $428.60 today, will continue to climb, reaching as much as $564 in 2025. Thus, Medicare Part B is likely to become more of a financial planning issue.

One key is to realize that there is a two-year lag between the income observed by Medicare and the resulting payments. Money that flows into a Medicare enrollee’s pocket in 2017 will be reported on a tax return filed in 2018, which determines Part B premiums due in 2019.

When seniors retire, they may pay the higher premium for two more years until that income history drops off their records. In order to reduce Part B premiums sooner than two years, you should appeal your higher IRMAA premium immediately upon retirement, if your income has dropped dramatically. One of the things that could qualify Medicare recipients for an IRMAA reduction is that they have stopped working.

You will qualify for the appeal under the life-changing event of ‘work stoppage.’ You can call Social Security or visit in person to present evidence of retirement to have your Medicare premiums recalculated.

IRA TROUBLE by Paul Ferraresi

What you think should happen to an IRA distribution and the actual outcome is two different things.

This great article (see link below) from the April 17, 2017 issue of https://www.financial-planning.com shows the tax horror stories that can develop.

The Lesson: Get competent advice from your advisor before doing anything with your IRA.

https://www.financial-planning.com/news/when-an-inherited-ira-becomes-a-tax-nightmare

IRA Mistakes on RMD – Part 2 by Paul Ferraresi

IRA RULES
One of the benefits of IRAs is that RMDs for multiple IRA accounts can be aggregated. This includes SEP and Simple IRA accounts. The RMD should be calculated for each account separately, but after that, the RMD amounts can be added together and taken from any one or a combination of accounts.

403(b) ACCOUNTS
A similar aggregation rule exists for 403(b) accounts. A person with more than one 403(b) account can calculate the RMD for each account and then add the RMDs together. The total can then be taken from one or a combination of 403(b) accounts.

EMPLOYER PLANS
RMDs from employer plans, not including 403(b) plans and SEP and Simple IRAs, cannot be aggregated. A person with multiple 401(k), governmental 457(b) or other employer plans must calculate the RMD for each individual plan and take that RMD from that plan only.

ROTH IRAs
There is no need to worry about whether Roth IRA RMDs can be consolidated because Roth IRAs have no RMDs during the account owner’s lifetime. It can’t get much simpler than that.

Any plan making a series of substantially equal payments over a period of 10 years or more, or over life expectancy, cannot aggregate that payment with the RMD from any other retirement account. The distribution from the account making these substantially equal payments is considered the RMD from the account only.

The following is a practical example:

What Happens When a Person Gets RMD Aggregation Wrong?

There are two potential penalties when people make RMD aggregation mistakes: the penalty for excess contributions and the penalty for missed RMDs.

THE 6% PENALTY
RMDs that are rolled over to another retirement plan create an excess contribution in the receiving account, which must be corrected as soon as possible.

When an excess contribution is corrected by Oct. 15 of the year after the year for which the contribution was made, the amount of the excess plus or minus the gains or losses attributable to the amount of the excess contribution must be removed from the account as well.

Excess contributions that are not corrected are subject to a penalty of 6% per year for every year they remain in the account. Form 5329 should be filed with the IRA owner’s tax return to report the excess contribution and to calculate the 6%.

THE 50% PENALTY
When a distribution is taken from the wrong type of account, you have a missed RMD. For example, suppose a person accidentally takes the 403(b) RMD from his IRA. This is against the rules. The person has a missed RMD in the 403(b). The penalty for a missed RMD is a steep one – it is 50% of the amount not taken.