It's Not Too Late - Yet! 3 Required Minimum Distribution Mistakes

By Beverly DeVeny, IRA Technical Expert

It's that time of year if you are an IRA owner age 70 ½ or older. You must take your required minimum distribution (RMD) before the end of the year. Not taking your RMD or the correct amount can result in crippling penalties, which is why we cover this topic in great detail at The Slott Report. 

Today, I examine 3 RMD mistakes you must avoid. Remember, it's not too late to take your RMD, just make sure you do it correctly with the assistance of a competent, educated financial advisor like those who train in this specialized area.


Aggregating Required Minimum Distributions (RMDs)
You have an IRA, a 401(k) and a 403(b). How many RMDs do you have to take? Three. You have to take an RMD from each of those plans. They cannot be added together.

You have two IRAs, two 403(b)s and two 401(k)s. How many RMDs do you have to take? Four. You can add together your IRA RMDs and take the total from one IRA. You can also add together your 403(b) RMDs and take the total from one 403(b). You cannot add together your 401(k) RMDs (or any other plan‘s RMDs) so you must take two distributions.

If you have aggregated the wrong accounts, you still have time to take the RMDs you missed.


Still Working
You are over the age of 70 ½, are still working and participating in the employer’s 401(k) plan. You do not own 5% or more of the company. The company has a still working exception to the RMD rules. You separate from service this year. You have an RMD from the plan for this year, even if you separate from service on December 31. That RMD must be paid out to you before any funds can be moved to an IRA.

If you have rolled your RMD to an IRA, you now have an excess contribution in your IRA. You have until October 15 of next year to tell your IRA custodian that you need to remove the funds as an excess contribution.


Roth IRA Conversions
You are age 70 ½ or older this year and did a Roth IRA conversion. You cannot convert your RMD to a Roth IRA. The RMD must be paid out before you do a conversion. 

If you have converted your RMD to a Roth IRA, you now have an excess contribution in your Roth IRA. You have until October 15of next year to tell your Roth IRA custodian that you need to remove the funds as an excess contribution.

A TEDx Talk for End-of-Life and Estate Planning

Why You SHOULDN'T Leave Your Roth IRA to Charity

By Jeffrey Levine, IRA Technical Expert As part of your estate plan, you may be considering leaving some of your assets to a charity. This is a fairly common part of many estate plans, and is often shaped by one’s experiences during life. For example, those who have suffered from cancer – or who have watched a loved one suffer from the disease – are more inclined to support cancer-related charities. Those who have been impacted by Alzheimer’s disease are more likely to support that cause as part of their final wishes. And so on... Certainly, leaving money to a charitable organization as part of your last request is commendable no matter how you decide to go about doing so. That said, if you’re going to do it, you should do it wisely. In that regard, and although there are always differences from person to person, as a general rule of thumb, you should not leave your Roth IRA to a charity if you have other sources available. Remember, if you have money in a Roth IRA, it means that you have already paid the income tax on most of those funds. In some situations, it’s very clear which assets you should leave to charity and which assets should be left to other beneficiaries. For instance, if you have $100,000 in a traditional IRA and $100,000 in a Roth IRA, and you want to leave $100,000 to charity and $100,000 to other heirs, the choice is simple. Leave the $100,000 traditional IRA to charity, which would get it income tax-free thanks to its tax-exempt status, and leave the Roth IRA to the other heirs. In other situations, however, it’s not quite as clear. For instance, suppose you have $100,000 in a brokerage account and $100,000 in a Roth IRA account. In general, both of these accounts could be inherited by a beneficiary income tax-free but, even in this case, the Roth IRA would make the better account to leave to your non-charity beneficiaries. Remember, in general, it’s not only what’s in the Roth IRA on the day you die that will be income tax-free to your heirs, but the future growth on those amounts as well. In contrast, while the value of your brokerage account on the date you die may be received by a non-charity beneficiary income tax-free (thanks to a step-up in basis), any future interest, dividends, capital gains, etc. would generally be taxable.

2014 SEP IRA Contribution Deadline Approaches

By Sarah Brenner, IRA Technical Expert

Are you self-employed or a small business owner and your business expenses go on your individual tax return? If so, and you have an extension for filing your 2014 federal income taxes, you may want to consider making a SEP contribution for 2014. It is not too late! Here is how it works.

The deadline for making a SEP IRA contribution for the year is the business’ tax-filing deadline, including extensions. If you have an extension to file your 2014 federal income taxes until October 15, 2015, you are still eligible to make a SEP IRA contribution until that date. This deadline is different than the deadline for traditional IRA and Roth IRA contributions, which is the tax-filing deadline, not including any extensions. That deadline was April 15, 2015. Your SEP contribution may be made to an IRA under an existing SEP IRA plan or you may still establish a new plan for 2014.

Only an employer may establish a SEP IRA plan. The employer could be a sole proprietor, a partnership or a corporation. There are no limits on the size of an employer who can establish a SEP IRA plan, but because they are easy and inexpensive to administer, they are attractive to smaller employers. Establishing a SEP IRA plan is an easy three step process. The employer will sign a SEP IRA plan agreement, give a copy of the agreement to the employees, and the employees then establish IRAs to accept SEP IRA contributions. Many employers will use the IRS model form (Form 5305-SEP) to establish SEP IRA plans. There are only six spaces for the employer to fill out on this form.

For 2014, an employer may make deductible contributions up to the lesser of $52,000 or 25% of compensation. Only the first $260,000 of an individual’s compensation is considered for 2014. For employees, compensation is usually wages as reported on Form W-2. If you are self-employed, you must use a special formula to calculate your compensation. A worksheet with the calculation can be found in IRS Publication 560. Generally, the employer must contribute the same percentage of compensation for each employee. You cannot contribute 25% of compensation for yourself as the owner and only contribute 10% of compensation for each of your employees.

SEP IRA plans offer you flexibility. If your business has a good year, you can contribute a higher amount. In a bad year, you can contribute a smaller amount or even nothing at all. Every eligible employee must receive a SEP IRA contribution or all the contributions to other employees will be considered to be excess contributions. This includes employees who are part-time or left employment during the year. Individuals who have attained age 70 ½ are eligible for SEP IRA contributions, even though they may not make traditional IRA contributions.

Under the law, employers may only exclude certain employees from SEP IRA plan contributions. These include employees who are not yet age 21, union members, nonresident aliens with no U.S.-based income, and those who either received less than $550 in compensation or have not met the years of service requirements.

After a SEP IRA contribution is made, it is treated like other IRA funds and subject to the same rules. The employer is not required to administer the funds. Employees have access to their SEP IRA contributions immediately after receiving them. However, if they take distributions, there would be the same tax and early distribution penalty consequences that there are with any traditional IRA contributions.

Is a SEP IRA plan right for your business? These plans offer a simple and affordable way to save for retirement and get a tax break. Time is running out for many business owners to take advantage of these benefits for 2014. If your business’ 2014 federal income tax-filing deadline is October 15, 2015, now is the time to consult with a knowledgeable financial advisor to decide whether a SEP IRA plan is a good strategy for you.

Special Needs Trusts vs. ABLE Accounts - Which is Better?

By Jeffrey Levine, IRA Technical Expert

ABLE (Achieve a Better Living Experience) accounts are a brand new type of tax-favored savings account created to benefit young disabled persons. In order to have an ABLE account established for a person, they must be disabled (or blind), as defined by the tax code, and such disability (blindness) must have occurred before the person’s 26th birthday.

There’s a lot that’s been written about the rules for ABLE accounts, and a simple Google search will lead you to any number of articles that will provide that important information. But for those that understand the rules and are planning for a disabled person, one of the questions that has been asked with increasing frequency is, “Should I use a special needs trust or an ABLE account to safeguard my money [for my special needs beneficiary]?”

There’s no simple answer to this question, because it involves looking at a number of different factors, but below are 5 key areas to consider, along with a brief description of whether a special needs trust or an ABLE account gets the edge in that particular area.

1. Amount that can be safeguarded without impacting benefits

Edge to special needs trusts – Unlimited amounts can be left/gifted to a 3rd party special needs trust without impacted federal/state benefits. On the other hand, SSI benefits will be suspended once an ABLE account’s value exceeds $100,000. In addition, there is no limit on the amount of funds that can be bequeathed/gifted to a special needs trust, whereas ABLE account contributions are limited to $14,000 (for 2015).

2. Potential uses of funds

Slight edge to special needs trusts – While the definition of qualifying disability expenses for ABLE accounts is fairly liberal, special needs trusts drafted with the appropriate language can allow for an even broader array of expenses.

3. Tax efficiency

Edge to ABLE accounts (big time!) – Any income that is generated by a special needs trust and not paid out of the trust to trust beneficiaries within the accounting year is subject to the brutal trust tax rates. In contrast, distributions from ABLE accounts, including earnings, will be entirely tax free if used for qualified disability expenses.

4. Legacy to future beneficiaries

Edge to special needs trusts – Any amounts left in a person’s ABLE account at the time of their death will first be used to repay publically provided benefits. That will probably wipe out the balance in most of those accounts. In contrast, if a special needs trust is established and implemented properly, the trust assets at the time of the special needs person’s death can be left to other heirs.

5. Cost and complexity

Edge to ABLE accounts – Trusts can be very expensive to create and administer. They also add a lot of complexity. ABLE accounts, on the other hand, will have minimal expenses and will be far simpler to implement. ABLE accounts are not required to file tax returns (like trusts are), and the income earned in the account will generally not be subject to income taxes.

So what’s better for you and your family? That is an issue best addressed with a qualified professional who specializes in planning for those with disabilities. However, determining which of these five key issues are important to you – and how important they are – will help you to make an informed decision.

IRS Considers New Tax on Wealthy Families

By Robert Milburn

The IRS wants to sharply curtail a favorite tax benefit affecting family partnerships and LLCs. The U.S. Treasury Department is zeroing in on new regulation that would effectively raise the taxable value of assets transferred into family partnerships and LLCs, currently granted a discount. Private bankers are nudging their wealthy clients to get out ahead of the likely new rules and set up such partnerships now, in order to capture valuable discounts while they still exist. Current speculation is that the new rules will be announced in early September.

Any changes could have sweeping ramifications. Partnerships and LLCs allow families to tax-efficiently pass on to heirs, say, a minority stake in the family business or in a pool of privately-held investments. The reasoning: The minority shares in the private business are illiquid, can’t really be sold to anyone else but the family, and therefore are worth less, from a tax perspective, than their stated market value. That helps families trim the taxable value of their assets, sometimes below the $5.43 million gift-tax exemption, and works well even if, say, the underlying investments getting passed on in this way are liquid. A pool of marketable securities that is packaged and passed on, might, for example, get a discount of 20% to 25%, says Lisa Featherngill, managing director at Abbot Downing. A basket of illiquid assets could get a larger haircut of 25% to 35%.

So let’s say a family business is worth $25 million and is entirely private owned by the family. You decide to pass on a 25% minority holding in the company to your heir via a Partnership or LLC. The IRS, as the rules stand now, allows you to discount the shares up to 35%, because they are illiquid. So, instead of passing on $6.25 million in shares, triggering a tax bill, you’re only passing on shares valued by the IRS at $4.1 million, which makes the transfer tax free, since it remains well below the $5.43 million gift-tax exemption.

The Treasury Department has put the estate planning community on notice that this all may change. In May, Cathy Hughes, of the Treasury Department’s estate and gift tax division, dropped hints at an American Bar Association event, saying that new rules on family partnerships could be released before the ABA’s next taxation meeting, scheduled for September 17 to 19. The proposed regulations have been on the Treasury’s list of things to do before, but were formally dropped during the 2010 to 2013 budgets, when the appetite to hit the wealthy with yet another Obama-era tax was diminished. Now that happy days are here again, the subject is very much back on the Treasury’s wish list.

The rules will tighten definitions and attempt to clarify existing murkiness, perhaps even narrowing discounts for certain assets. “Currently, it’s a battle of the experts, with the IRS’s expert up against the taxpayer’s expert” about how illiquid an asset is and what kind of a discount it should get, says Jim Hogan, of tax advisory Andersen Tax. The courts usually wind up serving as an arbiter, defining which assets are justifiably discounted, he says. The IRS doesn’t like that; it’s inefficient and a costly and time-consuming process to administer. “The new rules should give the IRS a tool to deal with discounts themselves,” Hogan says.

Details on the proposed legislation are sparse, which explains why the estate planning community is abuzz with speculation. Hogan left the IRS in April 2014 and, although not privy to the details of the new rule, supplies a few key insights. He suggests that certain assets are justifiably discounted, such as an operating business with sales; others have a harder time demonstrating that a “legitimate business purpose exists beyond just getting a discount.” An example of the latter might be putting an art collection into a family partnership. That “might be questionable,” Hogan says, unless, of course, the family maintains a gallery and actually sells its artwork. Abbot Downing’s Featherngill says the IRS could even take issue with LLCs that hold liquid securities like bonds and stocks.

However the proposed rule shakes out, wealth managers are advising clients to act now. Earlier this month, Abbot Downing sent out an email alert to all of its relationship managers, suggesting they talk with any client “considering formation of a family entity… Now may be the time to accelerate those discussions.”

Why? If more stringent rules are proposed, the Treasury could choose to make the rules effective immediately, even as details are hammered out at a later date. Which explains why many families are fervently hoping the Treasury department will just kick the whole can further down the road, as it has happened in previous years. We’ll know by the fall.

Basic Questions About Estate Planning in Washington – What is a QTIP Trust?

The qualified terminable interest property trust, commonly referred to as the QTIP trust, is an advanced estate planning device that is often included in the estate plans of people with blended families. The QTIP trust is, like other trusts, designed to provide specific benefits, but is not suitable for everyone. In this article, we will take a closer look at QTIP trusts and how they work.

QTIP Trusts

Like all trusts, a QTIP trusts allows you to create a legal entity that can own property on behalf of a person or persons, known as beneficiaries, who get to use it. But, unlike many other types of trusts, QTIP trusts are designed to protect two different types of beneficiaries at different times.

Here’s how they work. First the person who establishes a QTIP trust, called a trustor or grantor, decides to transfer property into the trust’s name. The trustor will then name two beneficiaries: the life estate beneficiary, and the final beneficiary. Once the trustor dies, the life estate beneficiary will have the right to use the trust property, or receive income from it, but does not have the right to sell or transfer the property to others.

After the life estate beneficiary dies, the final beneficiary(s) receives the property and effectively becomes the new owner. Unlike the life estate beneficiary, the final beneficiary can dispose of the property as he or she sees fit.

QTIP Trusts and Blended Families

The main reason people create QTIP trusts is because they have a blended family and want to protect both their current spouse and their children from previous relationships. The QTIP trust does this perfectly.

When people with blended families create a QTIP trust, they typically name their current spouse as the trust’s life estate beneficiary, while naming their children as the final beneficiaries. So, if the trustor should die, that person’s spouse will be able to use or benefit from the trust’s property. After the surviving spouse dies, the trustor’s children from a previous marriage then inherit the property as the final beneficiaries. Through a QTIP trust, both the current spouse and the children from previous relationships will receive inheritances from the trustor.

QTIP Trusts and Washington State Estate Taxes

Another benefit conferred by QTIP trusts is that they allow you to exclude the assessment of estate taxes. By transferring a Washington QTIP trust, you can exclude up to two million dollars from the survivors estate. This means your heirs estate tax bill will be eliminated or reduced significantly.

If you’d like more information about QTIP trusts, contact us so we can discuss the issue in more detail.

401(k) contributions up in 2013

By Nick Thornton

Contributions to 401(k) plans were up $13 billion in 2013 from the previous year, according to analysis from Judy Diamond Associates.

The 5 percent year-over-year increase in 2013 represents contributions from employees and employers, and is the most recent year for which data is available.

Employer matches were roughly $96 billion in 2012, while employees contributed $174 billion. In 2013, employer matches hit $101 billion, and employees increased their deferrals to $182 billion.

The increases represent a continuing positive trend since 2011, according to Eric Ryles, managing director of JDA, which is owned by ALM, BenefitsPro’s parent company.

“This indicates both companies and the people who work there are feeling better about the economy overall,” Ryles said. “They feel they have more to invest in their futures.”

Delaware had the highest average employer contributions in 2013, at $3,114. The District of Columbia, Wyoming, Minnesota, and New Jersey rounded out the top five, with average employer contributions in the Garden State coming in at $2,428.

New Jersey led the way with the highest average employee contributions, at $4,436, slightly above California’s average participant deferral of $4,511. Maine, Washington and Delaware rounded out the top five states with the highest average employer contributions.

While total contributions were up in 2013, sponsors established almost 1,000 fewer new plans compared to 2012, according to data mined from Form 5500s.

The 23,056 plans launched in 2013 represented a 5 percent decline from 2012, meaning 434,000 workers had new access to a defined contribution plan. By the end of 2013, new plans held $4 billion in assets.

But only 58 percent of eligible workers took advantage of newly adopted plans. The average employee contribution to the new plans was $1,980 and totaled $861 million. Employers chipped in about $491 million to new plans.

California, New York and Texas, states with the most businesses and people, accounted for one-third of all new plans, adding 7,266.

As a percentage of new plans, Nevada accounted for 6.29 percent of new plans, more than any other state.

What is Medicaid Planning?

Medicaid planning is an aspect of estate planning that a lot of people do not know much about. Even if you know that Medicaid has something provides health care insurance to the poor, those with disabilities, or the elderly, you may not know how this process works, or why it has anything to do with estate planning. To help better explain what Medicaid planning is and why it might become a part of your estate plan, today we are going to take a look at some essential questions surrounding the Medicaid planning process.

What is Medicaid?

Medicaid is a health insurance program jointly operated by the federal government and the 50 state governments that is designed to provide insurance coverage for people with disabilities, low-income children, and seniors. As a part of this coverage, Medicaid pays for the expenses associated with long-term care costs for people with disabilities or anyone who need to reside in an eldercare facility such as a nursing home or assisted living center.

What is Medicaid planning?

Medicaid planning is the process in which people create a plan that will allow them to use Medicaid to pay for long-term care costs as they get older. The planning process can be a little complicated, but it involves some basic steps.

First, those developing a Medicaid plan have to know what they own. Medicaid is only available to those who meet stringent asset eligibility criteria. In other words, if you have too much money, you cannot use Medicaid.

Second, once you know what you own, you then have to determine if there are any options available to you that will allow you to structure your assets in such a way that you can still keep as much as possible while receiving Medicaid. This evaluation is very complicated and can take a lot of time. It also requires the advice and guidance of an expert, which is why crafting a Medicaid plan with the assistance of your estate planning attorney is absolutely essential.

Who needs a Medicaid plan?

Almost anyone can benefit from crafting a Medicaid plan, but those most in need are those who believe they might need long-term care in the immediate or near-term future. Because Medicaid eligibility criteria are so stringent, and because there are significant time limitations associated with them, you have to be able to begin your Medicaid planning efforts as soon as possible. In fact, if you wait too long to begin Medicaid planning, you might be forced to spend some or all of your nonexempt assets before you receive the Medicaid benefits. This will effectively mean that you will have very little, if anything at all, to pass on as inheritances if you are forced to pay for long-term care costs on your own instead of using Medicaid to pay for them for you.

The Impact of Caregiving on Adult Children Who Care for Their Parents

As life expectancy continues to rise and medical costs increase, many adult children who take on the responsibility of caring for their aging parents are finding themselves faced with quite a dilemma. Because many simply don’t have the financial means for professional care, they’re faced with administering a considerable portion, if not all, of the care themselves.

Here are some interesting statistics and pieces of information that may help you in preparing for you, or your loved ones, end of life care.

Out of Pocket Costs

Caring.com performed a study to get some concrete data on what family caregivers are spending to provide care for their aging parents. Here are some statistics that demonstrate just how much it costs:

• Nearly half of family caregivers spend more than $5,000 annually
• 16% are spending as much as $9,999
• 11% are spending as much as $19,999
• 5% are spending as much as $49,999

The costs associated with caregiving add up over time and often put adult children in a difficult position. While they’re spending time and money caring for their parents, it often means they’re unable to put money into their own retirement funds.

Loss of Earnings and Benefits

Aside from the out of pocket costs, many caregivers have to take time off from work to administer care. Whether it’s driving their parents to doctor appointments, assisting with feeding or helping with bathing and hygiene, being a sole caregiver can be very time consuming. As a result, many people find themselves forced to take unpaid leave, reduce their hours or leave their jobs altogether to ensure their parents receive proper care.

In turn, this can lead to a dramatic loss of earnings and benefits, which not only affects long-term savings, but day-to-day living as well. Depending on whether an adult child has to take unpaid time off from work or potentially leave their job entirely, the cost in lost wages can be very damaging. Combine lost wages with other costs such as medicine, doctor’s appointments, and hospital stays and the challenge can seem insurmountable.

Employment Struggles

In addition to out of pocket costs and reduction of earnings, many people experience a negative backlash with employment as well. For example, employers may grow tired of employees who constantly require time off or show up late because they had to care for their parents. Not only can this create tension in the workplace, it sometimes leads to termination, and positions are replaced by employees who don’t have these obligations.

Even though care for an ailing family member is protected under the federal Family and Medical Leave Act, many employers will still terminate employment. The challenge may also arise that an adult child with a high-paying job who has a family of their own to support must leave their job in order to keep up with the demands of caring for loved ones, which is damaging to someone attempting to build a career.

The bottom line is that people living longer into their golden years is a double-edged sword. On one side, it’s great for those aging parents and grandparents to have more time with their families. However, on the other side, many outlive their savings, and their adult children are faced with a difficult situation where they suffer financially and emotionally during the process.

Planning ahead for end of life care becomes increasingly important in our aging society. Talking with your family about how to prepare for future costs and caregiving can help all avoid some of the stress of growing older.