Qualified Plan Rollovers and 20% Withholding

A client recently complained that his 401(k) plan sponsor made an error and withheld 20% for taxes when all he did was “roll my funds over to an IRA.” He was under the impression that transferring his 401(k) to his IRA was a tax-free and penalty-free transaction. Ultimately, yes, it would be tax and penalty-free but there’s a small catch…

When a distribution is made from a qualified plan directly to a plan participant, the plan sponsor is required to withhold 20% for federal income tax purposes.

In this case, instead of requesting a trustee-to-trustee transfer or “direct” rollover, the client’s paperwork revealed that he actually requested a distribution of eligible funds from his qualified plan to be paid directly to himself, not to his IRA.

Of course this client can still complete a timely rollover (within 60 days) with the amount he received and use out of pockets funds to make up the difference. Alternatively, he may choose to treat the missing 20% as ordinary taxable income on his return. However, this client is only 52 years old so if he elects to keep the 20% as a distribution, he will owe ordinary income taxes on that amount plus an additional 10% early distribution penalty since he is under 59½ years old.

If you intend to do a simple, tax-free and penalty-free transfer of your qualified plan to an IRA, make sure you have the correct forms and your transfer paperwork is filled out accurately.

If you are confused or are unsure what transfer or rollover forms you need, don’t hesitate to reach out to your local retirement distribution professional for assistance.

2016 IRS Individual v. Trust Income Tax Rates

A Few Key Points about Social Security

When you are deciding when you should begin your Social Security benefit based on your personal circumstance, there are some important things to keep in mind. When you are developing your overall retirement income plan, you should consider your life expectancy/health, projected income needs, whether or not you plan to work and survivor needs.

If you apply for your Social Security benefit early, your benefit will not only start lower but it will stay lower for the rest of your life. Contrary to a myth circulating out there, your Social Security benefit does not go up when you reach age 66. COLAs will magnify the impact of your early or delayed retirement and the longer you expect to live, the more beneficial it is to delay your benefits.

Your decision to start your Social Security benefit impacts survivor benefits as well. Delaying your own benefits may give survivors more income. If you do not think your Social Security benefits will be enough to live on, consider other strategies you may need to explore to supplement your projected benefit.

Your overall retirement strategy should take into consideration Social Security in the context of pensions, IRAs, 401(k)s, your investment portfolio and work related issues to maximize your retirement income.

What is the "Distribution" Phase of Retirement?

At a certain point in our lives, we are faced with important choices that could help defer or mitigate taxes. We spend the majority of our working years saving and accumulating assets, but then what?

As we grow older, we leave a period of relative complacency about money and transition into a more critical period of anxiety and fear during the distribution phase, the time when we begin to tap into our sources of income during retirement.

Careful distribution planning is required lest we drain our assets too quickly or withdraw assets in a tax-inefficient manner. Our asset distribution choices will ultimately dictate the kind of lifestyle we can enjoy when we leave the workforce. Successful distribution planning means understanding the challenges, opportunities and risks associated with this critical time.

Two big fears that many Americans face are 1) running out of money and 2) stock market volatility. The fear of outliving assets and consequently choosing an aggressive investment strategy may not be the best decision. Why? The answer is tied to the other fear – market volatility. It wasn’t so long ago that many hard working people lost a ton in 2008 and 2009 due to market turmoil. Many people had to delay their retirement and continue to work to try and build their portfolios back up as much as they could while knowing they wouldn’t be able to really recapture what had been lost. Understandably, investors still carry an aversion toward any investments that may threaten their principal and expose them to risk.

The good news is that despite increased anxiety about running out of money and losing assets to market volatility, safe choices for investors approaching retirement are greater than ever before. Investors can protect their principal, lock in gains and generate a stream of income that they cannot outlive. Your retirement distribution specialist and tax professional can work with you to identify the right safe options for you and your family.

Even Winners Have To Plan For Taxes

In light of the recent Power Ball fever that swept the nation, it left many wondering how some people who win the lottery, hit a jackpot or have a few Oscar statuettes or Super Bowl rings in their possession seem to go broke so easily. Besides sharing good fortune with family, friends and charities, sometimes those winners forget about their long lost uncle - Uncle Sam.

Donations to qualified charities are one thing, but what happens if you share lottery winnings with your siblings? They may be considered taxable gifts if you exceed the exclusion amount.

What happens if you win an Oscar this month? Having that statuette on your mantle is quite an honor but be careful with that “goodie bag”…award season goodie bags are notorious for being worth thousands or even tens of thousands of dollars and often come with strings attached. The IRS could deem the recipients as “earning” the items and in that case they would not be considered true gifts under IRS rules – it would be taxable income equal to the fair market value of the goodie bag.

A coveted Super Bowl ring may not be worth a whole lot (then again how can you really value bragging rights), but Pro Bowl and Super Bowl earnings can catapult some players into an income tax bracket they aren’t prepared to tackle during post-season. Generous gifts often follow victories so again, taxable gifts need to be considered as well.

The bottom line is you’re never “too rich” or “too savvy” to need sound tax planning guidance from a tax and distribution professional. Too often people lose their fortune as quickly as they win it and don’t seek expert advice until it’s too late.

What is a PLR?

A PLR is a Private Letter Ruling from the IRS. What does that mean exactly? A PLR is a written request a taxpayer submits to obtain some sort of exception to a tax rule. The IRS interprets and applies tax laws to the taxpayer’s specific set of facts. The IRS then makes a statement about the taxpayer’s transaction and this statement is binding upon the IRS as long as the taxpayer accurately described the submitted facts and specifically carries out the transaction as stated.

It is important to note that although a PLR may give some insight as to how the IRS may respond to a specific situation, the IRS’ analysis and decision only applies to the taxpayer who submitted the request. A PLR is not law and it may not be relied upon as a source of authority or legal precedent by anyone else.

Who Pays the Gift Tax?

If you give a non-spouse a gift valued in excess of the annual exclusion amount, you could be subject to a gift tax. For 2016, the annual federal gift tax exclusion amount for gifts to a non-spouse remains at $14,000 per person. If you are married, you and your spouse may give up to $28,000, per person, per year, free from federal gift tax.

Although there are no immediate tax concerns for the recipient of a gift because federal gift tax is imposed upon the donor, the recipient could be liable for capital gains tax in the future. Highly appreciated gifts such as real estate or stocks will render the recipient liable for capital gains tax when he or she decides to sell the gift at a later date.

The general rule is that the recipient’s basis in the gifted property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (which was also his/her basis) and you later sold it for $100 per share, you would pay tax on a gain of $90 per share.