Spouses Behaving Badly

PLR Tackles 60-Day Rollover Rule

Today we are going to take a look at Private Letter Ruling 201324022, in which IRS waived the rollover requirement due to a fraudulent withdrawal by the husband in this case. We look at the case and the ruling below.

A taxpayer we will call Debra asserted that her husband, who we will call Bill, took a distribution from her IRA without her knowledge or consent on January 5, 2009. Debra contended that her failure to accomplish a rollover within 60 days was due to the fraudulent withdrawal of amounts from her IRA without her consent.


When Debra and Bill wed in 2001, he completed powers of attorney documents as part of the couple's estate planning. Debra understood and intended that the power of attorney be valid for contexts in which she became incapacitated, disabled, or otherwise unable to make her own financial decisions. She did NOT understand or intend to empower Bill to make all financial decisions on her behalf.

Bill took a distribution from Debra's IRA and asserted orally and in writing that he was acting in his capacity as Debra's power of attorney and that he needed the distribution for Debra's medical expenses. Debra asserted that she did NOT need the distribution for medical expenses nor did she communicate any such need to Bill. She then discovered that Bill lost the entirety of distributed funds because of a gambling addiction.

Debra revoked the power of attorney and provided substantial documentation of Bill's gambling addiction, including a statement from a treating physician. Debra requested a ruling from the Internal Revenue Service to waive the 60-day rollover requirement, allowing her to re-deposit the distributed funds back into her IRA.

The IRS ruled in her favor and granted a period of 60 days from the ruling letter's issuance to redeposit funds into her IRA.

Lesson to Learn: 
IRS will generally grant waivers of the 60-day rollover period when the problem is something that is out of the account owner's control. They will consider factors such as illness, mistakes by a custodian, delays in the mail, and fraudulent transactions. This PLR highlights the issue of powers of appointment. While they can be very helpful when an individual is truly unable to take care of their affairs, they can also be used to commit fraud. Consider carefully the powers you give over your finances to others and the circumstances that will allow them to act.

Roth IRAs and the “5-Year Clock”

Since a Roth IRA is a retirement vehicle, your Roth contributions are subject to the IRS distribution rules. You may only take qualified distributions from a Roth income tax and penalty free. To be deemed “qualified,” two requirements must be satisfied:

This seems pretty cut and dry but misunderstandings about the “5-year clock” are not uncommon – a lot of Roth IRA owners are unsure when their “5-year clock” really began.

With respect to Roth IRAs, your 5 year clock begins on January 1st in the year you opened and funded your first Roth IRA. For purposes of this rule, if you make your first Roth IRA contribution but subsequently remove it, your 5-year clock has not yet begun. To illustrate, assume you made your first Roth IRA contribution on August 1, 2015, but later decide to remove that contribution and its earnings on March 1, 2016. Also assume you make a contribution on February 1, 2016 to that same Roth IRA. When does your “clock” begin? Under this fact pattern, your Roth IRA clock will begin January 1, 2016, not 2015.

Roth IRA conversions have a separate and distinct clock. For example, if you funded your first Roth back in 2010 and converted one of your traditional IRAs to a Roth this year that newly converted Roth IRA has its own 5-year clock that began this year on January 1, 2016.

What if you inherit a Roth IRA? An inherited Roth IRA has its own clock too. The 5-year clock for any Roth IRA you inherit carries over from the decedent.

The Importance of Understanding IRA Beneficiary Selection

Can You Name a Non-Individual or Entity?

Yes. Anyone or anything can generally be the beneficiary of your retirement assets such as IRAs, 401(k)s and annuity contracts. For example, an ailing client asked if he could name his trust as his IRA beneficiary. Provided the IRA custodial agreement permits him to name entities, yes, he may.

However the question becomes: does he really want to do that? What the client failed to realize was that his wife and older brothers were also named as trust beneficiaries. The IRS has made it very clear that when a trust is the beneficiary of an IRA, the oldest trust beneficiary’s life expectancy is the measuring life. Thus, his

children and very young grandchildren would be stuck with a significantly shorter distribution period. The client erroneously thought each trust beneficiary could use their own individual life expectancy to receive RMDs.

Does It Matter Whether You Name A Spouse or Non-Spouse Beneficiaries?

Yes. Spousal beneficiaries and non-spouse beneficiaries do not have the same options when it comes to inheriting an IRA. For example, a surviving spouse generally may elect to treat an inherited IRA from the deceased spouse as his or her own or choose to rollover the IRA into their own existing IRA. Non-spouse beneficiaries never have those options available. Distribution options for non-spouse beneficiaries are far more limited under IRS rules. IRA custodians also may limit distribution options for inherited IRAs.

What Options Do Your Beneficiaries Have?

Does your custodian permit your heirs to use a multigenerational IRA distribution strategy? This vital information will be found in your custodial agreement and other custodial documents issued by your financial institution such as amendments. If you are unsure or want to confirm how your hard earned money will flow when you are gone, your retirement distribution specialist can help you by conducting a Custodial Review. This is a complimentary service that costs you nothing but can really pay off for your heirs by thousands of dollars down the line.

What is Net Unrealized Appreciation?

QUESTION: CAN I AVOID TAXATION ON THE APPRECIATION OF MY COMPANY STOCK?

NET UNREALIZED APPRECIATION (NUA)
Money you make on the appreciation of an asset over time is called capital gains. Those gains are measured by the price the stock is sold for, minus the original purchase price of the stock when acquired. If your 401(k) plan holds stock from your employer and that stock appreciates over time, its fair market value will be considerably higher than its cost basis when you retire. The difference in the value of the stock from the time of purchase to the time of withdrawal is called Net Unrealized Appreciation.

A SPECIAL TAX BREAK
Special tax rules regarding NUA allow you to withdraw company stock from your retirement plan, retain ownership of the stock, and pay ordinary income tax on the acquisition price rather than its fair market value at the time of distribution.

WHAT HAPPENS WHEN I SELL THOSE SHARES?
Should you choose to sell the shares, you pay the long-term capital gains tax rate in effect on the appreciation and the applicable capital gains rate on any additional appreciation since distribution.

OUR ATS EXPERTS CAN EXPLAIN OTHER STIPULATIONS IN THE CODE INVOLVING NUA:

• To qualify for the break, you must take the entire pension plan account balance in a lump-sum distribution over the course of one tax year.
• Dividends paid on the stock are not tax-deferred.
• For inherited stock in an IRA, beneficiaries are taxed at a different cost basis, called a step-up in basis. Your America’s Tax Solutions retirement distribution specialist can describe for you how this strategy works, and how it may affect you and your heirs.

Thinking of a Self-Directed IRA (part 2)

2. IRA custodians and IRA LLC facilitators often miss legal and tax problems. It never ceases to amaze me when IRA account owners tell me that what they have done with their IRA (or IRA LLC) – or what they plan to do in the future – is okay “because their custodian said so.” There are numerous problems with this statement. First, IRA custodians and IRA LLC facilitation companies are not in the business of advising IRA owners on the subtleties of IRA legal and tax issues. These companies do not practice law, provide financial advice, or otherwise provide their clients with investment or tax advice. In fact, all IRA custodians and IRA LLC facilitators have language in their contracts that say things like “you are solely responsible for the success or failure of your account” or “we are not advising you on legal or tax issues.”

Second, although IRA custodians do their best to train their representatives to recognize obvious legal and tax problems, the ultimate motivation of IRA custodian and IRA LLC facilitator employees is to establish as many accounts as possible (i.e. more commissions). The result is that these representatives often glaze over the legal parameters and/or ignore key facts that might cause legal and tax problems. After all, it is not the employee’s problem if the IRA account holder violates the IRA rules.

The third potential problem with relying on the advice provided by an IRA custodian or IRA LLC facilitation company is that not all IRA legal and tax issues are “black and white.” For example, the “prohibited transaction” rules (which, if violated, can result in an IRA being treated as fully distributed to the IRA owner in one lump sum = terrible tax consequences) state that a “disqualified person” includes an IRA account holder’s spouse – in other words, no financial interactions can occur between the IRA and the IRA account holder’s spouse. However, this does not mean that a loan from IRA to the IRA account holder’s girlfriend is legally proper. In fact, the IRS has the ability to scrutinize any IRA investment that creates a “conflict of interest.” This is a simple example of the intricacies involved in the federal law that IRA custodians and IRA LLC facilitators either are not aware of or choose to ignore.

3. IRA tax returns – the tax compliance black hole. Many self-directed IRA (and IRA LLC) account owners are completely unaware that there are certain situations where the income earned by their self-directed IRA is not exempt from current tax (i.e. their IRA must file a tax return and pay a tax). Generically speaking, these situations occur when the IRA earns income that is “debt-financed” for from an “operating business.” However, the devil is in the tax details when it comes to these situations. In addition, because the IRA custodians and IRA LLC facilitators take a completely hands-off approach, many of these situations are entirely unreported to the IRS, and thus lead to a potential ticking time bomb (think: IRS audit).

For example, consider a situation in which a self-directed IRA (or IRA LLC) invests into a real estate partnership that has four other owners (which might or might not be other IRAs). The partnership then uses the initial investors’ funds along with a bank loan to purchase a piece of vacant land. The partnership then builds several houses on the property and sells all of them for a substantial profit. At the end of the tax year, the partnership will issue tax forms to the investors showing each investors’ share of the partnership’s gain. For the IRA investor, the forms will go to the self-directed IRA account holder (or IRA LLC’s Manager). This situation will definitely trigger a tax filing requirement for the IRA (due to development being considered an operating business and/or due to the debt-financing), but unfortunately the IRA custodian might never realize that this situation has occurred. Further, if the IRA account holder is unaware of the rules, a “tax compliance black hole” will emerge.

Summary: The issues above demonstrate the importance of IRA account holders speaking with experienced legal and/or tax professionals before moving forward with a self-directed IRA (or IRA LLC) formation and investment. If there is one thing that my experience with self-directed IRA investors has taught me, it is that up front education is critical in order to prevent both immediate and long term legal and tax compliance violations.

Thinking of a Self-Directed IRA (Part 1)

Introduction: The popularity of investing retirement accounts into “non-traditional” assets (e.g. real estate, private lending, and everything else you can imagine) using a self-directed IRA or an IRA-owned LLC (“checkbook control” IRA) has increased rapidly, perhaps too rapidly, since the economic meltdown in 2008. This growth has brought increased mainstream media attention, scams, and a huge amount of legal and tax non-compliance.

The unfortunate reality is that most self-directed IRA account holders do not receive a sufficient amount of

legal/tax education prior to investing. The reasons for this include: (1) the account holder’s normal “gatekeepers” (e.g. attorneys, accountants, financial advisors) are either unfamiliar with the rules or are kept completely in the dark because the account holder is afraid that their advisor will not approve; (2) the account holder receives incorrect or misleading information on the internet; (3) information is provided by representatives/salesman of IRA custodians or IRA LLC facilitators who are financially motivated to “sell” the particular self-directed IRA product that their employer provides; and (4) the IRA custodians and IRA LLC facilitators are not legally representing the IRA account holder (nor are they trained to do so), but rather providing “casual information”.

All of the confusion and misinformation has lead me to create the following top 3 reasons why an IRA account holder should speak with a tax attorney before forming a self-directed IRA (or IRA LLC):

1. Not all IRA custodians (and self-directed IRAs) are created equal. Two initial issues that should be carefully considered by a retirement account owner prior to setting up a self-directed IRA are: (1) “what custodian should I use” – there are actually a lot more of these custodians out there than you might think; and (2) “will the IRA invest directly or through an IRA-owned LLC structure”? Failure to consider these issues and rashly transferring funds to a particular custodian because “my neighbor uses them” can lead to administrative hassle, unnecessary fees, and other problems. Call 1-866-225 1786 for more information:

The fee structure of self-directed IRA custodians can vary dramatically, for example: some charge higher setup fees and lower revolving fees; some charge fees based on the IRA’s value; some charge fees based on the number and type of assets owned by the IRA; some charge fees when the IRA pays an expense, receives income, and/or custodian action is required in any way; and some even charge fees for “research” and account termination. In addition, the amount of “compliance” paperwork that is required when the IRA executes a transaction varies significantly between custodians – which, when an investment requires immediate action (e.g. real estate foreclosure auction), can be the difference between the IRA purchasing the asset or missing out on an opportunity. In short, no two custodians are exactly alike, so a thorough vetting based on the account holder’s likely IRA investment is essential.

Which custodian is the best fit for a particular account owner depends on the type of investments that will be made and the corresponding involvement of the custodian going forward. For example, purchasing rental real estate within a self-directed IRA is a very popular type of investment, but also leads to expenses that must be paid by the IRA (e.g. property taxes, insurance, maintenance and improvement costs, and possibly mortgage payments). The IRA custodian’s procedure for dealing with these expenses (and the transaction fees the custodian charges for this service) is a very important issue that should be considered by the IRA account holder before setting up an IRA.

Finally, if the IRA account holder chooses to gain the maximum amount of control by setting up an IRA-owned LLC, the account holder will generally want to pick a very low cost custodian. The reason for this is that the custodian will not be involved in the day-to-day investment decisions, which instead will be made at the “LLC level.” In short, why pay a custodian high fees to do almost nothing?

'Tis the Season

Few CPA firms see tax season as the time for investing hours in business development. But those who have, have come to realize that there is no better time to evaluate the service experience for your clientele and talk about issues that matter the most to your very best clients.

Like it or not, your clients rate getting their taxes done as one of their least favorite activities. This year you should commit to improving your clients experience and your revenue thereby making this the most successful tax season you have ever had. While filing the clients taxes is certainly important many even more critical opportunities to assist your clients exist during tax season. Clients want to know how to maximize their retirement accounts and minimize taxes. They want to know how to minimize the devastating effects on their nest eggs from the risk of living too long, low interest rates, market volatility, excessive taxation, and long-term care expenses. Study after study indicate that clients want you to take an active role in resolving these issues.

The time to do this is during tax season. Accountants are often their clients most trusted advisors. They possess highly specialized, financial skills. Those two things position them well to give financial planning advice. Yet many accountants and tax professionals are reluctant to add this potentially lucrative service to their practice or to team up with an outside advisory firm to provide.

Many of the most successful firms have felt compelled to enter the wealth preservation field. These accountants are committed to the clients well-being and want to provide them with top-notch advice. They also recognize that clients want them involved.

During this informative 60 minute webinar we will discuss why so many accountants and tax professionals are expanding into offering financial and wealth preservation strategies to their clients. Smart firms understand this is an excellent added value that deepens clients relationships, encourages retention and is ultimately a driver of revenue growth. This webinar will share important insights on the role of an account in providing financial planning advice and explains how you can overcome the challenges holding you back, sharpen your skills, and create a practice that steers clear of conflicts of interest.

But without the right partner, training and support, it can be a big undertaking full of challenges. During this webinar will discuss how America's Tax Solutions can make 2016 tax season your best one ever.

America’s Tax Solutions™ has helped hundreds of accountants grow your practice and serve your clients best interest simultaneously. During this informative 60 minute webinar we will highlight the journey of one accountant transitioned his practice by offering wealth preservation strategies for his clients and how he overcame the challenges to become one of the top accounting firms in his community.

Register using this link for the webinar today.

https://attendee.gotowebinar.com/register/6763048015843655682

America’s Tax Solutions™ is the leader in the accounting profession in helping people build successful wealth preservation practices within their existing tax practice.

Please use the link above to sign up for this extraordinary webinar today.

The Importance of Reviewing Your Planning Documents

Don’t wait until it’s too late…failure to review your retirement and estate planning documents can spell DISASTER for your beneficiaries yet this failure is surprisingly common.

Recently, a client discovered that her new husband hadn’t updated his beneficiary forms for his retirement plans. Unfortunately, the client didn’t find out until her husband passed away unexpectedly. A quick review of his important documents after his death revealed this huge mistake.

The good news in this particular case is that her deceased husband’s designated beneficiaries were all aware of his intentions to leave his retirement assets to his current wife. The beneficiaries in this case also plan to honor his wishes the best way they can (however, certain tax ramifications in this case cannot be avoided). Sadly, most stories don’t end this way and loved ones are often caught in the middle of family battles and even mired in litigation lasting several years.

Marriage, divorce, birth or death can occur at any time. Tax laws change or are updated on a routine basis. Even though you cannot predict what will happen and when it will happen, you can review your documents annually and update them as needed when any life changing event occurs or new legislation goes into effect that could impact you or your beneficiaries.

Review your beneficiary forms, custodial agreements, estate plans and anything else you may have in place to provide for and protect your loved ones at least once a year. An annual review will help ensure your assets will still flow the way you want them to and in the most tax efficient manner.

Your retirement distribution expert and tax professional can help you with these types of reviews. These reviews should set FREE services so don’t hesitate to schedule an appointment with your personal advisor(s) if you need guidance or assistance.

What Is The Real Cost of Aging?

It’s no secret that healthcare costs have dramatically increased over the past several decades. Unfortunately, it’s nearly impossible to know how much you need to put aside to cover your average healthcare costs, let alone guess how much you may need should your health take a turn for the worse. So what is the average American supposed to do?

Traditionally, standard long-term care insurance was really the only viable option but it was very expensive. However, new long-term care solutions are available and as a result, many Americans can now have peace of mind when it comes to planning for a long-term care event.

According to statistics and research from the CDC and AARP, there are over 16,000 nursing homes in the United States with approximately 1.5 million residents. The average stay is 835 days and the average cost is over $50,000. Approximately 1/3 of nursing home residents must use their own funds to cover costs.

How much can you expect to pay on average for nursing home care? Below is a chart showing the medial annual costs for nursing home care in select states. The amount for each state is approximate and is based on a 365 day stay with a semi-private room accommodation:

Don’t take a chance with your long-term healthcare needs…prevention is the best medicine after all. Your personal retirement distribution specialist, CPA, or other professional advisor can help you determine what the right solutions are for you and your family. Not all long-term care solutions are appropriate for every individual so it is important that you meet with your personal advisors for an individual assessment to discuss new solutions and strategies that are appropriate for your individual situation.

401(k) Withdrawals During Retirement

QUESTION: WHAT ARE YOUR OPTIONS WITH RESPECT TO YOUR EMPLOYER SPONSORED 401(K) PLAN WHEN YOU RETIRE?

Answer: It varies depending upon the options that are made available to you in your plan document - your 401(k) plan sponsor makes the rules!

TRUSTEE-TO-TRUSTEE TRANSFER

If you don’t want to leave your assets with the current plan sponsor, you may want to consider a trustee-to trustee transfer (direct rollover) to an IRA. This is a non-taxable transaction.

LUMP-SUM WITHDRAWAL

You will owe ordinary income taxes if you elect to take a lump-sum distribution. If you later decide to rollover this distribution, you are required to redeposit the funds into another qualified retirement account, such as an IRA, within 60 days of the distribution.*

AUTOMATIC PERIODIC WITHDRAWALS
Some plans will allow you to request regular monthly, quarterly or annual withdrawals. Automatic withdrawals come in handy for RMDs – it eliminates the risk of missing the RMD deadline each year.

WITHDRAWALS ANYTIME
Your plan may allow you to make as many withdrawals as you wish. Be careful with this type of option – besides any ordinary income taxes you may owe on distributions, you could be charged a high fee every time you take a withdrawal.

Be careful when it comes to fees and your 401(k). If you decide to leave your 401(k) assets with the plan sponsor, look into the fee schedule. How much will you be charged for each transaction? What about 401(k) management fees, do you believe they are too high?

Before deciding to leave your 401(k) assets where they are or choosing to transfer the assets to an IRA when you retire, it is critical to fully assess the pros and cons. Your local America’s Tax Solutions professional is a retirement distribution specialist and can help you evaluate your situation including information about safe, alternative options.

*A 20% mandatory withholding applies to lump-sum distributions from a 401(K). If you later decide to rollover that distribution within 60 days, you will not get the withholding back until tax time so you will have to add funds from other sources equal to the amount withheld.

Be Careful Out There

Man's Mistake Cost His Children $400,000 of an IRA Inheritance

Before Leonard Smith lost his battle with cancer in 2008, he worked with his financial advisors and attorneys to make sure his children received the balance of his retirement funds when he died. 

A single mistake, however, thwarted his well-laid plans. Family members realized a year after he died that his IRA beneficiary form was filled out incorrectly. Instead of specifically listing the names of his children along with the percentages designated to each heir, Smith wrote: “To be distributed pursuant to my last will and testament,” where the disbursement of funds was spelled out. 

But Smith’s failure to complete the form correctly invalidated the document, making his surviving spouse the beneficiary by default. 

“I had no idea that a will could be trumped by an IRA beneficiary form,” Deborah Smith-Marez, 50, Leonard’s daughter, told Yahoo Finance. 

Smith-Marez and her siblings fought in court to recover the money, but the court awarded the $400,000 in the IRA to their father’s wife, who married Smith two months before he died.

Like Smith-Marez, many Americans are unaware that long-forgotten beneficiary forms can override wills and undermine their loved ones' intentions. 

How does this happen? Beneficiary forms are meant to be a straightforward method for heirs to bypass the probate process and receive funds in a timely manner. But sometimes account holders forget they’ve filled out these forms and fail to update them with major life changes. 

Your estate is governed separately from your accounts with beneficiary designations, which include retirement accounts, life insurance policies, bank accounts, certificates of deposit, stocks, annuity contracts, bonds, and mutual funds. So if your last will and testament designates one person as the beneficiary and your IRA designates someone else, the IRA will outrank stipulations in your will. 

Americans now store more and more of their wealth in retirement accounts, with $6.5 trillion held in IRAs, and $5.9 trillion in employer-based defined contribution plans like 401(k)s, according to the Investment Company Institute -- all of which require beneficiary forms to designate recipients upon the account holder’s passing. 

Unfortunately, there are no automatic reminders to update these forms on a regular basis – the account holder has the responsibility to keep them current and valid. 

After losing a loved one, fighting with family over money compounds the emotional toll. To keep this from happening, follow these five tips. 

1) Set aside time at least once a year to update your beneficiary forms. Your beneficiary forms will override your will 99% of the time so it’s important to keep these forms up-to-date and make sure your will and your designated beneficiaries on accounts don't contradict each other. You should fill out a new form if you’ve had a birth, death, marriage, or divorce in your family. If you can't find your beneficiary designation form, ask the financial institution for a new one. If you choose to fill out this form online, make sure to print a hard copy for your files. 

2) When filling out a beneficiary form, don't forget to designate percentages next to the names of your beneficiaries. These should be whole percentages. 

3) If the institution where your money is held changes its name or merges with another bank, fill out a new form. Forms with old institution names may not be valid and the banks won’t go out of their way to tell you.

4) Keep hard copies of your beneficiary forms, including your “payable on death” forms and your “transfer on death” forms in your emergency file. If all of these forms are in your account online, keep hard copies on hand because computer systems change and the forms might be hard to track down, especially if the bank has merged or changed names.

5) Consider working with an America’s Tax Solution Distribution Expert. Many financial planners and attorneys who do not specialize in estate planning can make mistakes when filling out forms because of state-specific rules and laws, or just plain lack of experience. We have a 5-Step Plan to assure that your money gets to the people you want. 

The failure to make this a Multi-Generational IRA really cost the family more than $2,000,000. When is the last time you've updated your financial forms? Your Clients?

Rolling Over Your Retirement Plan

QUESTION: HOW CAN “TAX-INFESTED” MONEY BECOME “TAX-DEFERRED”?

You have some crucial decisions to make about how you take distributions from your hard-earned savings. Not understanding rollover regulations can lead to unintended tax consequences that chip away at your retirement funds.

The funds held in your retirement accounts are called “qualified savings,” since they qualify for special tax-deferred status by the Federal Government. If you decide to withdraw all of the money at once from those accounts, it is called a “lump-sum distribution.”

Your America’s Tax Solutions retirement distribution specialist can explain the tax consequences of taking a lump-sum distribution and the benefits of rolling those funds into an IRA.

WATCH OUT
Plan administrators of your 401(k)s will not automatically assume you want to do a rollover. Also, the Tax Code provides for a 60-day window during which you can remove your qualified money from your pension plan or 401(k) and deposit into a traditional or Roth IRA. Be advised: The IRS does not trust that you will dutifully meet your 60-day obligation. If you request a lump-sum distribution, your employer is required to withhold 20% for federal income tax. Thus, on a $50,000 lump-sum distribution, you would pay $10,000 in withholding to the Federal Government.

FROM TAX-INFESTED TO TAX-FREE!
Your America’s Tax Solutions retirement distribution specialist can explain how you may bypass the 20% withholding requirement by structuring the transaction as a trustee-to-trustee transfer. Your ATS specialist will also explain the legacy advantages of rolling your 401(k) into an IRA, including the ability to stretch the period of tax-deferred earnings within an IRA beyond the lifetime of the person who set up the account at a compounded, tax-deferred rate.