FIAs Are Protected When the Market Plunges!

The market plunges!… Wait, it’s going up!… No, it’s down again!…

With all of the recent turmoil, Fixed Indexed Annuity (FIA) owners can breathe a sigh of relief knowing they made a great choice that protects their hard earned money and retirement assets such as their IRAs from sudden market downturns.

An FIA is a tax-deferred opportunity to participate in the upsides of the market without the risks associated with market volatility. With an FIA, your money is protected from market losses.

Key FIA benefits include:

• No Loss of Principal
• Locked in Gains
• A Guaranteed Stream of Income for Life
• Liquidity
• Tax-Advantaged Accumulation
• Crediting Options - You Choose a Crediting Strategy

Unlike variable annuities, which are securities investments, FIAs are safe insurance products and only insurance licensed professionals may offer these safe tools.

Talk to your retirement distribution professional today to determine whether an FIA is an appropriate option to complement your retirement planning strategy.

UBIT Tax and Self-Directed IRAs

What?

Unrelated business taxable income (UBTI) rules could apply to your self-directed IRA, which subjects that income to an unrelated business income tax (UBIT).

Why?

The UBTI rules are a way for the IRS to prevent charities and certain self-directed IRA business activities from having an unfair advantage due to their tax-advantaged status (Congress really intended IRA investments to be passive and not compete with regular businesses).

When?

UBIT applies to the taxable income generated from any unrelated trade or business regularly carried on by an organization. Short-term and intermittent activities are usually exempt but certain seasonal activity is considered “regular” for purposes of this tax.

How much?

If the UBTI rules are triggered by your self-directed IRA, trust tax rates are used so in 2015 a tax of up to 39.6% could be imposed on the income deemed generated by unrelated business that is regularly carried on.

Exclusions from the UBIT tax include:

• Dividends paid to the IRA as a result of the IRA owning C Corporation stock
• Rent from real property
• *be careful not to trigger a prohibited transaction!
• Interest
• Royalties

Examples of self-directed IRA investments that can trigger UBTI rules are:

• Active trade or business (i.e., clothing store, café, gas station)
• Income through Partnerships and Limited Partnerships (LPs)
• Income through Limited Liability Companies (LLCs)
• *If your self-directed IRA invests in a business using a C Corp, UBTI rules aren’t triggered
• Investments that incur debt financing/income from debt financed property

Did You File Your Federal Income Tax Return in 2012?

The IRS reported that approximately $950 million in refunds are currently unclaimed!  It is estimated that over 1 million people who are entitled to a tax refund for 2012 have not filed a tax return with the IRS.  If you didn’t file your 2012 income tax return, you may want to hurry up…there is a 3-year window and the deadline to file so you can collect a 2012 refund is April 18^th of this year! It is important to note that there is no late filing penalty imposed by the IRS if you are owed a refund.

How “Safe” Is Your CD?

Determining the “Real” Rate of Return

Certificates of deposit (CDs) are intended for the ultra-conservative investor. Why are they appealing to so many? They are touted as the “safe” investment option with essentially no risk as they are not tied to the stock market. However, how “safe” are they really if, when you do a little math, you are actually losing out on money due to inflation and taxation?

Knowing the truth about CDs is very important. You can lose purchasing power with a CD when you factor in inflation and taxes. Most banks don’t talk about this aspect and we believe CD owners have a right to know what they really own. The bottom line is, “safety” doesn’t matter a whole lot if your overall rate of return is negative. The “real” rate of return on a CD requires you to factor in inflation (based on the Consumer Price Index [“CPI”]) and your real tax rate.

Here are the hard facts:

• For the past 7 years in a row, the average six month CD rate has been less than 1%.
• For the past 7 years in a row, CDs have earned a negative “real” return.
• CDs have had a negative “real” return for 16 out of the past 30 years.

This is what SEVEN YEARS of bad luck looks like…

Are you happy with your CD rates? There may be CD alternatives available to you that are “safe” options as well…what if you could get the safety of a CD with a guaranteed higher annual rate of return? Is that something we should talk about?

To find out the truth about your CD and other safe options that are available to consumers, give us a call today for a complimentary CD checklist evaluation. This is your hard earned money and we want to help you keep it!

Tax Crunch Q&A

Q: Social Security was my only source of income for 2015, is it taxable?
A: In general, if Social Security is your only income source, benefits are not taxable.

Q: I inherited an IRA from my brother who passed away in February 2015 at age 76. He passed away before taking his 2015 RMD so I took it in October 2015. Is the RMD reported on his estate tax return or my 2015 tax return?
A: Your tax return. Year of death RMDs are reported on the recipient’s tax return.

Q: I retired and transferred all of my 401(k) assets, including highly appreciated employer stock, to an IRA last year. I recently discovered that a Net Unrealized Appreciation (NUA) strategy could give me a huge tax advantage. Since I haven’t filed my tax return yet, may I still elect to use an NUA strategy?
A: No. Unfortunately, once you transferred your highly appreciated employer stock to an IRA, the opportunity to use an NUA strategy was permanently eliminated. To preserve an NUA strategy opportunity, among other requirements, the shares must have been transferred in-kind to a taxable account.

Q: I requested my 2015 RMD on December 31st but I just found out from my IRA custodian that I will get a 1099-R for 2016, not 2015…why?
A: The distribution year is determined by the processing date, which may differ from the date you make a request. It is important to know your IRA custodian’s deadline for processing distribution requests. Some custodians require that distribution requests be submitted no later than mid-December to ensure RMD processing satisfies the December 31st deadline. There is a 50% penalty imposed by the IRS for failing to take a timely RMD.

Q: May I deduct losses in my IRA on my 2015 tax return?
A: Generally no, unless you cash out all your IRAs of the same type. Losses and gains are not taken into account on your tax return while your IRA is still open. You may, however, deduct your Traditional IRA losses only if the total balance that you withdraw is less than the after-tax amounts (basis) in your TIRAs. Your basis is attributed to non-deductible contributions and rollovers of after-tax amounts from qualified plans, 403(b) accounts and 457(b) plans. You also must file IRS Form 8606.

72(t): Substantially Equal Periodic Payments

Substantially Equal Periodic Payments (SEPPs) are also referred to as 72(t) payments. IRA owners who need access to their IRA accounts but are under age 59½ sometimes choose to set up a SEPP plan. Why? Because Internal Revenue Code 72(t) permits a series of substantially equal periodic payments (SEPPs) that are not subject to the 10% early withdrawal penalty.

It is important to make sure you discuss a SEPP strategy with your retirement distribution expert and/or tax professional to make sure a SEPP plan is right for you before initiating one.

Basic SEPP Rules:

• Most modifications are prohibited (there are few exceptions).

• No contributions or additional withdrawals are permitted.

• You can’t rollover SEPP distributions back into the IRA or another IRA.

• You can’t convert SEPP distributions into a Roth.

• Distributions must continue for the longer of a full 5 years or reaching age 59½.

• The minimum 5 year distribution requirement is not waivable and applies regardless of whether your initial need for the money no longer exists.

To illustrate…

Scenario 1:

Assume you just turned 45 years old and start a 72(t) plan. Your SEPPs must continue at least until you are 59½. In this case, at age 59½ you will satisfy both the 5 year minimum distribution and age 59½ requirements.

Scenario 2:

Assume you just turned 58 years old and start a 72(t) plan. Your SEPPs must continue at least through the year you turn 63 years old. In this case, at age 63 you will satisfy both the 5 year minimum distribution and age 59½ requirements.

Disclaiming an Inherited IRA

There are several reasons why someone may choose to disclaim an inherited IRA. However, once that decision is made, it is important for the disclaiming beneficiary to avoid common errors.

In short, a disclaimer is a legal document and formal refusal of an inheritance by a beneficiary. Disclaimer rules apply to all IRA beneficiaries. Beneficiaries are not required to accept an IRA (or any portion thereof) and may instead choose to disclaim all or a portion of their share.

To have a valid disclaimer, the beneficiary must not have accepted or benefitted from the IRA assets or property. The only exception to this rule is the year of death RMD taken for the deceased owner. All disclaimers must be submitted in writing to the IRA custodian within 9 months of the IRA owner’s death.

Disclaimers are irreversible, permanent decisions. Some beneficiaries make the mistake of disclaiming an IRA, with the intent to pass on the disclaimed assets to someone else like their child or spouse. Disclaimed IRA assets may only go to the contingent beneficiary or beneficiaries named by the original owner. Disclaiming beneficiaries have zero control over the disclaimed amounts and how they flow.