Tag Archive for Retirement
The Taxpayer Inspector General for Tax Administration determined that the IRS Automated Under Reporter Program (AUR) is effectively determining the proper reporting of retirement income when Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., discloses the taxable amount of the retirement distribution. For example, for Tax Year 2007, AUR Program examiners made tax assessments totaling approximately $607.5 million on 217,811 tax returns. However, additional tax form information, if available, would improve compliance. In other words people the days of fudging on your required minimum distribution are O-V-E-R.
TIGTA recommended that the Commissioner, Wage and Investment Division: 1) revise the Form 1099-R to clarify the meaning of the Taxable amount not determined box in order to reduce taxpayer confusion and include the dates needed to identify retirement savings program distributions and transfers not rolled over within 60 days as required, and 2) establish procedures to transcribe additional lines from various tax forms.
The IRS substantially agreed with the recommendations and plans to revise the instructions to Form 1099-R to clarify taxpayer responsibilities and the amounts to report. The IRS plans to consider the feasibility and the benefits of including the dates of distributions and their respective contributions to identify distributions not rolled over within 60 days. However, TIGTA maintains this information would be useful to the AUR Program when taxpayers do not utilize direct transfers between financial institutions.
To view the report, including the scope, methodology, and full IRS response, go to:
Many people turning 70 see themselves in the prime of their life. A pervasive problem among this group is this idea of a Required Minimum Distribution (RMD) from their retirement savings accounts. Many people do not like to withdraw money from their retirement accounts particularly with investments still negligibly recovering from the crash of 2008. I have noticed that there is a good deal of confusion over RMD’s and many investment professionals seem to be having a problem expressing how they actually work. In fact I had an experience with one today that prompted me to research and recite the tax code to win an argument and as such I blog about it.
According to Reg. §1.401(a)(9)-8, you must have a separate determination of your Required Minimum Distribution (RMD) from each of your employer sponsored retirement plans including 401(k), profit sharing, defined benefit, etc. Each of these RMDs must be withdrawn from their respective accounts annually after you reach the age of 70 1/2.
HOWEVER with Individual Retirement Accounts (IRA’s) including SEP’s and SIMPLE’s even though you must have each separate RMD calculated by account, Reg. §1.408-8 allows you to aggregate the IRA RMDs and draw the funds out of a single IRA or combination of IRA accounts. In other words you do not have to take RMD’s from each and every IRA you own as long as you withdraw in total from any particular IRA account or combination of accounts an amount equal to the calculated RMD for the combined total of all the IRA’s.
The lesson learned here is that if you have multiple types of retirement savings investment accounts you can expect multiple RMD’s. If you have multiple IRA’s you can aggregate the RMD’s and take the withdrawal from any account or combination of IRA accounts you choose as long as the RMD threshold is met.
Payments received from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions. Early distributions must be reported to the IRS and are usually subject to an additional 10 percent tax. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. However you must complete the rollover within 60 days after the day you received the distribution. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, if you are disabled or if levied by the IRS. For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see the following IRS Publications:
Publication 575, Pensions and Annuities (PDF 227K)
Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
Form 5329, Additional Taxes on Qualified Plans (PDF 72K)
Form 5329 Instructions (PDF 40K)
The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2011. In general, these limits will either remain unchanged, or the inflation adjustments for 2011 will be small. Highlights include:
The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.
The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.
If you haven’t made all the contributions to your traditional Individual Retirement Arrangement that you want to make – don’t worry, you may still have time. Here are the top 10 things the Internal Revenue Service wants you to know about setting aside retirement money in an IRA.
You may be able to deduct some or all of your contributions to your IRA. You may also be eligible for the Savers Credit formally known as the Retirement Savings Contributions Credit.
Contributions can be made to your traditional IRA at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means contributions for 2009 must be made by April 15, 2010. Additionally, if you make a contribution between Jan. 1 and April 15, you should designate the year targeted for that contribution.
The funds in your IRA are generally not taxed until you receive distributions from that IRA.
Use the worksheets in the instructions for either Form 1040A or Form 1040 to figure your deduction for IRA contributions.
For 2009, the most that can be contributed to your traditional IRA is generally the smaller of the following amounts: $5,000 or $6,000 for taxpayers who are 50 or older or the amount of your taxable compensation for the year.
Use Form 8880, Credit for Qualified Retirement Savings Contributions, to determine whether you are also eligible for a tax credit equal to a percentage of your contribution.
You must use either Form 1040A or Form 1040 to claim the Credit for Qualified Retirement Savings Contribution or if you deduct an IRA contribution.
You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA.
You must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment to contribute to an IRA. If you file a joint return, generally only one of you needs to have taxable compensation, however, see Spousal IRA Limits in IRS Publication 590, Individual Retirement Arrangements for additional rules.
Refer to IRS Publication 590, for more information on contributing to your IRA account.
If your money is locked away in an ever-decreasing 401(k) or IRA account and you need it to stay afloat, relief may be on the way. Heavy penalties, including regular income tax as well as a 10% additional penalty usually apply to early distributions from these plans. However, there are special loan provisions and hardship withdrawal rules you may be able to take advantage of in these tough economic times which will lessen the penalty. You also can withdraw certain amounts for an immediate and heavy financial need. You can withdraw from IRAs for extraordinary medical expenses, medical insurance premiums if you are unemployed, and college tuition expenses. First-time homebuyers may withdraw $10,000 from IRAs to put down on a house. If you have had to take money from your retirement plan or if you will need to do so in the immediate future, contact me to find out if you may qualify for a hardship exemption.
Another important note. One of President-Elect Barak Obama’s tax proposals is to allow a withdrawal from a retirement plan of up to $10,000 in 2008 penalty-free. This provision may be enacted early in the Obama Administration with retroactive effect!