Advanced Underwriting Consultants

Ask the Experts – March 10, 2015

Question: I have a client turning 70 ½ this year in 2015. I know she is still eligible to contribute to a Traditional IRA for 2014, but not for 2015. If she opens a new IRA and contributes $6,500 for 2014, will she have to take a required minimum distribution for 2015 from that account?

Answer:  No

IRS Publication 590 Individual Retirement Arrangements clarifies that an individual can make contributions to their IRA for a given year until the due date for filing their tax return for that year, not including extensions. In other words an individual generally has until April 15, 2015 to make a contribution to their IRA for 2014.

Publication 590 also gives us the rules for determining when required minimum distributions must start and how to calculate them. An individual must receive at least a minimum amount from their IRA beginning with the year they turn 70 ½. In order to figure the amount for the required minimum distribution, the account balance as of December 31 for the preceding year is divided by the applicable distribution period or life expectancy factor for the individual.

In this case the individual client made the initial contribution in 2015 for year 2014. Since the account was opened in 2015, there is no account balance as of December 31 2014. Because there is a zero account balance as of December 31, 2014 there is no required minimum distribution due for 2015 from this account. The client will have to take required minimum distributions from this account in 2016 and for the following years.

Ask the Experts – July 16, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client is considering purchasing a longevity annuity for his IRA. The annuity doesn’t kick in until he has reaches age 85. How does he satisfy his RMD requirements on the value of the annuity?

Answer: The IRS recently issued final regulations addressing longevity annuities.

Generally, RMDs are calculated based on the IRA account balance as of December 31 of the previous year after the account owner turns 70 ½. However, as long as an annuity is a qualifying longevity annuity contract (QLAC), it is not taken into account when determining RMDs.

To be considered a QLAC, the contract must meet several requirements:

    1. Premium limitations: The amount of premiums cannot exceed the lesser of $125,000 or 25 percent of the aggregate non-Roth IRA account balances (including the value of any QLAC in the account).
    2. Age limitation: The contract’s commencement must be no later than the start of the month after the account holder turns 85.
    3. Post-commencement: After distributions commence, the contract must meet RMD requirements.
    4. Surrender/commutation limitations: The contract cannot allow for any commutation benefit, cash surrender right, or other similar features.
    5. Death benefit limitations: The contract cannot provide a death benefit other than a return of premium feature, which would allow the beneficiary to receive up to the amount of premiums paid on the contract, less the amount the contract has already paid out prior to death.
    6. Statement of intention: The contract must state that it is intended to be a QLAC.
    7. Annuity limitations: The contract cannot be a variable, indexed, or similar type of annuity.

If your client purchases an annuity that meets these requirements, then she won’t be required to take RMDs on the value of the contract until payments begin.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – July 11, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client inherited an IRA from her mother, who inherited the same IRA from her own mother. Can my client stretch RMDs throughout her own life?

Answer: No. IRA distributions can be stretched only by the account owner (after she reaches age 70 ½) and by the account owner’s beneficiary. Since your client isn’t the beneficiary of the original account owner, she cannot stretch RMDs based on her own life expectancy.

Instead she may continue the distribution schedule her mother was using. Of course, your client can take greater distributions than the RMDs if she prefers.

Here’s an example. Suppose Dorothy died in 2003 leaving her daughter, Barbara, an IRA worth $300,000. Barbara turned 57 in 2004, resulting in an RMD period of 27.9 years. Ten years later, in 2013, Barbara died, leaving the IRA, now worth $179,000 to her daughter, Jennifer. In 2014, the distribution period is now 17.9 years (i.e. 27.9 years minus 10 years). Therefore, Jennifer’s RMD for 2014 is $10,000.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – July 7, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: If my client has a simplified employee pension (SEP) plan and works after he turns age 70 ½, can he wait until he retires to start taking RMDs?

Answer: Unfortunately, the IRS says that even though SEP and SIMPLE IRAs are employer-sponsored retirement plans, they are still IRAs, and therefore the IRA rules for RMDs apply. An owner of an IRA must start taking RMDs in the year the taxpayer turns 70 ½, so even if your client keeps working, he will nevertheless be required to take distributions from his SEP plan.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – June 23, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client owns an IRA and will turn 70 ½ next year. Since she still works and plans on working indefinitely, can she roll over the IRA to her 401(k) and thereby avoid having to take RMDs until she retires?

Answer: Yes. RMDs are not required to be taken from 401(k) plans until the latter of (1) the year the employee turns 70 ½, or (2) the year the employee retires. For your client, the latter will be the year she retires. On the other hand, IRAs are required to start RMDs in the year the account holder turns 70 ½.

However, when an account holder rolls over money from an IRA to a 401(k), the funds become part of the 401(k) and therefore are governed under the 401(k) rules—which means the account holder may defer RMDs until retirement.

Keep in mind that not all employer-sponsored plans allow rollovers, so check with the plan administrator first. Also beware of the restrictions attached to some employer-sponsored plans. For example, your client’s plan might not allow withdrawals from the 401(k) plan until she retires.

Finally, since your client turns 70 ½ next year, she will need to complete the roll over this year to avoid next year’s RMD.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – May 9

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: When an IRA is rolled over to a Section 457(b) plan, do the RMD rules for IRAs or for Section 457(b) plans govern the separately-accounted-for IRA funds?

Answer: The RMD rules for Section 457(b) plans would apply—not the RMD rules for IRAs—even though IRA rollovers to Section 457(b) plans must be separately accounted for.

This question comes up because if an individual rolls an IRA into a Section 457(b) plan, the plan must separately account for the rollover contribution inside of the Section 457(b) plan. However, the fact that rollover contributions are separate does not affect the distribution rules for Section 457(b) plans.

Under Section 457(d)(2), the same distribution rules that apply for Section 401(a)/(k) plans also apply for Section 457(b) plans. Therefore, if an IRA is rolled over to a Section 457(b) plan, the funds are not required to be distributed until the later of the plan participant turning 70 ½ or his retirement. This is different from IRA required distributions which must commence by the date the owner turns 70 ½.

The separate accounting rule was not enacted so the IRA rollover contribution would retain all of the IRA rules. Instead, the separate accounting rule is on the books to make sure participants can’t avoid the 10% penalty rule under Section 72(t), which applies to IRAs—not Section 457(b) plans.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – April 21

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is age 72 and has been taking RMDs from his IRA for a couple of years now. When he retires later this year, he will also be required to take RMDs from his employer-sponsored Section 403(b) annuity. When is his deadline to take the 2014 RMD for the employer-sponsored plan?

Answer: If your client retires this year, he is required to take the 2014 RMD by April 1, 2015. Any subsequent RMDs must be taken by December 31 of the year for which the RMD is required.

The fact that your client is already taking RMDs on his IRA does not affect the deadline to take his first RMD from the employer-sponsored plan. Therefore, your client should take his IRA RMD by December 31, 2014, and his 403(b) RMD by April 1, 2015.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – March 31

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client failed to take his RMD last year. What’s the penalty for failure to take an RMD, and is there any way to have the penalty waived?

Answer: The penalty is 50% of the shortfall in the amount of distributions. For example, if your client was required to make a $5,000 distribution in 2013 but failed to take a distribution at all, the penalty tax is $2,500 (50% of $5,000). This penalty is reported on Form 5329 and Form 1040, line 58.

The IRS can waive part or all of the 50% penalty if he can show that the shortfall was due to reasonable error and that he is taking reasonable steps to remedy the shortfall.

To have the penalty waived, your client should first take the 2013 RMD this year. Keep in mind that this distribution is still in 2014, meaning taxes are due on the distribution for the 2014 taxable year. Also note that the taxpayer still needs to take his 2014 RMD by December 31 of this year.

Next, your client should fill out Form 5329, Part 8, as normal with one exception. On line 52 (where the shortfall would normally be calculated), he should enter “RC” and the amount of the RMD that he wants waived in parentheses. He should then subtract the amount he wants waived from the amount of the shortfall, and fill in line 52 with that number. It will be $0 if he’s requesting the full RMD waived. Next, he should fill in line 53 as normal.

Here’s what it would look like assuming the RMD was $5,000, and he is requesting a waiver of that full amount:

50  Minimum required distribution for 2013       .  .  .  .  .  .  . . .  .  .  $5,000

51  Amount actually distributed to you in 2013  .  .  .  .  .  .  .  .  .  .  .  .  .  . -0-

52  Subtract line 51 from line 50. If zero or less, enter -0- (RC $5,000) .  . -0-

53  Additional tax. Enter 50% of line 52      .  .  .  .  .  .  .  .  .  .  .  .   .  .  .     -0-

In addition to filling out Form 5329, your client must attach a “statement of explanation” showing that the shortfall was due to reasonable error and that he remedied the shortfall (or is in the process of remedying the shortfall).

The bottom line is that to ask for a waiver, your client should take the 2013 RMD as soon as possible, file Form 5329, and attach a statement of explanation.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – March 28

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: If an individual failed to take an RMD in 2013, does she have to take two RMDs in 2014 (one for 2014 and one for 2013)?

Answer: Generally, no unless the individual is attempting to have the penalty waived.

If an individual fails to withdraw any portion of an RMD, the amount not withdrawn is taxed at 50%. The IRS may waive the penalty if the account owner shows that the failure to take the RMD was due to reasonable error and that the RMD was taken, even though it was late.

If the individual fails to take the RMD in 2013 and the 50% penalty is imposed, the missed RMD does not have to be taken later. The 2013 RMD would still be in the account, and the 2014 RMD would be calculated including the extra in the account because the 2013 RMD was not taken.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – March 13

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a client with two separate IRAs. If he purchases an immediate annuity with one, and it pays more than his RMDs for that specific IRA, could the excess annuity payments be carried over to satisfy a portion of the other IRA’s RMDs?

Answer: We’re not entirely positive since the IRS hasn’t addressed this specific scenario. The conservative answer is that no, your client cannot use an immediate annuity to satisfy her other IRA. However, the logical answer is that she should be able.

While RMDs must be calculated separately for each IRA, the separately calculated amounts may then be aggregated, and the total distribution can be taken from any one or more of the individual’s IRAs.

On the other hand, Regulation Section 1.401(a)(9)-6 states that distributions are required over the life expectancy of the account holder, or over a shorter period. The IRS might argue that where an account holder annuitizes an IRA, she is choosing a shorter period than her own life expectancy.

If your client takes the conservative route, she should not credit the immediate annuity payments towards her other IRA.

If she does decide to credit any excess annuity payments to her other IRA, it seems reasonable to calculate the value of the annuitized IRA by using a present value calculation of all the payments due. Once she has the value determined, she can figure out how much she theoretically must distribute to meet the RMD rules. Any excess could then be used against her other IRA.

We’re not advocating one way or the other, but clients should understand the risks associated with their positions.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.