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DISTRIBUTIONS FROM AN IRA - LOAN OR TAXABLE DISTRIBUTION?

The July issue of Ed Slott's IRA Advisor Newsletter lays out an all-too-common occurrence during these tough financial times.

A Florida real estate agent suffered a massive drop in income due to the economic recession and the impact felt on the housing market, resulting in his decision to take a series of distributions from his IRA to meet living expenses for his family of four.

No big deal, right? They are just loans from his IRA. WRONG!

The July issue of Ed Slott's IRA Advisor Newsletter details the real estate agent's erroneous assumption and the price he paid.

YOU CAN LEARN MORE IN ED SLOTT'S IRA ADVISOR NEWSLETTER

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Inside Ed Slott's IRA Advisor Newsletter

Distributions from an IRA - Loan or Taxable Distribution?

James T. Colegrove, et ux. v. Commissioner

What Could Have Been Done?
Dangers of Representing Yourself in Tax Court
Advisor Action Plan

Your IRA Questions Answered

10% Early Withdrawal Penalty

Timing Error Results in 10% Early Withdrawal Penalty on a 72(t) Payment Plan PLR 200634033
Landmark 72(t) Case When do 72(t) Payments End?
Arnold v Comm., 111TC No. 12 (1998)

Guest IRA Expert
Seymour Goldberg
CPA, MBA, JD
Senior Partner
Goldberg & Goldberg, P.C.
Woodbury, NY

Is an Inherited IRA Protected from Creditors?

Recharacterizing Inherited Roth IRAs

If you are not already an Ed Slott's IRA Advisor Newsletter subscriber, you can preview past issues before subscribing.

MARRIED MEN: DON'T TAKE SOCIAL SECURITY TOO EARLY

Social Security benefits usually begin to be received between ages 62 and 70. A common scenario involves a married couple where the husband is older and the higher earner. In these cases, the largest monthly payment is produced if the husband waits until age 70 to claim his benefit. Once payments begin, they will continue until the end of the surviving spouse's life.

Most married men usually claim Social Security benefits at age 62 or 63, despite the fact that their family's overall expected lifetime income would be much greater if they waited a few years. The longer an individual waits to claim Social Security benefits, the larger his or her monthly payment will be. This is the result of an actuarial calculation that takes into consideration the delayed commencement of benefits.

Those most affected by an early claim of benefits are wives who outlive their husbands. While men who begin taking benefits at age 62 lose about 4% of the lifetime income they could have expected to receive if they had not started early, a surviving spouse typically receives a survivor's benefit that is 20% less than it would have been.

So why do men begin taking Social Security benefits at age 62 or 63 even though it's usually not in their family's best interest? A recent study by the Center for Retirement Research at Boston College examined this question with surprising results. While it might be assumed that men are more likely to claim early because they need the money, the study found that wealth makes little difference in when benefits are claimed. Men without a lot of savings often claim early because they need the money to live on, but wealthly men often claim early too, because they want to leave their children an inheritance and they prefer to live on benefits instead of spending down other assets that could otherwise be passed along to their children.

A Roth IRA would be a great asset to pass to the children. A Roth IRA has no required minimum distributions (RMDs) during the owner's lifetime and the designated beneficiary generally can withdraw it over his or her own life expectancy. This means a 40-year-old beneficiary who inherits the Roth can draw it down over approximately 43 years. With no RMDs during the owner's life and the extended time the beneficiary has to withdraw it, there should be ample time to generate meaningful growth to pass on to heirs, income tax-free.

Private Letter Ruling 201022024

A client we will call "Tonya" said that religious ministers in her community convinced her to invest part of her IRA funds in their organization. She believed she could make higher returns on her IRA that would allow her to better "engage in God's work and his ministry." On June 20, she withdrew an amount of money from her IRA and distributed it to help needy families who were in financial difficulty. Later, she withdrew another amount of money from the IRA, and combined with the remaining funds from the previous withdrawal, invested the total amount with the religious organization.

"Tonya" learned one month later that an IRA account was not available with that organization. Also, in early July she had difficulty getting the interest earned on the investment and became concerned about the investment's safety with the organization. She began the process of obtaining a refund of her investment one month after the initial withdrawal.

Despite threats of legal action, "Tonya" did not receive the complete return of her investment until October 20. The U.S. Securities and Exchange Commission filed an emergency action against the organization alleging a Ponzi scheme and requested a freeze on its assets.

"Tonya" needed this PLR to get an extension to rollover the funds back to her IRA. However, she was granted an extension to rollover just the one distribution (the amount she gave to the religious organization) and not her first withdrawal (part of which went to needy families) based on the "once-per-year" rule.

The moral of the story is be careful of "great" opportunities.

Q: What are the income limits for converting Roth IRAs next year? We thought originally it was unlimited this year only and now we believe that it is unlimited going forward and anyone any year can convert their IRAs to Roth IRAs no matter what income they make.

A: You are absolutely correct to your second point. The income limit of $100,000 has been eliminated permanently. Everyone, regardless of income, can now convert to a Roth IRA in 2010 and beyond.

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